A banking revolution to solve the challenge of climate change

Banking in the 80’s was a somewhat simpler business and climate change a topic for the future. Turn the clock forward three to four decades, and banking faces nothing short of a revolution as it works with multinationals, governments, and start-ups to decarbonise the global economy by 2050.

Objectives for mitigating climate change are being aligned throughout value chains, giving banks an important role to play since they are partners to all parties involved, using finance to drive change. What is more, as these holistic restructurings of value chains rely on new technologies and business models, banks must master the science involved.

“As well as providing advisory and financing solutions for established companies or governments, banks are enabling new industries to evolve, and helping to shape government policy. In what we view as a major shift, transactions will require specialists from across banks’ teams, as we place decarbonisation at the heart of everything we do”, says Pierre Palmieri, Head of Global Banking and Advisory at Societe Generale.

Testifying to the urgency of tackling climate change, the Intergovernmental Panel on Climate Change’s latest report, released in April 2022, made clear that without immediate and deep emissions reductions across all sectors, limiting global warming to the critical 1.5°C target will be beyond reach.

Notably, the IPCC added that the tools and know-how required to limit global warming already exist, mentioning the falling costs of solar and wind energy, and batteries. According to Palmieri “the key is harnessing the money and political will required to scale up these technologies”.

From a financing perspective, the International Renewable Energy Agency estimates that $116 trillion will need to be invested in Energy Transition technologies over the next 30 years. This depends on finding ways to fund unproven business cases, as start-ups and existing businesses harness new technologies. “How can you finance an early Gigafactory, for instance, or a green steel plant? Will government support be needed? It is up to the financial sector to help answer those questions and to deliver the advisory solutions to clients old and new – as well as our share of the actual finance needed”, says Palmieri.

New technologies, geopolitics and new regulations are creating complexity for corporations. Some banks, those that have developed specialised expertise in a wide range of sectors, are now the best placed to understand the entire business value chain of their clients. For example, relying on its deep-rooted financing and advisory experience in sectors like road and rail, air transportation, agriculture, shipping and renewable energy, Societe Generale is becoming a problem solver for its clients, concentrating on key value chains and aligning its teams accordingly.

A new electric car, for instance, needs green steel, green aluminum, and batteries. The value chain spans the car manufacturer, battery Gigafactory, green steel and aluminum producers, renewable energy generators and charging stations. Similarly, making tomorrow’s hydrogen planes requires new designs from aircraft and aircraft engine manufacturers, as well as gas pipelines and storage, green hydrogen electrolysis and so on. At Societe Generale, the banking teams today work more and more holistically, leveraging their collective expertise to solve challenges across each value chain.

To be effective, the way banks work with their clients and third parties must also change. Socgen’s service is evolving towards co-construction through collective intelligence, including the expertise of its technical specialists such as geologists, engineers, or scientists. As members of the Hydrogen Council, the European Battery Alliance, the Poseidon Principles for shipping, as well as the Steel, the Aircraft and the Aluminium Climate-Aligned Finance Working Groups, for example, together with other banks, Societe Generale is also helping to shape the policy framework needed to unlock the full potential towards decarbonisation.

Beyond value chains, in their quest to solve problems, the most pioneering banks also need to support innovation by focusing on emerging leaders that are developing cutting-edge technologies, new business models for the circular economy, and nature-based solutions for CO2 sequestration and biodiversity.

“At Societe Generale, we have been at the forefront of financing climate action mitigation through renewables for close to two decades, with leading roles in the United States’ first offshore wind farm, Taiwan’s first commercial scale offshore windfarm, and France’s first floating offshore windfarm. These early transactions were performed by specialised energy project finance teams, whereas now the whole of our investment bank focuses on climate change through the lens of value chains spanning key sectors”, adds Palmieri.

Just as many industries are doing, the need for banks to shift to focus on decarbonisation is nothing short of revolutionary. It will only be successful when financing the zero-carbon transition becomes business as usual.

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