For some time, senior City folk have been saying that the hoped-for surge in green investment will not only be essential for the planet, it will also be a boon for the financial industry. For European banks and active asset managers in particular it will bring a much-needed boost. But will it?
The sceptics, including this column, have questioned whether the green revolution will really offer that much net growth for the financial sector.
Take green bonds, for example. True, issuance has been growing very fast. But there is little evidence that any of the funds are additional. Green bond issues have simply replaced brown ones.
Nor are green bonds more lucrative for the banks that underwrite them. On the contrary, they tend to be less profitable than conventional bonds.
Yet in recent months, there seems to have been a growing consensus that the green investment boom should be good news for financial firms. The main factor that has convinced some of the doubters is the rising forecasts for the amount of investment needed to get the global economy to net zero.
Many experts are now saying that it will require a big increase in total global capital investment over the next few decades. The bulk of this will have to be raised by the private sector and that should mean higher fees for banks and other financial firms. In a new report, the banking team at Autonomous Research calculates that these forecasts imply a 15% increase in total global financing volumes over the next 30 years. For European banks, this could generate an extra €6bn a year in revenues.
When the growth potential is recognised by investors, Autonomous reckons that it could translate into a 15-20% increase in bank share prices overall (or more still if bank shares get a higher rating relative to their earnings to reflect the better growth outlook).
The banks that should benefit most are Standard Chartered and HSBC, partly because of their exposure to Asia where the green financing need will be greatest, together with Deutsche Bank and, among the Americans, Citigroup.
Better still for the banks, Autonomous points out that the growth will be well-protected from the fintech threat as it relies on corporate banking relationships and balance sheet capacity (both for lending and underwriting bond issues), which fintechs don’t have.
This all sounds great. It certainly gives more credibility to the bullish views expressed privately by industry leaders such as the chief executive of one of Europe’s top banks who says green finance will be a “significant” growth opportunity for the sector overall.
However, some caution is still warranted. The additional revenue from green finance estimated by Autonomous amounts to only 1% of European bank revenues. And profits on those revenues will be under pressure.
According to UBS analysts, green bond underwriting fees are about 10% below those on brown bonds, due to intense competition. And green loans tend to be cheaper too with electric car loans about 50 basis points lower. Overall, UBS estimates that sustainable finance is 10-15% less profitable.
Meanwhile, investors are starting to worry about how much it may cost banks to meet their targets for reducing emissions linked to their loan books. Banks tend to be way ahead of their customers on all this and the fear is that banks will have to offer bigger green subsidies, buy increasingly expensive carbon offsets or simply dump more brown business to make good on their commitments.
Consultancy Oliver Wyman reckons green finance will generate revenue of €25bn to €50bn for European banks, with a quarter of it new, which looks even more bullish than Autonomous. Yet James Davis, its head of sustainable finance Europe, says that green finance should be thought of more as a “pivot” for the banks rather than an opportunity that will drive growth across the sector.
“It will be something that drives competitive advantage rather than lifts all boats,” he adds.
There will be more of a market-wide boost in savings and investment, reckons Davis, with the shift towards green investing helping to slow the decline in margins across the industry. Yet some insiders are sceptical about this too. “I don’t see it increasing the size of the cake for the industry in the medium-term,” says the head of equities at a large asset manager.
What is not in doubt is that companies will need plenty of help implementing and reporting on their transition, which makes it plausible that the green revolution could be at least modestly positive for the financial industry as a whole.
The major caveat according to Autonomous would be if investment does not ramp up enough to deliver the green transition in time. But in that case we would all have bigger things to worry about than the lack of revenue growth at European banks.
To contact the author of this story with feedback or news, email David Wighton