Thorunn Egilsdottir
Corporate Communication Manager
14th June 2024

Banking industry’s commitment and how to reduce their carbon footprint

How can financial institutions leverage technology and data analytics to mitigate environmental risks within their investment portfolios? What are the strategies adopted by banks to align their financial services with sustainable development goals and how they can incentivise customers to adopt eco-friendly banking habits? In this interview, Julien Froumouth, Sustainable Finance Adviser at ABBL, addresses the role of Luxembourg's banks in financing renewable energy projects and supporting the transition to a low-carbon economy. Furthermore, Julien provides five tips for readers to assess a bank's corporate behaviour regarding environmental responsibilities.

1. What role do Luxembourg's banks play in financing renewable energy projects and supporting the transition to a low-carbon economy?

Banks, including Luxembourg ones, are the main source of funding to households and companies. Hence, they have a key role to play in helping to raise and allocate capital in line with the EU and the national sustainability goals. Luxembourg banks are in a unique position to assist and advise their clients in their transition and to finance projects that are environmentally, socially, and economically sustainable. 

To this end, there are key pillars banks could leverage to support the transition: 

  • Lending money to their customers to renovate their home or buy an electric vehicle. 

  • Making sustainable investments on behalf of their clients. 

  • Reducing the negative impact of their own operations. 

Banks are not exempt of the collective effort needed and they are implementing measures to reduce the overall energy consumption from their activities as well as from their own operations, optimizing the heating and air conditioning, the use of electronics or lighting. 

Achieving the transition towards a sustainable economy can only be the results of joint efforts from all stakeholders, from policy makers to end-consumers and investors, companies in the real economy as well as financial institutions. Banks are key intermediaries in the financing lifecycle, but they cannot drive the transition on their own. We all need to act together! 

2. What strategies do Luxembourg's banks adopt to align their financial services with sustainable development goals?

Aligning financial services with sustainable development goals does not necessarily mean for banks to completely change their investing and financing approach.  

Integrating sustainability dimensions in investment-making decisions and advisory processes could take different forms. 

Banks must find the right balance between the risks stemming from the transition to a lower-carbon economy and the opportunities it offers through new technologies, innovation, climate solutions and job creation. 

Some Luxembourg banks have joined initiatives such as the Net Zero Banking Alliance (NZBA) or other voluntary commitments to align their financing activities with net-zero goals. Such banks are taking specific steps to be credible and design the right strategy. First, they set a net-zero plan, then they put the plan into action to implement the plan and finally track and measure progress. 

There are numerous routes for Luxembourg banks to decarbonize their portfolio or meet sustainability targets. Some of them have set targets at portfolio level, and track progress against defined milestones and indicators such as the CO² emissions of carbon intensity. 

Other banks engage with their counterparties or investee companies to encourage ambition to decarbonize or simply improve their ESG performance. We have also observed banks that have started to reallocate their portfolio towards low-carbon assets or sectors, climate solutions or investment opportunities related to the energy transition. 

Finally, Luxembourg banks are progressively setting limits or reduction targets towards carbon-intensive sectors. 

3. In what ways should Luxembourg-based banks incentivize their customers to adopt eco-friendly banking habits?

Banks have started to design financial products and solutions for their clients based on their ESG performance or the sustainability objectives of the underlying financed projects. According to a recent survey conducted by the ABBL and Aurexia, Luxembourg banks have trained their staff including client-facing employees to identify their clients’ sustainability preferences and advise them about solutions that match their personal needs and preferences. Luxembourg banks are designing green loans whose proceeds are used for specific green projects like building renovation works or green hydrogen, or loans whose terms and conditions are linked to the sustainability performance of the asset financed or to the sustainability profile of the borrower. 

Some Luxembourg banks are also offering ESG discretionary mandates with a large proportion of investments made in environmentally friendly or sustainable investment funds. 

One key aspect underlying the action of banks to incentivize their clients relates to educating, informing, and communicating to the clients in a clear, understandable and not misleading manner about the banks’ commitment and intended impact of their decision to support the transition. 

This also mean that banks are increasingly developing a range of advisory services and products tailored to their customers, leveraging the current measures in place such as state guarantees or subsidies as well as additional aids and measures of KlimaAgence. 

4. How can financial institutions leverage technology and data analytics to mitigate environmental risks within their investment portfolios?

As for other financial services, many fintech companies and startups leverage digital innovation and Artificial Intelligence for improving ESG-related processes. Financial institutions can now benefit from innovative solutions for client’s ESG scoring, sustainability reporting, ESG controversies identification or data collection. Some generative AI solutions are also making recommendations on actions to reduce emissions and reallocate portfolios to sustainable investment opportunities. 

Such technological potential is also used for auditability purposed through enhance ESG data verification process. 

5. What are your five tips for readers that want to get a quick overview of bank's corporate behaviour to environmental responsibilities?
  1. Educate yourself to have a clear understanding of what constitutes a responsible and sustainable bank’s corporate behaviour. 

  2. Identify how environmental responsibilities have been set across the organisation. 

  3. Check whether the bank has set any clear ambition to reach net-zero emissions, sustainability goals or any other voluntary commitments. 

  4. Look at the concrete actions implemented by the bank to support its sustainability objectives. 

  5. Monitor the progress of the bank’s actions against the pre-defined targets and milestones.

About the blog:

There is an urgent need for rapid transition to global sustainability. Business and industry have enormous social and environmental impacts. "Why does it matter?" is a bi-monthly blog that aims to elucidate this important topic through the eyes of our experts. 

Don't miss out our experts' practical tips for your daily life and be part of the positive change.