Banks, payment companies battle climate change with incentives

May 5, 2022 11:35 AM

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Businesses are big spenders that generate sizable card rewards, and companies like BNY Mellon are betting that this spending can be harnessed to combat climate change.

BNY Mellon has released new environmentally focused tools and perks aimed at its corporate clients in an attempt to encourage more sustainable practices such as reducing paper checks for corporate payments.

"There's a cost of change to adopt this," said Carl Slabicki, co-head of global payments and treasury services at BNY Mellon. "But the benefits are inherent. There's an economic benefit and a lower risk benefit."

The bank is one of several financial companies that have introduced new sustainability programs in the past few months that focus on helping users see the impact of their decisions, and how reducing climate risk can be managed economically.

Energy-related carbon dioxide emissions rose 6% in 2021 to 36.3 billion tons, the highest level ever, according to the International Energy Agency. That trend — and pending regulations — adds to pressure on banks and other corporations to reduce exposure to carbon emissions. While there has been some pushback from shareholders against the largest U.S. banks reducing loans to fossil fuel companies, there has also been progress in payment companies worldwide reducing their exposure to carbon emissions.

"If you look at geography, more of the deployments of carbon tracking or incentives thus far are coming outside of the U.S.," said Moutusi Sau, a vice president and analyst at Gartner.

Sau attributed that momentum to European regulation.

The EU Sustainable Finance Disclosure Regulation, which is a set of rules that include predefined metrics for assessing environmental, social and governance outcomes, went into effect in March 2021, while U.S. regulations around climate change are still a work in progress.

The Federal Deposit Insurance Corp. at the end of March issued climate guidance for banks with more than $100 billion of assets. The FDIC says banks should consider impacts and risks to people and property connected to severe weather events and other climate-related issues. The FDIC's guidance is in its public comment period. The Office of the Comptroller of the Currency in December issued climate guidance on areas such as governance, planning, risk management and scenario analysis. The Federal Reserve is analyzing climate impact ahead of potential guidance. BNY said that as these regulations come, tools to move clients away from paper-based transactions will become "critical."

Here are some examples of how banks, fintechs and payment companies have added carbon calculators, incentives and new investment programs to measure and reduce climate risk during the past year.

BNY Mellon

BNY Mellon in April accelerated its effort to reduce check payments as part of the bank's sustainability initiative. It began offering financial benefits such as fee waivers, fee holidays and price discounts for clients that agree to partner with the bank on shifting from paper to digital-based payment services.

"We're helping to educate clients about the impact of their paper payments and learn from early adopters on the digital side," Slabicki said.

These initiatives are trying to accelerate the decline of checks, which are more expensive and environmentally risky than paper transactions. The number of commercial checks collected through the Federal Reserve was about 3.7 billion, down from 4.3 billion in 2019, 5.5 billion in 2015 and 7.7 billion in 2010. BNY Mellon estimates 2 billion checks is the equivalent of more than 400,000 trees. BNY Mellon processed nearly 300 million checks last year for its clients and processes $3 trillion in wires each day. "By offsetting the cost of digital implementation, we can make it attractive to adopt," Slabicki said.

By using payment data and liquidity data, BNY hopes to provide insights for its clients, such as how many checks they are using, how much payment volume is on ACH, wire transfer or the RTP rail, and how that mix impacts emissions. "We can tell them how many trees are involved, what the water usage is and the carbon output," Slabicki said.

BNY Mellon is also exploring a carbon-tracking tool that clients could use to calculate the current cost of their paper-based payments.

"We can tell the client: 'Here are the highest areas of carbon footprint, and there are the digital solutions for that. And here are the best practices that we see other clients working on,' " Slabicki said. "We can use that to help them set goals for the future."

BNY Mellon is part of what will likely be a broader trend toward banks providing offsets and carbon calculators as regulations and public pressure ramp up, Sau said.

"There are several ways banks can encourage change, including measuring footprints and offering carbon offsets as part of a payments reward program for larger clients," Sau said.

Klarna

The fintech Klarna in 2021 added carbon impact calculations for payments through Doconmy's Aland Index, which measures CO2 emissions for payments. Klarna, which is based in Sweden, is best known as a buy now/pay later lender, though the company also processes payments independent of BNPL and has a general banking license in the European Union.

Klarna has set a goal of reducing the company's emissions by 50% by the end of the decade, and is also making donations to environmental initiatives.

Adyen

Also in 2021, the Dutch payments processor Adyen launched a product that provides options for consumers that want to offset the carbon footprint of their payments. Consumers pay the offsets to reforestation or other environmental projects.

Adyen additionally partnered with the sustainability technology firm South Pole to develop an emissions calculator.

Adyen's adopters of the energy efficient initiative include Kazidomi, a Belgian online supermarket chain.

Mastercard

Mastercard's carbon calculator collaboration with Doconomy became available to third parties in 2021 via an application programming interface, though the two firms had worked on carbon footprint based on payments for several years before an internal launch in 2019.

The gauge measures the environmental impact of products that consumers purchase, and enables carbon offsets through United Nations-certified projects. Users can also use the data to inform investments in venture capital funds that are focused on environmentally sound outcomes.

The calculator offers equivalents for comparison, such as the number of trees required to absorb the same amount of CO2 for a particular payment, and provides tips about sustainable living.

Visa

Visa in November launched Eco Benefits, a bundle of sustainability-focused perks that issuers can use to encourage cardholders to adopt environmentally sound payments. Eco Benefits launched first in Europe and will be rolled out gradually this year.

Visa's bundle includes a carbon footprint calculator with a temperature score that helps consumers understand the climate impact of their personal spending behavior. Cards made with sustainable materials are additionally available through a collaboration between Visa and CPI Card Group.

There's also a carbon offset program for cardholders and payment processing for donations to environmental organizations.

Rabobank

The Dutch bank, which has its roots in farm lending, launched an online platform this year that links businesses that are trying to reduce emissions with farmers who are using environmentally focused planting strategies, or agroforestry.

By expanding the number of trees on their farms, the farmers — who are mostly in developing countries — can offer the equivalent of the CO2 stored in the tree to large companies via Rabobank/Microsoft platform. Using machine learning, the bank and Microsoft are measuring the positive environmental impact of the newly planted trees against the carbon emissions that the participating corporate clients generate.

JPMorgan Chase

The bank in 2021 released a package of environmental initiatives that are designed to help the bank adhere to the recommendations of the Paris Climate Agreement, or a non-binding set of goals for carbon reduction and greenhouse gas emissions.

Part of that is Carbon Compass, which encompasses a series of policies that are designed to guide the bank as it financially supports companies in renewable energy, efficiency technology, sustainable finance, agriculture and food technology. JPMorgan Chase in April 2021 also announced a plan to invest $1 trillion in green activities over the next ten years, including funding technology that is designed to measure and reduce carbon emissions.