By Niraj Singhal, Senior Vice President, Consulting & Digital Transformation Services, NTT DATA
Banks are at the center of the global value creation chain, and as important intermediaries, they are expected to champion the cause of sustainable economic growth and development.
We believe advancing sustainable ecosystems and driving inclusive growth goes far beyond simple regulatory obligations. Financial institutions that scale up green investments, focus on local green financial markets and enhance environmental risk management not only differentiate themselves better but also achieve higher growth and customer retention.
In this paper, we will look at how advanced technologies can enable banks to manage environmental, social and governance risks and increased capital flows to activities with positive environmental and social impact.
The recent pandemic completely changed the dynamics of the world economy, wherein humanity became more important than economy. With a renewed focus on social welfare, equality and an environment-first approach, the banking sustainability imperative has taken a new sense of urgency over the last two years. With several banks aiming to move towards net zero emissions by the next decade, the definition of sustainability has finally transcended beyond traditional Corporate Social Responsibility (CSR) initiatives to become a business priority.
According to analysts, moving the world economy to net-zero carbon emissions by 2050 will require a massive $275 trillion investment1. As the front runners, financial services players are expected to contribute a major portion of this investment. The new criteria for measuring success will now be the “triple bottom line” approach: Profit, People and Planet!
The year 2021 was an inflection point for the financial services industry to actively start transitioning to sustainability owing to market demand, stakeholder expectations and increasing awareness of “Environmental, Social and Governance” (ESG) issues among consumers. With the onset of 2022, an additional push is coming from regulators, including recent directives from the European Central Bank (ECB), Prudential Regulatory Authority (PRA), Commodity Futures Trading Commission (CFTC) and various Central Banks in the Asia-pacific region.
Customer Influence & Industry opportunity
With global corporations making active investments in going green, customers expect their banks to be gamechangers when it comes to achieving their global sustainability goals, with accountability and transparency given priority. These customers are now aware of the fact that the amount of plastic used to produce banking cards each year is equivalent to the weight of 80 Boeing 747s.
An increasing number of customers are taking account of a company’s positive social and environmental impact when choosing a brand or product, and they are ready to pay a premium for it. By 2019, consumers whose choice of bank was influenced by its purpose-controlled banking revenues were worth $300 billion – almost 14 percent of total client-driven revenues!
Increased customer influence in sustainable banking services is leading to exponential growth estimated to exceed $50 trillion over the next five years. The industry is responding with innovative products and models. Banks have already started integrating environmental sustainability factors into their services such as lending, investment and portfolios, more specifically by financing green energy projects or issuing green bonds. For example, wealth managers are guiding investors to do portfolio diversification by building a Green Portfolio (focus on companies or projects committed to the conservation of natural resources). Retail banks are creating new sustainable products and services, including green deposit accounts and green loans meant for sustainable, environmentally friendly purposes, such as reducing CO2 emissions, or purposes contributing to the green transition in society, like developing new environmentally friendly technology.
Apart from client push and exponential growth in the ESG finance, regulations are also evolving at a high pace and scrutiny is already moving beyond climate change and will further address the social and governance aspects. In the year 2020, the European Central Bank introduced the “Sustainable Action Plan” to bolster sustainability risk management and transparency2. Similarly, Commodities Futures Trading Commission (CFTC) addressed the topic of climate change and sustainability as part of its report, “Managing climate risk in the US financial system.” With the regulatory pressure of disclosures, stress test and KPIs looming over them, banks are taking steps to embed these into their policy, compliance and risk management frameworks. In addition, banks are focusing on enhancing their data capabilities from a reporting standpoint as well as having actionable insights.
Strategy & Approach to be taken by Banks
In the current context of global push towards sustainability, banks need to act fast and develop a comprehensive agenda. Many banks and FI’s have already started building sustainability into their products with innovations.
The first step in this journey would be to do a current state assessment to map the “As-is” state to understand the maturity of existing sustainability programs and initiatives. The second step would be to create a data-driven strategic framework on the future aspirations and “To-be” state or target state. The journey would need to be collaborative, with all key stakeholders on the same page right from day one. The third step would need implementation of this framework, leveraging organizational change management best practices for cultural alignment. The implementation of this transformation would necessitate having a robust governance, and an industry-wide knowledge sharing framework.
Global sustainability objectives cannot be achieved without banks and financial institutions working toward a common goal with a collaborative approach. Sustainability programs will need to be outcome-oriented with measurable performance indicators and service levels. The transformation journey towards sustainable banking has been depicted in Figure 1 below.
Figure 1 : Sustainable Banking- Design & Implementation
Sustainability Success Stories
The business model changes required by banks to incorporate sustainability into their core business operations are major. With the increasing adoption of digitalization in banking, technology will form the backbone of this transformation journey. IT has an enormous impact on the environment today; it is responsible for 6-9% of total electricity consumption. Eco-friendly innovations like algorithmic efficiency, asset and resource optimization, virtualization, server consolidation and smart recycling will significantly reduce the carbon footprint.
Some of the large banks are already working towards adoption and setting an example for the rest of the industry. Some such examples are provided below.
- Open banking adoption for sustainability: Banks are increasingly adopting an ecosystem approach through collaboration with FinTechs to drive sustainability in their products and operations. Ecosystem includes big data, API’s, artificial intelligence (AI) and the internet of things (IoT), to name a few. Eight percent of all European and UK Fintechs using Open Banking APIs have a sustainability product (or “green fintech”), and most of these are Digital Payment and online Account Solutions.
- Cloud Migration for scale and optimization: Banking industry is optimistically treading the path of cloud with the vision to reduce global carbon emissions by ~60 million tonnes of carbon dioxide per year3. This equates to taking 22 million cars off the road and 5.9% reduction in total Information Technology (IT) related emissions.
- Digital Lending & Straight-through Servicing: Leading banks are including sustainability considerations in lending decisions, while building on the investments they have made in automating and speeding up credit processing. They are looking at transforming their lending value chains, building data platforms and reskilling lending practice teams. Additionally, Sustainable-linked lending has skyrocketed from $5 billion in 2017 to $120 billion in 20204.
- Purposeful Robo-advisory: Sustainable Funds have grown in popularity due to specialist robo-advisors that deal exclusively in sustainable finance. This will make it easier for individuals to invest in accordance with their values and preferences. Based on research conducted by Sustainable Research and Analysis by Baron’s5 that was focused on the 10 top ranked robo-advisors, five of the ten top robo-advisors were found to offer a sustainable investing option.
The pressure to address environmental, social, and governance problems is increasing from governments, citizens, business and international agreements. At the same time, today, many financial players realize that integrating ESG into their management is more than a marketing tool. For example, there are digital-only banks that plant a tree every time their customers spend certain dollars. It is no longer just a question of reducing carbon footprints, but also of adapting to new societal expectations, addressing growing regulatory needs, generating new revenues, and gaining overall resilience. Banks that are prepared to take meaningful action early will have an advantage over their peers as the sustainable finance market matures.
- A net-zero economy: The impact of decarbonization | McKinsey
- ESG in Financial Services: Technology Trends identified by Global Data (retailbankerinternational.com)
- Environmental, Social, And Governance: How Sustainability-Linked Debt Has Become a New Asset Class, S&P Global Ratings, 2021
About the author:
Niraj Singhal, Senior Vice President, Consulting & Digital Transformation Services, NTT DATA In his career spanning over two decades, Niraj has worked with global clients in areas of digital banking strategy, sustainable transformation, process re-invention, automation, and industrialization. He also has a strong focus on building new ecosystems, through partnerships and collaboration. Niraj is a regular speaker at various industry forums and advises clients on sustainability imperatives as they grapple with pressures of cost, compliance and customer retention.