Will "Green Banking" Lead to Red Ink for US Banks?

By Patricia McGinnis, Financial Insights

In the "green" domain, American industry across the board is in the unfamiliar position of being the laggards. Many other nations of the world (unlike the U.S., signatories to the Kyoto Protocols) have already taken great strides in both educating their populations and changing the behavior of their business managers, including those in financial services. Eventual U.S. adoption of some sort of expanded emissions control legislation is inevitable, although its timing and scope remain uncertain. When it happens, American consumers and American businesses together will face a possibly difficult period of adjustment.Globally, the green movement is broadly focused on stopping and reversing the trends in climate change and the warming effects of too much atmospheric "greenhouse gas," primarily carbon dioxide. Around the world, social and political forces are proposing that sustainable policies and practices must replace those that have prevailed throughout the Industrial Revolution. While some may still want to debate the scientific evidence, U.S. business managers must essentially lay that question aside, and concern themselves now with the reality of a broad new regulatory framework which already impacts their activities worldwide, and will have increasing effect domestically.

Is this green movement all hype? Positively not. Improved energy efficiency is well within the reach of American industry and American consumers. Current levels of fuel prices justify the attention regardless of one's views on global warming. Nevertheless, Al Gore's Nobel Prize is testament to the high regard accorded to the "global warming" argument internationally, and climate change-driven policies are being implemented globally, by the UN, the EU and multiple other governmental bodies.

Have green initiatives been "hyped" for image purposes? Of course they have. Some U.S. firms have already launched their own energy efficiency initiatives and begun planning for anticipated business impacts, including the launch of purportedly "green" products. Simultaneously, they have revved up their PR machines to trumpet their intentions and achievements. Firms should also be aware that the risks attending over-zealous PR in this domain are high. Environmental activist groups have already demonstrated the ability to mount their own negative PR blitzes if a firm that tries to "talk the talk" of environmental responsibility is judged to have failed in "walking the walk."

Who does the calculation that supports such a judgment? Is the green movement an issue of moral and social responsibility, or an economic one? Clearly it began primarily as a social issue among individual supporters of environmental groups. In the hands of governments and regulators, however, it is rapidly becoming an economic one, based on the calculated "carbon footprint" or aggregated carbon emissions of the person or firm. Multinational efforts are underway to bring transparency to the emerging discipline of energy-efficiency accounting; that transparency will gradually separate fact from fiction and substance from rhetoric.

This new energy-driven math is beginning to have wide-reaching effects. Already in much of the world, persons and entities that despoil the environment will be made to bear those costs; those which enhance and repair the damage will be financially rewarded. Many industries and businesses have long enjoyed a free ride of unreimbursed environmental damages as a side-effect of their activities; under new and still developing regulations, these costs will become all too real in the form of required "carbon offset" purchases.

What will all of this mean for U.S. banks? They can expect significant changes in three major areas, some of which offer bottom line opportunities, while others may put the bottom line at risk.

Internal operations: Like all other firms, banks will become subject to the full costs of their own energy and resource use. Paper recycling is just the tip of the iceberg! Data centers are a focus of "green IT" because of the available savings in hardware costs and electricity, both for power and for cooling. Teleconferencing will replace much business travel, as it has already in Europe, and low energy usage certified (LEED) premises will become more attractive. There is virtually no end to the list of alternative techniques, from wind power to machine virtualization, but the good news is that most of them will result in reduced expenses, as well as reduced resource consumption.

Business parameters: Banks will experience significant repositioning of the efficiency, liquidity and risk profiles of their customers, although the impacts will differ greatly between retail and wholesale banking. Heavy carbon emitters will be penalized, (both individual and corporate, some for the better and some for the worse) as they, too, feel the financial effects their own carbon footprints. Committed retail clients may present new opportunities for profit through carefully designed "green" product and service offerings. On the wholesale side, corporate clients will experience their own, possibly traumatic adaptations to the world of carbon-neutral economics. Banks will need to carefully monitor the risks they accept in corporate relationships until they are able to assess the bottom line impacts to be absorbed by those customers.

New opportunities: Banks that make an early effort to catch up with the Europeans in understanding "carbon economics" will find major new opportunities. Global markets are developing for the trading of "carbon offsets," and banks should be in the forefront to price and trade these, as well as multiple other new instruments that future customers will want or need. Similarly, banks will find huge financing opportunities in new energy efficiency-driven industries such as wind and solar power, bio-fuels, fuel cells, hybrid autos, new building materials and many more. As in any new frontier, some explorers will win and others will fail, and it will take savvy bankers to tell the difference in advance.

Advice for bankers? Yes, the green movement is real and is a game-changing movement. It will have major long-term effects on banks' own operations, as well as the fortunes of their customers. Banks must take steps now to understand how it will impact every aspect of their activities, in order to ensure black ink rather than red. Banks that seize the opportunities will prosper-the remainder will be left in the dust by those who do.

Patricia McGinnis is a senior research analyst with Boston-based Financial Insights, an IDC company.