Banking and Climate Change Risk

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You may be doing everything you can to reduce or offset your carbon footprint and prevent further contributions to climate change and global warming—carpooling or biking to work, recycling plastics and other materials, and even shopping at environmentally friendly retailers. 

However, your personal money management solution could incur a higher carbon emissions output than you think—especially if you complete financial tasks with a traditional bank.

In this article, we’ll discuss the relationship between climate change and banking. While banking creates greenhouse gas emissions that harm the planet, climate change and global warming also negatively impacts traditional banks. We’ll explore the ramifications of this dynamic for everyday consumers and discuss a few ways you can combat climate change while responsibly managing your money, including opting for sustainable financial services over a big bank. 

How Does Banking Impact Climate Change?

Every industry must contend with resource acquisition, energy needs, and waste management—all critical indicators of their influence on the environment. Banking is no exception. 

There are two major impacts of banking on climate change:

  • Direct, operational emissions – Banks hire employees, maintain facilities, and create technological infrastructure to complete their basic operations. These employees commute to brick-and-mortar facilities that require energy and resources to maintain. Electronic operations, too, pose a high utility demand. All said and done, these everyday operations contribute to their carbon footprint. 
  • Indirect investment impacts – Banks profit from investing in or lending money to projects and initiatives in need of capital—and they use the cash in customers’ accounts to temporarily foot the bill. But, big banks don’t always invest in environmentally responsible companies or projects. By financing clients who create greenhouse gas or carbon emissions and funding the coal and fossil fuel industries, banks indirectly increase their carbon footprints. 

What Effect Does Climate Change Have on Banking?

It may surprise you, but there is a reciprocal relationship between the health of the banking industry and the well-being of the climate. Banks, like other businesses, are vulnerable to the manifold consequences of climate change. 

Climate risk for banks manifests in two ways—physical risk and transitional risk.

Physical risk covers damages to or degradation of infrastructure from weather events or other environmental factors. A few examples include:

  • Decreased brick-and-mortar facility lifespan due to soil erosion, wildfires, or storm damage
  • Increased cost for technological infrastructure as tech materials become more scarce
  • Mandatory investment in alternative energy infrastructure per local, state, and federal energy requirements

Transitional risk refers to the financial health impacts of adapting to a changing climate, including:

  • Decreased investment diversity – Investors create diverse portfolios to protect themselves against financial risk. By spreading their investments between multiple businesses and sectors, bankers can protect themselves from financial ruin if one of their investments isn’t profitable. As businesses—or entire industries—become obsolete in the face of dwindling resources or technological changes, banks lose the ability to safeguard their portfolios through diversification. 
  • Untenable resource trading prices – Natural resources—energy, wood, coal, metals, and fossil fuels—move through the market like any other good. But, as our natural resource reserves deplete and our demand for alternative resources increases, shifting prices can destabilize the resource market and the economy at large, potentially impacting banks’ bottom lines. 

Why is the Banking-Climate Relationship Important?

Banks can facilitate environmental harm, and the changing climate poses novel risks to the banking industry. Why should consumers care about sustainability?

  • When banks suffer, so do their clients – Risks can cut into your bank’s bottom line. If the bank’s investments fail, they can’t support as many profitable initiatives. If physical risks come to fruition, your bank won’t continue to profit. Both scenarios could impact their ability to pay interest on your deposited cash. 
  • Negative climate impacts affect everyone – For the most part, banks have elected to leave their obligation to environmental responsibility at the whim of the free market and legislative action. Meanwhile, massive financial entities continue to place the burden of climate action in the hands of nonprofits, eco-conscious companies, and individuals. 

How to Reduce Your Financial Carbon Footprint

When banks wreak havoc on the climate, they impact our future security and well-being. When the climate begins to disrupt long-standing economic functions—including banking—consumers suffer worldwide. 

What can you do to break the mold?

  • Carbon offsetting – If you continue to bank with a large financial institution, consider purchasing carbon offset credits to help neutralize the emissions you create while managing your money. 
  • ESG investing – You can bolster the green economy and support environmentally responsible companies by climate change investing in companies that display environmental, social, and governance (ESG) responsibility.
  • Green financial products – Aspiration is a financial service provider—not a bank—that’s revolutionizing the relationship between the financial sector and the climate with climate fintech. Products like the green credit card help you tackle your carbon footprint by planting trees with every purchase.

Climate-First Alternative Banking With Aspiration

Climate change and banking impact each other—and the consumers bear the brunt of both environmental and economic catastrophes. 

If you’re ready to take a stand and manage your money with the climate in mind, rest easy. With built-in carbon offsetting, an eco-friendly debit card, and a sustainable investment fund, Aspiration gives you the power to plan for your financial future and complete everyday transactions—all without sacrificing your values.

It’s time to say goodbye to big banks and embrace the green financial institution that can help you change the world. 

Sources: 

BankTrack. Banks and Climate. https://www.banktrack.org/page/banks_and_climate 

International Monetary Fund. Climate Change and Financial Risk. https://www.imf.org/external/pubs/ft/fandd/2019/12/climate-change-central-banks-and-financial-risk-grippa.htm

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