The bank that wants to be an impact finance laboratory

One of the central issues in sustainable finance is whether the financial sector can genuinely steer the physical economy to greener paths, or whether it is merely a passenger, bound to finance whatever economic activity is carried out.

It is clear which side of the debate Philippe Heim, CEO of La Banque Postale, is on. “There will be no decarbonisation without the engagement of finance,” he told GlobalCapital. “Our intention is, very humbly but also firmly and efficiently, to promote the idea of impact finance.”

La Banque Postale’s declaration, in the run-up to COP26, that it would immediately stop providing new banking services to oil and gas companies and manage down its existing involvement to zero by 2030 is clearly designed to give the economy a push towards decarbonisation.

It delighted France’s environmental NGOs, which had been pressing the country’s banks this year to stop financing the expansion of oil and gas production.

Greens have been emboldened by the International Energy Agency’s influential Net Zero report in May, which argued that if greenhouse gas emissions are to be eliminated by 2050, there is no need to explore for more fossil fuels, nor build new installations to bring more to the surface.

It is less likely that LBP’s decision pleased oil and gas companies — or other banks.

Oil firms are not going to suffer financially from losing LBP’s support. Its total gross exposure to fossil fuel producers is €1.2bn.

The worry is the message Banque Postale is sending — that financial institutions could actually leave fossil fuels behind, as early as the end of this decade.

That sits ill with the transition plans of companies like France’s TotalEnergies. In its energy outlook in September, Total suggested, even in its ambitious ‘Rupture’ scenario, that fossil fuels would still be supplying 30% of world energy in 2050.

Total itself will increase energy supply 30% this decade, with half the growth coming from renewables and half from liquefied natural gas. In 2030, it expects its sales mix to be 30% oil, 50% gas, 15% electricity and 5% biomass and hydrogen.

If Total continues on that path it is unlikely to be a client of La Banque Postale’s in 2030 — not as a loan borrower, but also not for deposits, cash management, securities investment or insurance.

La Banque Postale has put itself far ahead of the main pack of banks on the march to becoming a green bank. But they are making the same journey.

Like the chief executives of the larger French banks BNP Paribas, Société Générale, Crédit Agricole, BPCE and Crédit Mutuel, Heim (pictured) sits on the executive committee of the Federation of French Banks. “This is a subject we are more and more discussing,” he said. “We have to give credit to the efforts of all the market participants to address transformation, but the pace of transformation is different.”

Four days after LBP’s announcement, all six banks made a joint commitment to reduce financing of oil and gas extracted from shale and tar sands, which are even more polluting than conventional sources. From January, they will no longer finance projects in these industries, nor companies which make more than 30% of their revenues from them.

The group pledge is much less ambitious than LBP’s. It will exclude many companies in the north American oil industry, but not the majors, nor most producers in other parts of the world.

The mantra of big banks is that they will accompany their clients, even those in highly polluting industries, on the transition, rather than abandoning them.

But banks have also made their own commitments to transition — individually, and by joining the Net Zero Banking Alliance, to which nearly all large Western banks now belong.

A bank can join the alliance merely by signing a pledge, but very soon, serious action plans will be required. At that point, each bank will have to work out whether the transition intentions of Total, Shell and Exxon are compatible with its own targets.

The question of how to evaluate whether transition plans are ambitious enough is at the heart of sustainable finance, and attention to it is growing rapidly.

The six year old Science-Based Targets Initiative is finally attracting wide notice among investors. Run by four NGOs, it allows a company to submit its targets for evaluation, to determine whether it is doing its share to keep global warming below one of two temperature thresholds — well below 2°C, or 1.5°C. The company can then say it has a validated Science-Based Target.

SBTs provide an objective way for banks to know whether they can accept a client’s plans, or need to crank up pressure on it or divest. Heim said LBP would continue financing oil and gas companies if they had pathways validated by SBTi: “We are really asking clients to engage in a trajectory on a science-based approach.”

But SBTs also offer a more all-encompassing solution for banks and investors. Since the standard was launched, the SBTi has wanted financial institutions to be able to set their own SBTs, but devising a system to evaluate them has proved difficult.

La Banque Postale, among other firms, has been working with the SBTi since 2018 to create the methodology, which was finally published in October 2020.

LBP submitted its own strategy the following June and received validation this October — the equal first financial institution to achieve this, alongside KB Financial Group, the South Korean life assurer, and Swedish private equity firm EQT.

Sceptics might argue that LBP is not a typical bank. A historically retail institution, it has little involvement with fossil fuel producers in the first place, and its 100% ownership by the French state — directly and through Caisse des Dépôts et Consignations — give it a different set of priorities from other banks, arguably making it a tool of government policy.

But this is less true than it might appear. When the government separated it from La Poste in 2006, its idea was “to create a fully fledged, diversified bank, with retail, private banking and corporate banking,” Heim said.

Last year a new strand was added with the acquisition of CNP Assurances, tripling LBP’s balance sheet to €740bn. It is now the 11th largest banking group in the euro area.

The group’s net income now comes 60% from banking and insurance in France, 12% from overseas bancassurance, especially in Brazil and Italy, 6% from wealth and asset management and 22% from corporate and investment banking.

Its oil and gas lending, though small, is not trivial: about 2% of all corporate banking exposure at default. Most of the clients are large or medium sized, members of the SBF 120 index in Paris.

“When we built the corporate franchise we could have positioned ourselves on every deal to put capital to work,” said Heim. Instead, LBP’s modest exposure to fossil fuels was “the reflection of a constant and disciplined policy over the last 10 years. From the beginning we have had no appetite for oil and gas. Yes, it has caused us a loss of revenue in past years and we accept that in the coming years.”

Heim also said quitting fossil fuels was not an order from the government. “My mandate as CEO is to transform the model of La Banque Postale,” he said, “creating a sustainable model, creating value, which is able to finance its own growth. We also want to be more and more international. But there is no topic of sustainability or ESG. This is something we developed on our own.”

In this, Heim is following the path set by his predecessors. “We are a young bank, but from the very beginning we are responsible by design,” he said. “We had this international leadership in ESG — we are number one with Vigeo Eiris and ISS.”

When the bank formulated its present strategic plan, announced in February, “we decided to move forward through an action plan in B2B, B2C, asset management, with very specific and concrete measures. And then when we presented our project to be a purpose-driven company, it was decided to formalise this policy on oil and gas.”

Under France’s Pacte Law, passed in 2019, companies must take into account social and environmental issues in their management, and have the option to declare a corporate purpose in their articles of association that incorporates social objectives.

LBP is working towards adopting such a mission, which it aims to finalise in March.

Asked whom LBP saw as its stakeholders, since the government is its only shareholder, Heim said: “There is a growing demand [for more responsible policies] from our clients, specifically young clients — we can notice and measure that.”

For evidence, he pointed to LBP’s asset management and private banking offerings, which were fully responsible, “reflecting that we have strong demand” and to the importance of SRI in attracting talent.

The bank also happily acknowledges the influence of civil society. “NGOs are very important stakeholders in sustainable finance for us,” said Adrienne Horel-Pagès, chief sustainability officer at La Banque Postale. “They play a role academics used to play. NGOs are really the actors that have been pushing reflection as far as they can, and sometimes they have analysis capabilities that exceed the banks’. We don’t always agree, but we try to have a constructive dialogue with them.”

But LBP also felt an obligation to improve understanding of sustainable finance among the general public.

“Even though we had strong commitments, we felt there was growing confusion among our stakeholders,” Heim said. “So it was of paramount importance to draw a line and be certified.”

Asked what this confusion was, Heim said: “There was a survey made in France among the population. Fifty to fifty-five percent of citizens know the acronym ESG, but less than 5% understand it. There are a lot of newspaper front pages on [sustainable finance] commitments, deliveries, highlighting various concepts — SRI, ESG etc. There is a sense in which ESG is an exercise of communication — so having a scientific basis is key, to restore confidence and trust on that topic.”

Horel-Pagès said this was “also the way we’ve been approaching our overall strategy on sustainability — trying to get external approval.”

When LBP Asset Management decided to become a fully responsible investment firm, all its active funds obtained the French government’s ISR label for socially responsible investment funds.

So far, the fossil exit policy covers banking, not asset management or insurance. But it is likely to be expanded to cover them too.

The whole organisation has committed to have net zero emissions by 2040, and the other wings of the group are ambitious in their own ways.

CNP is a member of the Net Zero Asset Owners’ Alliance, which requires making an early start on decarbonising the portfolio. It excludes companies with more than 10% of revenue from unconventional oil and gas.

“We play an active role as shareholders,” said Horel-Pagès (pictured). “Last April at the shareholder meeting of TotalEnergies, both LBPAM and CNP Assurances voted against the climate resolution proposed by management. We felt it was not transparent enough or science-based enough.”

This stance is one reason why LBP’s oil and gas clients, when informed about the exit decision immediately after it had been announced, were mostly not surprised, Horel-Pagès said. “LBPAM is very active in every AGM, so they know what is our non-appetite for fossil energy,” she said.

However, “it’s fair to say we’ve had to explain our policy, because this is a demanding framework for them as well as for us,” Horel-Pagès said. “It’s easily arguable in that we are going to be a purpose-driven company in our corporate statutes, so we explained that, given our vision to accompany the just transition, it was necessary for us to be absolutely clear on our path to net zero. They respect our decision, and if they want to exit from [fossil fuels], we are ready to accompany them on that transition.”

Dealing with oil and gas producers is the easy part. LBP must now embark on a journey into the unknown — actually removing all emissions from its portfolio. This involves working with each department to align its business plan with the strategy.

The most difficult aspect, Horel-Pagès said, was data availability.

Up to now, LBP can only roughly estimate its total Scope 3 carbon footprint, which for a financial institution means the carbon emitted by all the organisations it finances and insures.

The SBTi requires a financial firm to meet minimum thresholds for holding climate data on entities in its portfolios. The SBT has to cover at least 70% of its equity, bond and project finance portfolios.

“In some asset types we just meet the threshold,” Horel-Pagès said. Climate targets covered 85% of its portfolio, but “the rest is sovereigns, where there are no data or methodologies”.

Large companies, however, are bound by the European Union’s Non-Financial Reporting Directive, so have to publish “a fair amount of data, and definitely on greenhouse gas emissions,” said Horel-Pagès. “It’s more difficult with small and medium-sized companies, but manageable.”

Mortgages were optional for LBP to include in its SBT, but it decided to put them in. By 2030, it is aiming to cut emissions 36% in its commercial property portfolio and 46% in residential mortgages. Energy performance data can be gathered when new mortgages are made, but it is harder for the existing stock.

The main tool LBP will use is specialised loans for customers wanting to renovate properties — including when they are about to sell them.

Putting in place a robust, science-based methodology for decarbonisation is a huge step forward for a bank. But Heim said this was not enough. “We are now a large banking and insurance group,” he said. “Our ambition is to be an impact finance laboratory.”

Central to this is the idea of the just transition — cleaning up the economy in a way that makes it more socially inclusive.

“Green is just one component,” Heim said. “Our Western societies are facing many challenges — climate change, desertification, social imbalances. As banks we are at the crossroads of many things. We have a more global view of what we consider impact finance, which corresponds to what the UN has defined as the Sustainable Development Goals.”

Banking accessibility is an important part of LBP’s mission. “About 1.3m people in France — immigrants, homeless people — can go to La Banque Postale and use a savings account to withdraw cash and receive benefits,” said Horel-Pagès.

The bank offers discounted loans for people buying electric cars, but, conscious that this might mainly benefit middle class consumers, it is working with NGOs to design a more widely available loan that includes an offset for two years of the car’s emissions.

“Our main goal for 2022 is to measure impact,” she said. “We’re working on an impact weighting factor to enable us to measure our environmental, social and territorial footprint.”

This will be integrated into the business cases for loans and other products. “Capital weightings might be a use case, but we’ve not decided yet,” Horel-Pagès said.

La Banque Postale might not have the clout of a JP Morgan, but nor is it a niche ethical institution like Triodos Bank with a €20bn balance sheet. It is a substantial player in the French financial scene and is trying to discover — and demonstrate to others — what a bank of the future could look like.

“We clearly have a vision,” said Heim. “We want to open the path for everybody, and we have a responsibility to the emergency we face. We need to provide more clarity and be more ambitious in the kind of objectives we set for the financial sector.”

Philippe Heim photo © Stephane Sby Balmy