NatWest sees big opportunities in race to go green, says climate chief
In the early 2000s, Royal Bank of Scotland was one of the biggest financiers of the oil and gas industry and went so far as to register the domain name theoilandgasbank.com.
Today, the website is long gone and the bank has very different ambitions. Now known as NatWest Group (NWG.L), the lender has promised to stop working with any oil and gas company that doesn't have a "credible" plan to go green.
Chief executive Alison Rose has made tackling climate change one of her key priorities since taking over NatWest at the end of 2019. She has called it "one of the defining challenges of our lifetime" and said NatWest has "a clear obligation" to help.
"Alison, her tone around this is authentic and committed," James Close, NatWest's newly appointed head of climate change, told Yahoo Finance UK in his first interview since joining the bank. "She’s personally hugely engaged with it."
Close, a former director of climate change at the World Bank, was drafted in to lead NatWest's environmental work in December. He and a small team act as "the catalyst for the rest of the organisation," he said.
NatWest had made a series of green pledges before Close's arrival, including a promise to cut the carbon footprint of the bank's financing activities in half by 2030. The bank has set out detailed plans for how it plans to do so in several sectors and work is ongoing for other industries.
READ MORE: UK government tells banks to go green in anti-carbon push
Close's job is to make sure these and other commitments are met, while also tapping in to new green industries that could prove to be huge growth areas.
"We’ve looked at our lending portfolio from the risk perspective — where are we exposed to potential future stranded assets and how are we going to deal with that," Close said. "But at the same time we want to we want to frame this conversation as an opportunity to be part of financing this extraordinary transformation that’s going to happen over the next 30 odd years."
Reaching net zero by 2050 will require global investment of around $1.6tn (£1tn) each year for the next three decades, according to a recent report Energy Transition Commission. It represents a huge opportunity for banks that can figure out how to take advantage of it.
READ MORE: BlackRock vows to address climate change: 'Climate risk is investment risk'
"If you think about the way in which we heat our homes, the way in which we travel around, the way in which we produce materials like cement, steel, aluminium — it’s all got to be transformed," Close said.
NatWest's green shift is part of a broader reckoning going on across finance. Banks and investors have come to realise that lending to, and investing in, fossil fuels is a key component of the climate issue.
WATCH: NatWest boss on climate change and economic recovery
At the same time, they see big money in a green future. Investment in "ESG" funds — environmental, social, and governance — has grown tenfold since 2017 and reached $1.6tn last year, according to Societe Generale. Close called the increase "staggering".
READ MORE: $1tn still invested in 'dirty' coal despite Paris pledge
Part of the urgency comes from heightened awareness of the problem. Wild fires in Australia and California, snow storms in Texas, and a record-breaking Atlantic hurricane seasons last year have all highlighted the issue of climate change.
“We’ve kind of won the argument around where we need to get to," Close said. "There’s still one or two sceptics out there but by in large the science is settled and the destination is pretty well agreed."
Johan Frijns, a director at BankTrack, a non-profit that monitors the social and environmental impact of the banking sector, said NatWest's public climate commitments "stand out" within the industry.
READ MORE: Investors pressure HSBC to ditch coal
“Generally, they are on the good side of things," he said. "They are above most of their peer banks."
In November, NatWest was announced as the banking sponsor of the 26th UN Climate Change Conference — known as COP26 — which takes place in Glasgow later this year. The partnership puts NatWest's climate agenda firmly in the global eye-line and raises the stakes when it comes to following through on promises.
"They stick their neck out by being the one bank principle partner for COP26," said Frijns. "I sincerely think they are genuine in their wish to do it differently but they face some real difficult decisions that we’d like to see before COP26."
Turning NatWest green is a complicated task that involves both cutting back "dirty" industries and investing more in clean alternatives — a carrot and stick approach.
Part of the challenge is figuring out how to finance the transition to a green economy. Lenders must price "true" climate risk into loans, allowing green investments to access cheaper capital than dirtier ones.
READ MORE: Bank of England told to 'put its money where its mouth is' on climate change
"With technologies like carbon capture usage and storage — these have been talked about for a long time but we need to mobilise the money behind them to drive the innovation and the engineering solutions that are going to enable those sorts of things to happen," Close said.
Pricing can prove challenging given that green investments often lack the track record that fossil fuels do. A lack of predictability can make the cost of capital for early stage clean industries unattractively high. Close said banks needed to learn lessons from the growth of solar power and other renewable energies.
WATCH: COP26: Last, best opportunity to get real on climate change, says John Kerry
"We’ve learned a lot from subsidizing renewables to the point now where they don’t really need subsidising," he said.
"Once you really start to understand what the underlying risk is of the financing, you can price it in a way that makes it appealing to people. I think that’s the dynamic that will drive the transformation at the rate at which it’s required."
READ MORE: Banks curb fossil fuel lending but 'still heading in wrong direction'
Close said NatWest's job was to help its 12.5 million customers make the right everyday decisions.
"We see an opportunity to support our customers, whether it’s figuring out ways to retrofit or build energy efficiency into their homes or whether it’s looking at the ways in which they can shift the emissions profile of commercial real estate or commercial travel," he said.
NatWest recently announced a partnership Octopus Energy that will give the bank's customers access to discounted electric vehicle charging stations. It has partnered with Microsoft to develop software for NatWest's business customers to measure and reduce their carbon footprint. Close said these were examples of "the type of collaboration that we think is going to enable us to really be part of this transformation."
"All our research shows that people really do want this," he said. "84% of Londoners are either worried or extremely worried about climate change. The number of the rest of the UK is a little bit lower but it’s of that order of magnitude. It is factoring into people’s minds now."
READ MORE: Bank of England's Bailey denies backsliding on climate crisis
The bank's sizeable customer base means it has a part to play in policymaking too, Close argued.
"We want to pick areas where we think we have insights that are useful to government, particularly as a result of understanding of our customers, their behaviours and what they want," he said.
"The devil will be in the detail with all of these things. We’re obviously not going to be in the room when government’s deciding exactly what it wants to do but we want to make sure they’re equipped with the best quality information for making some of those decisions."
READ MORE: Mark Carney hails 'tipping point' in fight against climate crisis
BankTrack's Frijns said NatWest was on the right path but needed to provide more details. For example, how will NatWest determine what counts as a "credible" climate plan for an oil and gas company?
“They came a long way," he said. "They considered themselves essential for the oil and gas industry, and what we see now is they are positioning themselves very differently. Our impression is that it’s a genuine effort to do things differently that now needs to deliver.
“We get cynical in this business. You do it for a long time, you see a lot of promises. We want a bank to be sincere and we haven’t given up on NatWest yet."
READ MORE: City of London mayor: 'Climate change bigger threat than COVID'
2021 is likely to be a pivotal year. COP26 takes place in November and banks across the UK will face the Bank of England's first ever climate "stress tests" later this year. Lenders could be forced to set aside billions extra in "risk weighted assets", Bank of America analysts warned in a recent note.
This could be the catalyst banking needs. Stress testing "dirty" assets will inevitably make them more expensive to hold, which could help drive capital to greener investments.
Action is needed fast — campaigners warn that we are already dangerously close to climate tipping points that could do irreversible damage.
Close is ultimately an optimist, pointing to past step changes in human behaviour as evidence that the world can transform in short order.
"There’s a great picture of Fifth Avenue in New York in 1905 with horses and carts for Easter Saturday," he said. "By 1915 it’s almost entirely Model-T Ford cars. In 10 years you’ve almost entirely transformed the method of transport in New York. Those innovations can be done and they can be done very quickly."