Climate Responsibility in Banking: How Banking Works (Chapter 1)

In our new monthly video series, Bank.Green unpacks the impact of banking on climate change, from fossil fuel financing to greenwashing and decarbonisation efforts. We’ll explore how different banks operate, how they fund industries, and what their climate commitments really mean. More importantly, we’ll equip you with the knowledge to make informed banking choices that align with your values. Whether you’re new to sustainable banking or looking to take action, this series will help you understand the role your money plays in building a greener future.

In the first episode of Bank.Green’s educational series, Katherine, Head of Ratings, breaks down how banks operate, from lending and investments to underwriting. Learn how banks allocate your deposits, including funding fossil fuels, and why their choices impact the climate. Watch below to understand where your money goes!

Introduction to Bank Green

Katherine:  Hi, Anoushka. 

Anoushka: Thank you so much for tuning in today. Do you want to give me a bit of an introduction on yourself? 

Katherine: Yes, of course. So my name is Katherine. I'm Head of Ratings at Bank.Green. Bank.Green is a non profit organisation. We're entirely volunteer-led. And the mission of our organisation is to help individuals and businesses align their banking practices with their values.

So we rate banks based on their environmental performance, we look at whether these banks lend to fossil fuel companies and also to the renewable energy sector, and then we provide individuals with an assessment of how their bank stacks up and also provide alternatives as to the more sustainable banks that they can choose as an alternative.

Anoushka: Cool. That sounds great. Thank you. And where are you tuning in from? 

Katherine: I’m joining you today from Los Angeles, where last week – we are recording this on January 14th – last week, a number of neighbourhoods in the city were obliterated because of catastrophic wildfires, and we know that this is driven by temperature increases and droughts, and scientists have concluded that these fires were made more likely and, in terms of their severity, they were twice as severe as typical wildfires during this time of year because of these warming temperatures that are caused by burning of fossil fuels. 

So this issue is really personal to me as we talk about this issue today. 

How do banks work?

Anoushka: Yeah, definitely. And so just diving in, I'd love to ask the initial question of – so Bank.Green is analysing banks, but how do banks actually work? How can we break them down? 

Katherine: Yeah, great question. There's very different types of different financial institutions that provide banking services, and we'll look into that spectrum in one of our upcoming videos. But just in a nutshell, banks make money in three different ways. First of all, they make loans, so they take customer deposits and then they lend to either retail customers, so individuals or businesses or both. And we'll look at an example a bit later. 

Second is they hold bonds. So they invest in financial assets and receive investment income.And then finally, they engage in underwriting. So they act as intermediaries and facilitators to help businesses get funding. Sometimes they operate alone, sometimes they enter into what we call syndicated arrangements. So they work in collaboration with other banks to provide funding for businesses.

How is my $100 used by the bank?

Anoushka: Cool. Thank you. And another question, just from someone who doesn't know too much about banks – if I give a bank $100, what happens to that 100? 

Katherine: Yeah, great question. Before I answer the question, and we can just dive in and take a look at an example, banks have diversified portfolios. And by that I mean that for risk management purposes, they need to have a really broad spread of where their lending or investments go. So no bank puts 100 percent of the money that they have in their balance sheet into, say, fossil fuels, right? Or transportation, or agriculture, or another industry, right? So they need to have a diverse portfolio across a number of industries. And what we find in the course of our work is, on average, about 2 to 5 percent of large banks' lending portfolio will be a allocated to the fossil fuel industry. 

Example

Katherine: But don't take my word for it. Let's take a look at an example. This is an example of Barclays. It's one of the largest banks in the UK. And what you're looking at here is a balance sheet. So if we look at the liability section, you can see the line item deposits from customers. Barclays at the end of last year had GBP 524 billion of cash that they've taken as deposits from customers. And as we go up, as you can see in this line item, this is how much they lent out in loans to individuals and businesses. GBP 333 billion. Now it's a little bit more complicated because they have different types of assets that they're showing on different line items. But really simplistically, that's what's happening here.

Where does this money actually go? Barclays has really helpfully provided a breakdown of that lending by industry. And if you remember, it was GBP 333 billion , 311 of that went to what they describe as carbon-related sectors. So high-carbon-emitting sectors, and – you can see –automotive, chemicals, metals, et cetera. And you can see they've got line items here for oil and gas refining, oil and gas extraction, oil and gas wholesale, etcetera. It's worth noting that the fossil fuel industry has different phases, so you start with extraction, then production, refining, transportation, downstream transportation, etcetera. So there are different sub sectors.

But at the bottom, what you can see is, Barclays has really helpfully told us that the total lending to the oil & gas sector is GBP 8 billion. And that is about 2 percent of their total portfolio of commercial lending. Now GBP 8 billion, maybe it doesn't sound all that much, but there are 50,000 banks in the world and across top 60 banks, we know that they funded USD 6. 9 trillion worth of lending to the fossil fuel industry since the signing of the Paris Agreement in 2015 – so it does all add up. 

Why do loan amounts vary by bank?

Anoushka: Thank you for that. And we analysed that Barclays lends 2 percent of its money towards the fossil fuel industry, but as we know different banks lend different amounts and therefore I'd love to ask, why does this happen? Why do different banks put different amounts of money into fossil fuel funds? 

Katherine: Yeah, sure. There's a number of reasons for that. Smaller banks don't have as much capacity to invest in these big projects. Larger banks have a lot more capital to invest, but also these portfolios, they're dynamic, right? They're not static. And banks are always looking out for the combination of two factors, right? And they tend to track the wider sentiment in the global economy, and they always want to minimise their risk. So they're always looking for safe investments, but they also obviously want to maximise their return. So they're looking at industries that are cash-generating that are safe for them to invest in. And whenever oil prices are high, that means that the oil industry is really attractive in terms of investment and lending. When, however, we have corrections where oil prices maybe drop because of the global crises or because renewable energy is being subsidised increasingly in different jurisdictions globally, they adjust accordingly. We saw that several years ago when banks all rushed in to put a lot of money into renewable energy, and they scaled down that investment as oil prices rose after the war in Ukraine started. It's dynamic and some of them are more opportunistic and more bullish when it comes to the fossil fuel industry.

Until next time!

Anoushka: Cool, great. Thank you so much! That's everything that I have to ask this week, and this week we analysed more how banks work and next week we'll look more into why banks will put money in certain places. So I'm looking forward to that, and thank you so much for enlightening us with your knowledge.

Katherine: My pleasure, bye, take care Anoushka. See you soon. 

Anoushka: Thank you. 

Katherine: Bye. Bye.