By Ruby Walia, Senior Advisor for Digital Banking, Mobiquity

The banking industry has a major role to play in the fight for environmental sustainability. But for some banks, it’s a larger role than they’re prepared to handle.

In 2016, the Paris Climate Agreement listed low-emission financial flows as a core component of effective climate change mitigation. That positions financial institutions (FIs), including those in the private sector, as key figures in driving green initiatives.

Unfortunately, progress on that front has been slow. Despite overwhelming support from industry leaders to tackle climate change, few institutions’ sustainability programs are mature enough to make meaningful progress toward lofty emissions targets. And the optics of these struggles reflect poorly on the entire industry. Two-thirds of consumers think their financial institution is “greenwashing,” or focusing more on promoting themselves as climate-conscious than on trying to lower their carbon footprint.

When it comes to reducing carbon emissions and gaining public approval, best intentions can only take FIs so far. To put climate initiatives in action, FIs must leverage fintech solutions like artificial intelligence (AI) and advanced data analytics. These technologies hold the key to scaling sustainable banking initiatives at a pace that maintains progress toward environmental goals, while protecting institutions’ profitability.

It’s not easy being green

Across the industry, FIs are treating sustainability as a top strategic priority. They’re mobilizing trillions of dollars for green financing, hiring environmental specialists for key decision-making roles, and working with international communities to tackle climate change. Many of the largest players are even pledging to build carbon-neutral investment and lending portfolios by 2050. By all accounts, FIs seem to be doing their part. In practice, however, they’re struggling to follow through with their commitments.

The world’s 60 largest private banks invested $742 billion into the fossil fuel industry in 2021 — a negligible drop from the prior year and an increase from when the Paris Accords were ratified. As for plans on going carbon-neutral, there’s not much happening beyond talking. Recent assessments say the world’s top banks need to “substantially accelerate” their efforts if they’re going to help keep global temperatures in check.

While there’s a clear intent from top financial decision-makers to engage in more sustainable banking, factors unique to the finance industry create significant hurdles toward real progress.

In particular, long-standing ties to non-sustainable industries and a lack of enforceable standards hinder green investment strategies and goal-setting efforts. Banks like JPMorgan are working to hit long-term emission reduction targets, but deep investments in non-renewable energies creates a responsibility to support global energy needs. And even if FIs fall short of sustainability goals, no governing body can hold them legally accountable. Nor are FIs operating on a shared set of guidelines that constitute best practices for transitioning to green banking policies. Governments are working to create sustainable banking standards and laws, but the politicization of the issue virtually ensures the process is slow and drawn out.

Digital solutions as sustainable solutions

The path forward is for FIs to identify strategies and structural changes that will keep environmental initiatives on track without causing severe financial disruptions. Commitments to creating a more sustainable world are a start, but meaningful change requires data-driven insights into the risks and opportunities of green banking.

This is where fintech solutions — notably risk management and predictive modeling through AI, machine learning, and robust data analytics — come into play. By enabling measurable progress toward sustainability goals, these technologies can make the difference between empty greenwashing and truly championing environmental causes.

Here are three ways FIs can apply fintech to drive effective sustainable banking:

1. Identify key investments. Although the long-term profitability of sustainable business activities is well-documented, environmentally minded lending and investment decisions can have detrimental short-term consequences if carried out improperly. It’s critical that FIs find a balance between climate progress and profitability mandates. Fintech solutions can set parameters for green initiatives to identify investments and loans with a high likelihood of lowering emissions and generating a return. Cutting-edge AI is capable of automated data analysis to evaluate and visualize opportunities with sustainable investment and lending decisions.Machine learning and data analytics, meanwhile, will continually generate input on green initiatives and support quick adaption to changing economic or social conditions. For example, geospatial data helps an FI identify climate-driven environmental changes that project the long-term viability of controlled assets. Such data can inform models quantifying exposure and justify divestment or reallocation decisions.
2. Drive climate-related risk management. FIs also need to understand the risks of climate change to create more effective green strategies and drive progress toward sustainability goals. Financial regulatory bodies around the world are deploying climate-specific stress tests to determine banks’ exposure to physical and transition risks. These tests will be a major tool for regulators to evaluate resilience and keep climate commitments in check, so FIs need to come prepared with thorough risk management assessments. Scenario analyses can power these assessments to identify climate hazards and risk sources on an industry-specific level. Predictive modeling through AI can then generate estimates of the impact of damaging events like natural disasters and droughts. The results will support stronger risk management strategies and give the FI a better understanding of how to focus sustainability efforts and continue progress toward its goals.
3. Support accountability. Just as digital solutions drive more strategic green banking, detailed sustainability reporting through technology resources improves accountability and elevates confidence in green initiatives. Data analytics can power frequent and comprehensive assessments on the progress of green initiatives, along with long-term projections. An FI that can generate and share such reports will show solidarity with the values of conscious consumers. And that will be important to improve market reach going forward.

Almost half (48%) of consumers say that having access to green banking options has become more important to them over the past several years. These consumers will have greater faith in a transparent institution to make profitable investments in entities that cut into their portfolio’s carbon footprint. In turn, FIs will have a better chance of balancing sustainability with profitability when there’s greater interest in and financial support for green industries.

Sustainability is the future of banking

The road to green banking isn’t simple or easy — climate pledges come with the understanding that net-zero emissions will take decades of work and trillions of dollars in investments. It’s a tall task, but not an impossible one if financial leaders are willing to invest in the technology and people to give long-term green initiatives a fighting chance.

Fintech solutions enable a path toward sustainable and profitable banking practices for FIs of any size — and can help make greenwashing a thing of the past.