By Matt Williamson, VP of Global Financial Services, Mobiquity
In recent years, banks and financial institutions have faced increasing pressure from regulatory bodies to consider environmental, social and governance (ESG) factors in their operations within the banking and finance industry. In the European Union (EU), the European Green Deal has been put in place with the goal of holding banks and financial institutions accountable for considering sustainability in their policies and strategies. This involves obligations related to transparency of strategies to minimise environmental impacts, disclosure of non-financial metrics—including carbon emissions and climate-change effects, and methodologies used to measure such metrics. Within the Green Deal, several objectives have been set, with the most notable being that of achieving net-zero carbon emissions by 2050. Having such goals established by regulatory bodies, including governments and central banks, creates pressure for large corporations, banks and financial institutions to follow suit.
Although the United Kingdom has left the European Union and has not formally announced any regulatory alignment post-Brexit regarding the European Green Deal, the ongoing discussion around it compels not only the UK but also other notable non-European jurisdictions to follow suit, granting them the opportunity to adopt similar strategies and position themselves as global leaders in sustainability and green industrial development. Furthermore, the UK is a state party to the Paris Agreement and has also set a legally binding target of reducing carbon emissions to net-zero. As such, this move towards a greater focus on sustainability in banking and finance can be seen on both sides of the Channel.
Beyond regulatory and legislative pressures from public administrations and authorities, banks and financial institutions are increasingly subject to ongoing societal pressures to adopt values-based strategies and business models, particularly from younger generations, including Millennials, Generation Z and Generation Alpha. Therefore, aside from being a regulatory obligation, it is also in banks’ and financial institutions’ interests to authentically engage in sustainable practices to achieve customer retention and reputation management. This trend has been endorsed by several notable institutions and spokespeople, such as Meniga’s chief executive officer, Georg Ludviksson, and Cogo’s chief executive officer, Emma Kisby.
Why does sustainability in banking matter?
In recent decades, sustainability, environmental welfare and climate change have gained a much larger space in public discussion. From an ecological and human well-being perspective, the importance of reducing carbon emissions, halting deforestation and preventing rising sea levels and global temperatures seems obvious. However, further to that, climate-related risks and their societal responses increase the potential for disruption of the global economy and financial system—something banks and financial institutions are attempting to prevent and, if possible, reverse.
Given their privileged and unique position at the intersection between economic policy and wider society, banks and financial institutions must incentivise and contribute to sustainable practices to ensure that the global financial system remains resilient against imminent climate risks. The most obvious arena through which this can occur is lending and investment, and banks must move towards providing investment and loans to ESG-oriented projects and programmes, ensuring that such sustainability-focused undertakings have the resources to grow and ultimately make a greater impact on reversing the effects of climate change.
How can banks ensure that moving towards becoming more sustainable meets their business objectives?
There is a common misconception that sustainability and profitability are mutually exclusive. In fact, engaging with sustainability has the potential to drive significant growth, with the Business & Sustainable Development Commission (BSDC) reporting in their “Better Business for a Better World” report that the inclusion of the United Nations’ Sustainable Development Goals (SDGs) in business strategies can open up US$12 trillion in global market opportunities for banks and corporations.
Beyond transitioning towards sustainability in their own activities and operations, banks must be conscious of the emissions and climate risks pertaining to their supply chains and clients. As such, banks must support clients’ transitioning towards more sustainable agendas and aim to move towards net-zero in their financed emissions as well. This will create an ecosystem with sustainability at the heart of business strategies, ensuring that revenue is increased with this focus across the board.
Furthermore, the adoption of sustainable strategies can help banks and financial institutions adapt to the experience economy and generate greater customer value and retention—particularly among young, authentic and value-driven consumers.
For banks to ensure that they continue to meet their business objectives while moving towards sustainability, it is vital that they communicate their concrete plans to clients with transparency and honesty and are open about shortcomings should they happen.
What is technology’s role in powering a sustainability agenda?
The integration of digital technologies with banking and financial services opens up an array of opportunities for sustainable finance and reduced carbon emissions. Consumer preferences and expectations for digital services and experiences have shifted in recent years. At the same time, provisioning for sustainable-centric services has led to banks and financial institutions relying on digital offerings to enhance customer experiences.
The rise of sustainability and ESG has brought a greater emphasis on data management to inform intelligent decision-making. To ensure sustainable-banking services are delivered efficiently, the right technological infrastructure is essential—from lending and investment decisions assisted by artificial intelligence and machine learning to undertaking climate stress tests, facilitating transactions and enabling client engagements.
The World Economic Forum (WEF) has estimated that by 2025, there will be 160 zettabytes of data in the world, 80 percent of which will be unstructured. A portion of this data will be used to generate ESG statistics and figures. Technologies including artificial intelligence, machine learning and natural language processing will inform future ESG reporting, which will, in turn, shape future sustainability agendas and strategies.
The ESG market is booming, estimated at more than US$1 billion at the end of 2021. As this sector continues to grow, technology will become increasingly necessary to power it.
What sustainable practices do banks and financial institutions have in place?
The United Nations’ Principles for Responsible Banking have inspired several banks worldwide to pledge to cut the number of carbon emissions they finance and give significant amounts of money towards climate-change and sustainability initiatives.
In the United Kingdom, the Bank of England (BoE) has made a 10-part pledge to advance the climate agenda across the bank’s operations by employing strategic priorities. This serves not only to advance the climate agenda in the UK—given the Bank of England’s vast influence across the nation—but it also sets an example for other non-state banks and financial institutions to follow suit. Several traditional and investment banks, including JPMorgan Chase and BNP Paribas, have made similar pledges to lower carbon emissions, promote climate-conscious activities or donate lump sums to sustainable development and green initiatives. In a similar vein, Rabobank has introduced the Rabo Carbon Bank, a climate-smart initiative focused on reducing emissions through carbon farming and decarbonising supply chains. Rabo’s innovative propositions enable customers to use carbon, rather than money, as a currency, developing projects and mediating between farmers and companies seeking to reduce or compensate for their own emissions. Alongside this, challenger banks and fintechs (financial-technology firms) have also set standards for climate-conscious operations in banking and finance. Paired with tech-powered product and service offerings, such initiatives have the potential to attract new customers and guarantee greater customer retention, as clients are increasingly likely to engage in services with companies with values that line up with theirs.
To champion a sustainable future—and ultimately a better world—it’s imperative that financial institutions engage consistently and transparently in ESG reporting, making themselves accountable for their environmental impacts.
What are the future trends toward sustainable banking?
As generations become eco-conscious of their personal impacts on climate change and the surrounding environment, they expect the same from their service providers. If banks fail to respond to these future customer needs, they will lose their market shares to more progressive offerings.
Despite the urgency of adopting sustainable strategies, research shows that only a few C-level executives view sustainable banking as a top priority at the board level. The current apathy among some banks and financial institutions towards sustainable practices can be attributed to cultural challenges, lack of cohesive ESG strategies or limited knowledge of how to implement sustainability. As such, to ensure that the sustainable-banking imperative is achieved, there needs to be structural change, particularly within traditional, corporate and investment banks, so that all banking activities—including the wider supply chain of customers and end-users—exhibit clearly sustainable and environmentally friendly practices.
ABOUT THE AUTHOR
Matt Williamson is Vice President of Global Financial Services at Mobiquity. Beginning his career as a fraud investigator at Thomas Cook and Travelex, Matthew went on to run Travelex’s Global Business Payments Tech for EMEA. Following this, Citibank appointed Matthew as its Senior Vice President of Technology for Treasury Trade Services.