The financial services sector is critical to achieving a net zero carbon future. However, as the ESG agenda adds new pressure, financial companies must step up their game to fulfill their duties to customers and other stakeholders.
Lending, borrowing, investing and paying all grease the wheel of the modern economy. Financial institutions must also be at the heart of the massive economic transformation needed to move away from fossil fuels and achieve a net-zero world.
Currently, however, the greenhouse gas emissions associated with global financial institutions’ investments are estimated to be 700 times greater than those associated directly with these companies’ largely office-based activities, according to global disclosure not-for-profit CDP.
Additionally, only 45% of banks, 48% of asset owners and 46% of asset managers report taking steps to bring their investments in line to keep global warming well below the threshold of 2.0 degrees Celsius above pre-industrial levels.
Growing pressure from society
However, financial companies experience increasing pressure to act. The growing sense of urgency around environmental sustainability changes expectations from consumers: 67% of consumers globally would like their financial institutions to become more sustainable.
Talents also demand awareness from their future employer. In the UK, for example, 65% of office workers are more likely to work for a company with a strong environmental policy. And if financial companies fail to deliver, fintech companies are offering the alternatives craved for.
Another driver is that the business case for sustainable finance now is clearer than ever. There appears to be little clash between climate-friendliness and profit-maximization, according to a study by the Global Alliance for Banking on Values.
Steps for thriving in the net-zero era
Among our clients, we increasingly see forward-looking financial institutions beginning to respond to the new reality. There are several steps financial institutions can take to thrive in the net-zero era:
- The first will be to identify the risks associated with their portfolio emissions. Few have been doing a good job here though – CDP has found that only 41% identify climate-related risks they classify as operational risks, 35% identify those seen as credit risks, and a mere 26% identify those classified as market risks.
- Climate-based assessment as part of the criteria used to direct investments or make lending decisions will become important. For asset managers and owners, a good place to start is Climetrics, a climate rating service by CDP, which provides monthly updates for 18,000 funds covering over €15 trillion.
- Banks can also nudge their customers to adopt greener products via incentives such as discounted lending rates. Open banking can help. By opening up their financial data, banks can unlock insights into customer behavior, consumption patterns and preferences, helping them change their behavior or rewarding them for their contributions toward sustainability.
- Smart financial services firms will link carbon footprint analysis to current and future spending patterns; some, such as Swedbank and BBVA, have built in-house proprietary calculation tools, while others, such as NatWest and Mastercard, have partnered with third-party providers to calculate their customers’ emissions.
To summarize: The rise of the ESG agenda adds pressure on financial institutions to modernize – and technologies play a major role in succeeding. In a recent Economist Impact research though, the banking and capital markets industry ranked fifth of eight in future-preparedness. From advancing core modernization, to boosting personalization, to rethinking their operating models, banks, asset managers and financial intermediaries need to step up their modernization game.