Bankers for Net Zero response to the Review of the Standards of Lending Practice for business customers – August 2023
Bankers for Net Zero convenes the UK Country Chapter of the UN-convened Net Zero Banking Alliance. The initiative brings together banks, businesses, policymakers and regulators to define and implement the interventions needed to accelerate the UK economy’s transition to net zero.
We shall be primarily responding in our role as an organisation which represents a large sum of the banking industry in the UK and which also works with other relevant stakeholders to accelerate the flow of finance into sustainable solutions in the UK.
We share the UK Government’s commitment to mobilise finance to achieve net zero targets as reflected in its update to the Green Finance Strategy which switched its focus to “mobilising green investment” and emphasized the potential for growth by transitioning to more environmentally-friendly operations.
We welcomed the Government’s commitment to supporting SMEs to set meaningful net zero targets and reduce their GHG emissions. Recognising that simplifying the data collection process is key to achieving this is a step in the right direction. We were delighted to see our Perseus programme championed by the UK Government, with a Dear CEO letter from Minister Stuart urging organisations to join the programme and included in the Green Finance Strategy as a crucial part of the decarbonisation architecture required to ensure the UK reaches its emissions reduction targets. Working with SMEs, UK banks, audit and accountancy firms, ledger providers and energy companies, Perseus will deliver a solution to automate GHG reporting for every SME in the UK with an operational pilot by COP28.
We welcome the Review of the Standards of Lending Practice for business customers, especially for the opportunity to incorporate green finance into the document and ensure that business customers are protected in the transition to net zero.
There are numerous challenges that SMEs face in their transition to net zero. The Standards are an opportunity to help and protect SMEs. Despite over 5.9 million SMEs in the UK (employing 16.8 million and delivering £2.3 trillion to the economy), there is not yet a dominant standard for SMEs to report GHG emissions. Measuring emissions across their operations and value chain can be a challenging task for SMEs who often lack the necessary resources and expertise. Additionally, after the COVID-19 pandemic, SMEs had to rearrange their operations, and many of them still face financial difficulties and do not have the necessary means or incentives to act on the climate agenda. SMEs also need the right information on the steps they need to take to reduce GHG.
For banks and large enterprises with net-zero targets, it is imperative that they provide support to the SMEs in their portfolios. This support should encompass both gradual and transformative solutions to reduce emissions. The Standards should serve as a great tool to encourage registered firms to comply and help SMEs achieve net zero emissions.
Bankers for Net Zero
Founded in October 2019, Bankers for Net Zero started as an initiative with the aim of galvanising credible, demonstrable leadership from the UK banking sector on climate change. Our work is focused on activating a positive feedback loop between government, regulators, industry, business and the banking sector that raises ambition and accelerates action.
Bankers for Net Zero sits at the nexus of industry commitments, policy development, regulation, business and civil society. Our focus is strategic policy alignment. By creating clarity on which areas of the net zero transition require policies that can optimise the contribution banks can make to the real economy, we enable both policymakers and banks to play their part in accelerating the transition to net zero. In April 2021, at the launch of the Glasgow Financial Alliance for Net Zero (GFANZ), Bankers for Net Zero was announced to lead the UK Country Chapter of the UN Convened Net Zero Banking Alliance, the first initiative of its kind in the world. We provide the bridge between the high level commitments that banks have made and implementation on the ground, with a particular focus on ensuring that there is an enabling regulatory and legislative environment to achieve net zero targets.
Our response to the Review of the Standards of Lending Practice for business costumers
The current Standards do not make any mention of green finance or sustainable practices. However, lending standards can play a crucial role in encouraging business customers to transition to net zero by shaping the financial landscape and incentivizing sustainable practices.
The report “Business customers and green finance”, launched in April 2023, highlights how “firms providing finance to SMEs will play an important role in influencing the outcomes and effects of the net zero transition, by holding responsibilities around financing the transition, supporting skills development and place-based entrepreneurship across the regions of the UK.”
The report does mainly deal with new finance and green finance. It does not consider existing finance and whether or not lenders are going to exit certain markets or whether there will be punitive measures on businesses that are not transitioning quickly enough. The Standards Review must consider how the transition will happen and the role lenders have to play in this transition.
Firms might not transition fast enough to net zero whether because they do not have enough resources or because of their own will. The Standards should examine which action should be taken against firms which are not willing to report on their greenhouse gas emissions and understand how to help those customers who do not have the means or capacity to do so.
A lending standards board can establish guidelines and principles for financial institutions to follow when considering environmental, social, and governance (ESG) factors in their lending practices. These standards can encourage banks and other lenders to assess the sustainability risks associated with their loans and investments.
The Standards ought to encourage registered firms to help SMEs transition to net zero. The Standard should consider and highlight how registered firms can support their business customers in this transition. Registered firms need to provide incentives for business customers to transition to green finance. For instance, financial institutions can offer incentives such as reduced interest rates or lower fees for businesses that meet specific sustainability criteria. This would motivate businesses to prioritize sustainability and reward those that are making positive contributions.
Lenders can inform and suggest what options registered firms have to incentivise them to help their business customers such as establishing specific criteria for green finance, offering preferential terms, lowering interest rates, or longer repayment periods to businesses that meet certain sustainability benchmarks. This encourages businesses to adopt environmentally friendly practices and invest in net-zero initiatives.
The Standards can encourage registered firms to report on their lending practices related to SMEs and the environmental and social impact of the funded projects. Transparent reporting can promote accountability and demonstrate the firm’s commitment to sustainability.
The Standards can also incentivize SMEs to decarbonize by outlining the benefits they could receive from registered firms. Financial standards can offer incentives to registered firms for providing green financing options specifically tailored for SMEs. This could involve reduced regulatory requirements, lower capital adequacy ratios, or access to funding at preferential rates for sustainable SME projects.
The Standards can suggest or require financial firms to allocate a certain percentage of their lending portfolio to sustainable SME projects or businesses that demonstrate strong environmental and social performance.
The Standards should outline product and labelling guidelines to decrease the possibility of greenwashing. They should also address the disclosure and verification of the environmental advantages of financing offered to SMEs. The Standards could strike a balance, preventing excessive burdens on finance providers and their customers while still ensuring compliance with necessary requirements.
There is no mention of whistleblowers in the Standards. Incorporating whistleblowers into lending standards is a good way to combat greenwashing within the financial sector. Whistleblowers can reveal instances where financial institutions falsely present themselves as environmentally responsible. By encouraging employees to report such misconduct, lending standards can enhance accountability, prevent reputational damage, promote transparency, and strengthen regulatory compliance. Establishing robust whistleblower protection mechanisms is crucial to fostering a culture of integrity, ultimately contributing to a more responsible and genuinely sustainable financial industry that aligns its actions with its environmental claims.
There is a limited number of firms which are signed up to the Standard. This is particularly important for green finance since new lenders will be producing green finance products, and if they are not covered by this Standard then business customers will not be protected.
The Business Plan & Budget 2023/24 does not make much mention of the word “customers.” The Standards should be fully aware of the position their business customers find themselves in. Data from business customers has a role to play in this. In terms of green finance, the Standards should encourage firms to adopt programmes that ensure access to assurable and reliable data, with no room for greenwashing. Only in that way, registered firms will know how their business customers are truly performing in terms of sustainability.
The Standard board should have a process in place to gather data from customers to regularly assess that the Standards are working as well as to engage their business customers in the process. Data is important also to account that the lenders are complying with the Standards and to raise customers’ awareness regarding banks’ performance when complying with them.