We all know the concept of sustainability. It is an ethical approach to business that keeps the environment and carbon footprint to the fore, allowing us to do what we have always done, but without making the mess we have always made. Though most bankers would probably put it more wordily.
In annual reports throughout the banking industry sustainability and environmental, social and governance (ESG) issues have come to the forefront. The banking sector across the globe is sending out a clear message; financial services will be a major force in reaching the UN’s Sustainable Development goals.
Why is sustainability important for banks?
It’s a bottom line issue – there is pressure coming from all sides to be more sustainable, and if the sector resists the pressure they will break faith with their customers, the public, and (importantly) regulators.
The public expects banks and financial services to do their part when it comes to achieving sustainability goals. They demand transparency and accountability. It is not enough to make a few token changes – people want to know a real effort is being made, and they want to see that effort bear fruit.
Since the Paris Agreement on Climate Change in 2016, all sectors have to meet their sustainability targets. Some sources have suggested that the changes necessary to make banking sustainable will require over $5 trillion in investment.
Regulators and central banks understand that climate change poses the biggest ever threat to the global economy. An Ernst & Young report of 2020 found that 52% of banks considered climate change as a key risk to their business in the short to medium term. And if the threat is real, banks can no longer afford to ignore the climate change science, because the results will be catastrophic. So banks are increasingly building sustainability goals into their own policy, compliance, and risk management frameworks.
What are banking sustainability challenges?
The first challenge is to form a workable sustainability strategy.
An action plan to deliver on this follows. Organisations must conduct thorough analysis, and find ways to be more responsible. They might examine their culture for ways to insert positive initiatives that promote and reward sustainability. This is a governance and change management challenge.
Then there is risk and regulatory compliance. A sensible bank will try to get ahead of the curve when it comes to regulatory compliance. We know what is coming, so instead of waiting, we can be proactive and lead the change. Meet targets before they are set.
Then banks will want to get their customers on side with the new agenda, by offering greener and more sustainable investment opportunities. These could include green products like bonds, sustainable mortgages, and sustainability-linked loans. This could have a knock-on effect across multiple industries, which rely on financial services. Banks will need products that meet green objectives, but these products must work as well as the old products they replace. There are major challenges ahead.
Banking sustainability strategy
A smart strategy for promoting sustainability will combine strong operational discipline, changes in work practice, and a clear eye on governance. This last is vital. Data on how the bank is achieving its targets must be rigorously kept. ESG data should become an integral part of the relationship between a bank and its clients.
Green IT will be a vital part of the effort. Data and computing infrastructure can be moved to the cloud, which has the twin benefits of reducing carbon emissions, while also reducing operating costs. Win/win – for the bank and the environment.
According to some calculations (https://bankingblog.accenture.com/banking-sustainability-new-digital-now-what), the numbers are impressive. Migrating data and computing to the cloud could reduce global carbon emissions by 59 million tons of CO2 per year. That is almost a 6% reduction in total IT emissions. Great numbers, but what do they mean in real terms? That is the equivalent of taking 22 million cars off the road. That will go a long way towards meeting the targets of the Paris Agreement.
Eco friendly banks
Enough of the theory – what would an eco friendly bank look like in practice?
For one thing, its investment profile will be different from a traditional bank. Traditional banks do not have a good record. Though banks have funnelled billions over the years into charities and good causes, they are also some of the biggest contributors to the fossil fuel industry. As an example, the USAs four largest banks alone have funded the fossil fuel industry to the tune of $976. And this money has been spent on some of the most destructive projects, including fracking and arctic and offshore drilling.
Eco-banking is different. Not only will they be looking at the return from their investments, the eco-friendly bank will also look at what their investments are funding. Customers’ money won’t be used to help industries that harm people, or the environment.
An eco-friendly bank will be committed to creating social and/or environmental good without focusing exclusively on profit, and without funding businesses that impact negatively on communities or the planet. And generally these eco-friendly banks will be able to prove their bone fides with external certifications of various sorts. At CEC we would be delighted to help more of the financial sector move towards sustainability. Get a free consultation!