Tuesday 11 May 2021 2:00 pm

Extinction Refinancing: Banks are the next generation of climate activists withholding funding for carbon-heavy businesses

Amanda Gray is a partner at Addleshaw Goddard

Banks are unlikely to be the first group that comes to mind when thinking of climate activists. Although there is now immense and growing pressure on every area of the financial community to drive down emissions and lead the transition to a low-carbon economy, banks often seem to face the most scrutiny.

A massive 92 per cent of businesses, however, say they have been influenced to act sustainably by their banks, according to research by Addelshaw Goddard. They have more sway than regulators, customers, employees and other stakeholders.

There is an even more stark finding: all types of financial institutions are planning to turn off the funding tap in at least two sectors over the next four years to businesses without a decarbonisation transition strategy. Already banks are used to offering favourable terms to borrowers who can show they are meeting sustainability targets. But the figures show they intend to stop funding the ones that don’t, full stop. The message is clear: go green or just go. 

This should not come as too much of a surprise. For some time now, the writing has been on the wall for anyone who cares to read it. Two years ago, the then Bank of England Governor Mark Carney warned that companies that ignored the climate crisis would go bankrupt “without question.” 

Last summer the head of the Prudential Regulation Authority, Sam Woods, wrote a “Dear CEO” letter to the heads of all regulated firms, telling them “(climate) change represents a material risk both to their firms and to the financial system itself”. The government’s white paper on audit, published last month, included demands for companies to make mandatory climate change disclosures. Change is coming in our financial institutions and it is happening faster than any of us thought. 

For many this will come as good news. There is a lot of noise and goodwill around sustainability – we are inundated with green products, or new strategies, and have seen policy change from multiple governments and industry groups in a bid to change businesses behaviour – but we often hear complaints that very little real action is taken. Ceasing to fund companies that don’t show they are making real efforts to embrace a new, sustainable, future surely counts as real action. 

But some businesses will be unsettled. Whilst large corporates may have the resources to drive through the necessary changes, and smaller, more agile start-ups can build in these values from the beginning, this is not true for all firms. For many this sort of repositioning will take a lot of effort and significant investment.  Yet if they do not act now, they face being trapped in a spiral: not having the money to invest in becoming sustainable enough to access further funds.

However, they should take heart. Most businesses expect sustainability drives to turn a profit by 2025. Acting now is not purely defensive, in order to be able to get funding from the banks, it is also an opportunity to get ahead of the competition and thrive. 

Going green is fast becoming business critical. This is no longer about gaining an edge, or even doing the right thing. It is about being able to do business at all. Bankers may not be marching in the streets, chanting slogans, but when it comes to a genuine, systemic transformation, they might be the ones who are going to change the world.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.