“The sustainability revolution will, hopefully, be the third major social and economic turning point in human history, following the Neolithic Revolution moving from hunter-gathering to farming and the Industrial Revolution.” –Charles Philip Arthur George, Prince of Wales
Introduction
Banks are becoming a major force in achieving the UN Sustainable Development Goals (SDGs). We have also seen changes in the C-Suite. Most companies have created new executive-level positions, such as sustainability directors or officers, and are responding to calls from increasingly engaged boards of directors. With pressure to act from all sides, the banking industry has reached an ecological tipping point.
Ecological tipping point for Banks
The conversation about sustainability is not new (the Paris Agreement was signed in 2016), so why the sudden urgency? In a word: pressure. Banks feel it everywhere. They are scrutinized by the public, regulators, employees, customers, and investors, and each group is motivated by slightly different interests. The public expects the financial services industry to be the catalyst for achieving the United Nations SDGs. They ask for transparency and accountability beyond mere economic indicators. Achieving the objectives of the Paris Agreement requires a new contract between the banking industry and society.
Regulators and central banks now understand that climate change poses a profound, immediate, and existential threat to the global economy. It follows that it is a systemic risk for the financial services industry. Banks can no longer ignore or deny the science of climate change and its catastrophic financial and systemic costs. As a result, these bodies are increasing pressure on banks to immediately comply with the principle of sustainability. The previous tone has shifted from advice and recommendations to mandatory disclosures and actions related to capital requirements, stress tests, risk models, disclosures, and KPIs (e.g., green asset index).
Banks have slowed down to join the sustainability efforts of some other industries but the momentum towards sustainable banking is only increasing, and it will continue to grow for the next decade. At this green tipping point, there are five areas in which banks can accelerate their sustainability journey:
- Crafting a sustainable banking strategy:
Define your sustainability strategy and develop an action plan to implement it. Do a thorough analysis and map your path to becoming a “responsible bank”. Determine the business model and technology required to seize the opportunity and define your value proposition for your customers. Examine your company culture for ways to embed positive initiatives that recognize, reward, and promote sustainability across the company. It’s about governance and change management. Integrate sustainability into proper governance and start empowering everyone on the new way forward now.
- Compliance with risks and regulations:
ESG regulation is evolving at a rapid pace and control already extends beyond climate change and will continue to address governance and social issues. Some regulatory requirements are already in place, such as climate stress testing and sustainability disclosures. The next step will be to filter loan books against taxonomies. Banks should try to stay ahead of the regulatory curve. ESG-related risk management is not just about regulatory reporting, it should be seen as a paradigm shift for end-to-end risk management frameworks and guidelines. Leverage your data capabilities with smart tools to collect, validate, and analyze ESG data and ensure you turn data into action.
- Sustainable product offerings:
With innovative green products such as bonds, sustainable mortgages, and sustainability-linked loans, banks are already seeking competitive advantages in the green finance market. This will set off a chain reaction across multiple industries to embrace sustainability. Banks will need products and processes to support green initiatives, but these solutions must be efficient in terms of process structure and technical architecture. Get advice from your ecosystem partners to help you make the necessary changes in policies, processes, and technology.
- A smart target operating model for sustainable banking:
Some research shows a clear impact of ESG on banks’ target operating models, including customer service and back offices. Sustainable financial decision-making and monitoring, ESG client due diligence, investment advice, and supply chain financing are just a few of the well-known use cases; actually, there are a lot of them. Since ESG frameworks and taxonomies are still too volatile and available data, such as ESG ratings, is not consistent enough or not available to all clients, we expect massive efforts from ESG analyst cohorts.
- Green IT:
Gain operational efficiency by moving applications, data and infrastructure to the cloud and double the impact on stakeholder value by reducing CO2 emissions and operating costs. Taken from a sustainability perspective, migration to the clouds can reduce global CO2 emissions by 59 million tons of CO2 per year. Research (Accenture 2021) estimates that this reduction equates to a 5.9% reduction in total IT emissions. That’s the equivalent of taking 22 million cars off the road, a massive reduction that can help meet the collective commitments on climate change.
Conclusion
The green transformation is a major challenge in the banking industry, and this require the right calibre of human resources in the right places to turn the transformation dreams into realities. There must be deliberate value-based recruiting to find the right people to transform internal corporate cultures within the banks. This will eventually result in the outward-oriented transformation the world envisages in green banking and ultimate sustainability.
Time to get down to business.
References
https://greencoast.org/quotes-about-sustainability/ [Accessed May 30, 2024]
https://www.accenture.com/gb-en [Accessed May 27, 2024]
https://www.un.org/en/climatechange/paris-agreement [Accessed May 31, 2024]
[Accessed May 29, 2024]
https://www.hsbc.com/news-and-media/hsbc-news/hsbc-sets-out-net-zero-ambition [Accessed May 29, 2024]
About the Writer
Green/Sustainable Finance|Digital Banking||
Email: ebenezer@worldinspiringnetwork.org
