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Are Financial Institutions Improving Their Green Credentials Through Sustainability Spending?

Writer's picture: Emil GasparyanEmil Gasparyan

Renewable energy is derived from natural resources such as sunlight, wind, rain, tides, and geothermal heat, which are naturally replenished. Unlike fossil fuels, which are finite and contribute to environmental degradation, renewable energy sources offer sustainable alternatives that can reduce carbon footprints and combat climate change.


Investing in renewable energy not only helps the environment but also enhances a company's reputation among shareholders and the public. Companies that prioritize green initiatives demonstrate their commitment to sustainability, which can attract socially responsible investors and customers. Moreover, investing in renewable energy can create long-term value by reducing operational costs and mitigating risks associated with fossil fuel dependency.





Renewable energy has been a theme as the fiscal year opens in 2024 with tech companies, banks, and oil and gas already increasing their ESG budgets. Financial institutions have come back strong with increasing their spending on renewable energy.


Brookfield Corporation, a Canadian alternative investment company has announced a deal to sell renewable power to Microsoft in exchange for data centers. Microsoft is ordered to back Brookfield projects to bring 10.5 gigawatts of renewable generating capacity online between 2026 and 2030, which is enough to run 1.8 Million Homes. This is a large ESG initiative by Brookfield and accounts for 30 per cent of Brookfields's renewable energy capacity growth, in addition to its existing ESG portfolio. The deal has a primary goal of focusing on wind and solar power, however plans to include other new technologies to generate clean energy.


The trend of ESG and renewable energy spending has continued for other investment banks such as HSBC, JP Morgan, and even BNP Paribas. Increasing ESG spending and ESG initiatives does come with difficulty of withholding that level of green credential in the eye of the shareholders.


HSBC has faced backlash and was challenged by shareholders with their $1 trillion sustainable finance plan in the coming years. The announcement of $740 Billion - $1 Trillion of sustainable finance by 20230 was described as "Too broad" and "Too Vague". Institutions are constantly reminded to create clear deadlines of ESG spending and initiatives to be transparent with the shareholders on company spending.


This hasn't been the first time HSBC announced a vague ESG initiative and this has been the case for other banks as well. The term greenwashing has been introduced in the recent years and is described as the act of making very false or misleading statements about the environmental benefits of a initiative, a product, or practice. The recent years there has been many announcements with large asset managers increasing financial initiatives but very little economic targets being hit.


McKinsey & Co, a management consulting firm estimates that the required spending to achieve net-zero emissions by 2050 will need to amount to $9.2 trillion per year as the annual average. They do not think that we are on target and they unfortunately estimate that we need to increase are target by $3.5 Trillion more to reach this goal.


Would increasing our spending or adding regulations be a solution?


When analyzing ESG spending, it is possible for financial institutions to allocate more funds towards ESG initiatives, such as renewable energy projects, and green technology. The transition to low-carbon economy needs a transitionary period with a shift in alternative investments such as private equity to focus more on sustainable green assets.


Regulations on the other hand can be a powerful tool to encourage institutions to invest if done correctly. As we are nearing a recession in North America with rising unemployment, inflation, and refusal of reducing the interest rates by the central bank (fed), it can be harmful to the economy of increased regulations. Instead of regulations, the best method would be accountability and to force institutions to be responsible for their efforts, therefore reducing any greenwashing. With more accountability, and the possibility of interest rate cuts in the near future, being on track is definitely possible in a booming economy.


Future Thought for Financial Institution Sustainability Spending


The fiscal year opening in 2024 has seen a significant uptick in renewable energy and ESG spending, with key players like Brookfield Corporation and HSBC making substantial commitments. However, challenges remain, particularly in ensuring transparency and accountability in ESG initiatives to avoid greenwashing. While regulations can be effective, a balance must be struck to avoid hindering economic growth, especially in the face of potential recessions. Ultimately, with responsible spending and a focus on accountability, the goal of achieving a sustainable, low-carbon economy by 2050 is within reach, even amidst challenging economic conditions.


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