Green treasury strategies for the future

Banks are being asked to face an extraordinary challenge: to finance the development of greener technology, support customers that want to invest in green assets, and fund the conversion of polluting infrastructures into sustainable ones – all while continuing to provide liquidity to those companies that are not green, but are still fundamental to the economy as it functions today. To put a figure on this, it is estimated that the energy sector alone will require between 3.5 and 5.8USD trillion a year to transition to net zero by 2050. And, while the transition happens, we can’t expect old technology to disappear overnight: most cars still require petrol to move, and petrol companies require funds to function – for several more years, at least.

Since closing the liquidity tap for all “brown” companies is not a viable option just yet, banks need to define a different strategy to support the transition to net zero. They need to have a plan to gradually increase their exposure to “green” assets, while reducing exposure to “brown” ones. To understand how this can happen, let’s look at the core business for banks (or, at least, the most traditional one): providing loans to the economy.

The demand for loans, as for most other products, is price-sensitive. When you increase the price for a specific type of loan (i.e. the interest rate), you can expect the underlying demand to decrease, and vice-versa. Starting from this simple assumption, in our latest publication we explain how banks can set their internal FTP pricing in a way that incentivises green assets, without closing the tap to brown assets.

Historically, banks have played a key role in the economy with regard to loans: by assessing the credit risk of every potential creditor (normally by assigning a credit rating/score), they have ensured that the money printed by the central bank could flow into the economy in the most efficient way. In our team, we strongly believe that banks should now develop a similar role when it comes to evaluating sustainability. Assessing how green a certain asset or creditor is (or, more generally, assigning them an ESG score) will become as relevant in the coming years as assigning them a credit score. Banks will have to be the intermediaries, ensuring that money from central banks flows into the economy in a way that supports the transition.