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The banking industry in a changing climate – financing the low-carbon transition

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The banking industry in a changing climate – financing the low-carbon transition 1

By Lauren Compere, Director of Shareowner Engagement, Boston Common Asset Management

Lauren Compere,Director of Shareowner Engagement, Boston Common Asset Management

Lauren Compere,Director of Shareowner Engagement, Boston Common Asset Management

We already know that financing the low-carbon transition will be expensive – from low-carbon technology to mitigation infrastructure – and we know banks will have to play a vital part.

But what does climate best-practice actually look like in the banking industry?

As is often said, what gets measured gets managed. That is why Boston Common leads a coalition of over a hundred investors with assets totalling nearly $2 trillion, calling on the world’s largest banks – including the likes of HSBC, Lloyds, Bank of America, JP Morgan Chase, Morgan Stanley and Deutsche Bank – to disclose more information about their exposure to climate-related risks and opportunities, and how these are being managed by banks’ Boards and senior executives.

The coalition wants banks to supply robust and relevant climate-related disclosure to investors on four key areas: climate-relevant strategy and implementation, climate-related risk assessments and management, low-carbon banking products and services, and banks’ public policy engagements and collaboration with other actors on climate change.

These are also the four core areas that the G20-supported Task Force on Climate-related Financial Disclosures (TCFD) – chaired by financial heavyweights Mark Carney and Michael Bloomberg – offered as a standard framework by which all companies and financial institutions can report on.

What does climate best practice look like? 

Addressing the challenges of climate change requires urgent action, the mobilization of vast sums of private capital and a break from business as usual by companies. Some of the best-practice standards we have seen emerging and encourage across the board include:

  • Risk management commitments such as that made by Standard Chartered, to introduce new assessment criteria relating to climate risks for energy industry clients in order to promote alignment with a 1.5°C climate scenario. We’ve also seen Natixis commit not to finance coal-fired power plants or thermal coal mines, and ING exclude financing directly linked to the mining, exploration, transportation and processing of oil sands.
  • Strategy and governance commitments such as Barclays linking senior executive compensation to company performance on climate strategy-related goals.
  • Commitments to low-carbon products and services. For example, we were delighted to see JP Morgan Chase’s recent commitment to facilitate $200 billion in clean financing through 2025 – one of the largest the banking industry has seen to date.
  • Policy engagement such as that initiated by the insurance sector. In August 2016, Aviva, Aegon and Amlin – which together manage US$1.2 trillion in assets – issued a joint statement urging world leaders to build on previous commitments and end fossil fuel subsidies within four years.Many banks did join industry and multi-stakeholder commitments ahead of the Paris Agreement in December 2015, but further action is needed.

We need to see the adoption of best practices such as these across the board, and that is not just in the interests of the planet but for banks and their shareholders too.

Climate change poses serious material risks….

Banks are exposed to climate-related risks through their lending activities as well as other financial services, including project finance and equity and debt underwriting. These risks are real and wide-ranging, and investors want to know whether they are being managed responsibly and at the highest level of the organisation.

A recent study estimates that the value at risk for investors under business-as-usual scenarios may be equivalent to a permanent reduction of between 5% and 20% in portfolio value in just over a decade.[i]

A recent report published by Carbon Tracker estimates that almost a third ($2.3 trillion USD) of the potential capex to 2025 for oil and gas companies should not be deployed under the International Energy Agency’s (IEA) World Energy Outlook 2016 450 scenario (which could be used as a proxy for a 2 degree scenario).[ii]This number is even higher under a 1.5 degree scenario, which is the aim set in the Paris Agreement.

… But also a once-in-a-generation opportunity

An estimated $90 trillion of infrastructure investment is required by 2030 to limit global warming to 2 degrees[iii]and the banks that take advantage of this once in a generation green opportunity can benefit across all business functions.

The TCFD means climate disclosure is about to go mainstream

Boston Common has been working with banks for several years to encourage greater disclosure and have been joined by an increasingly large coalition of investors. Our work was greatly aided this summer by the recommendations from the Financial Stability Board’s Task force on Climate-related Financial Disclosures (TCFD), which introduced a new universal framework and expectations around disclosure. Although the recommendations remain voluntary at this stage, they could prove game changing. This September the UK Government officially endorsed the recommendations, the French government called for them to be mandatory, and in New York the recommendations were endorsed by a number of leading global companies.

Such initiatives have the power to accelerate action, and banks should use their financial and lobbying clout to advocate for public policy action on climate change. By pro-actively engaging with policymakers and industry groups, banks can help create a regulatory environment that facilitates green financing, adoption of cleaner technologies, energy efficiency measures and renewable use – across both the private and public sectors.

In order to keep global temperatures from rising to dangerous levels, the way we do business will have to change – and urgently.Banks must shift their financing away from the projects of the 20th century, like pipelines and petrol, to the technologies that with fuel a new, sustainable economy and deliver prosperity in the long-term.

Banking

Mastercard Delivers Greater Transparency in Digital Banking Applications

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Mastercard Delivers Greater Transparency in Digital Banking Applications 2
  • Mastercard collaborates with merchants and financial institutions to include logos in digital banking applications
  • Research shows that ~25% of disputes could be prevented with more details

As more businesses turn to digital payments, and the number of connected devices grows, one thing is becoming increasingly clear: consumers are demanding more clarity around what they bought and who they bought it from.

Most everyone has experienced the frustration of trying to decipher confusing and brief purchase descriptions when reviewing online statements. This confusion forces cardholders to contact their banks unnecessarily to dispute unrecognized transactions, adding extra steps for consumers and generating an array of costs for merchants and banks.

A new initiative from Mastercard and managed by Ethoca, the company’s collaborative fraud and dispute resolution technology, aims to eliminate this confusion and improve the customer experience. All merchants are encouraged to visit www.logo.ethoca.com and upload their logos for inclusion in online banking and payment apps. The merchant logos will be linked to corresponding transactions, adding clear visual cues to help cardholders quickly identify legitimate purchases. Participating merchants are provided an opportunity to simultaneously extend their brand presence as well as eliminate expensive and time-consuming chargebacks. This program is also available to all financial institutions.

Mastercard Delivers Greater Transparency in Digital Banking Applications 3

A recent Ethoca-commissioned Aite Group study of the US market revealed that 96% of consumers want more details that help them easily recognize purchases, and nearly 25% of all transaction disputes could be avoided by delivering these details – including logos. It’s estimated that global chargeback volume will reach 615 million by 2021, fueled in large part by frustrated consumers turning to the dispute process unintentionally.

“With greater digital dependency, having real-time purchase details is critical for consumers, merchants and card issuers alike,” said Johan Gerber, executive vice president, Cyber and Security Products at Mastercard. “We continue to collaborate with industry partners to bring clarity and simplicity before, during, and after transactions. By enriching transaction details, merchants can alleviate friendly fraud, reduce chargebacks and improve the customer experience.”

This endeavour is part of comprehensive efforts to deliver the most efficient, safe, and simple payment experience from the minute a consumer begins browsing to once they’ve made the purchase. This includes Click to Pay, Mastercard’s one-click checkout experience, to the integration of biometrics to secure both digital and physical transactions, and Ethoca’s full suite of consumer digital experience solutions.

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Banking

AML and the FINCEN files: Do banks have the tools to do enough?

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AML and the FINCEN files: Do banks have the tools to do enough? 4

By Gudmundur Kristjansson, CEO of Lucinity and former compliance technology officer

Says AML systems are outdated and compliance teams need better controls and oversight

The FinCEN files have shown that it’s time for a change in AML. We must take a completely new approach in order to catch up with the speed of innovation in financial crime.

Despite what you’ll read in news headlines, we can’t lay all of the blame for anti-money laundering failures at the doors of the banks. The majority of compliance teams are doing what they can, and what they are being asked to do.

Historically, AML has, in large part been a box-checking exercise. Banks have weaved through mountains of false alerts, investigated cases, sent SARs, and then got on with business as usual. In some jurisdictions, banks can‘t even interfere with customers under investigation, in fear of jeopardizing cases.

But the sentiment towards banks’ responsibility in AML is changing. They are increasingly looking at AML as a corporate social responsibility issue and even a competitive advantage. Banks are looking to protect their brands from the horrors of an AML scandal, and as such are taking a more proactive approach.

They are also throwing a lot of money at the problem. Deutsche Bank claims to have invested close to $1 billion in improved AML procedures and increased its anti-financial crime teams to over 1,500 people. Most big-brand banks have a similar story to tell.

With reputation on the line, better AML controls can become good business.

So where does the problem lie?

From the thousands of SARs discovered in the FinCEN files, lack of customer oversight is evident. Banks need to establish a method of knowing their customers through their actions across the organization and beyond the organizational walls. By doing so, banks can better understand AML and compliance risk, which gives them the necessary tools to bar customers from doing business or limiting their activity.

While banks are striving to better enforce regulations by pouring money and resources into CDD and transaction monitoring, forming this type of intelligent customer overview might be the real solution. Proper Customer Due Diligence and customer risk monitoring can only be achieved by continuously tracking customer behaviour and transactional networks. With the latest developments in Artificial Intelligence – that is now possible.

But, the reality for compliance teams is they are hindered by outdated technology in their risk assessment and transaction monitoring systems and because of this, banks are fighting a steep, uphill battle against serious organised crime.

In 2019, the Bank of England issued a statement that claimed: “existing (money laundering) risks may be amplified if governance controls do not keep pace with current advancements in technological innovation.”

I know from my time working as a senior compliance technology officer that many traditional AML systems are inefficient, slow and labour intensive, and often lead to inaccurate outcomes. In fact, most of the systems pre-date the iPhone, so they are using last-generation technology and techniques to detect criminal activity.

In short, legacy AML systems are not fit-for-purpose. Legacy vendors built them for the box-checking world of the past, and they are focused on one suspicious transaction at a time – rather than looking at ‘bad actors’ in the financial system, and patterns in their behaviour.

As launderers constantly evolve their techniques to circumvent rule-based or simple statistical detection, the AML systems market has not kept up. There is a dire need for innovation.

Unless systems are updated, banks can continue to file suspicious activity reports (SAR), but if bad actors can conduct their business ‘as usual’ and shuffle money around the globe to hide its malicious origin, the effectiveness of a SAR is significantly diminished.

What’s the solution?

I believe we need to rethink our entire approach to AML. We need to empower compliance departments with better controls and oversight, and move away from outdated, traditionally rule-based systems and towards a modern, AI-enabled, behavioural approach.

While the bad guys have learnt how to evade rule-based systems, they find it extremely difficult to get around AI algorithms that search for anomalies in behaviour. The advancement of AI algorithms, especially in the field of deep learning, provide an opportunity for banks to detect more complex and evasive money laundering networks.

So the answer is to establish continuous automated risk monitoring and implement a workflow system that provides money laundering risk scores for customers.

The latest AI software could kickstart a new age of customer AML risk-based overview. Instead of relying on static and self-reported KYC data, AI systems can analyse behaviour over a period of time and compare it with peer-groups and past actions. It provides compliance teams with a continuous risk-rating of their customers, actor insights and summaries to facilitate efficient and thorough investigations, and an organizational-wide overview.

Recent advancements in AI have not only made the above possible, but also practical. Our latest Human AI models contextualize and explain the appropriate data, making it easier for banks to spot sophisticated crime.

By looking at AML not simply as a box-ticking exercise, but as a competitive advantage that can increase customers’ trust in their financial institutions, banks have a lot to gain. Moving towards behaviour-based AML systems is a move towards making money good.

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Banking

Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild

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Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild 5
  • 23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs
  • Similarly, 30% of Britain’s strongest businesses have obtained external finance in the last 3 years
  • New findings come as part of an independent, holistic study into small business success, commissioned by Allica Bank to support British businesses

A new study, commissioned by business bank, Allica Bank, shows that a high level of engagement and interaction with external institutions and resources, is central to SMEs’ prospects of success.

The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook. To measure SMEs’ external engagement, survey respondents were asked whether or not they had engaged with local enterprise partnerships, growth hubs, or external financial advisers, as well as whether they had obtained credit or sought re-financing advice, in the last three years.

The benefit to small businesses in making the most of external resources are clear to see, with a quarter (23%) of the UK’s top performing SMEs – those in the top tenth percentile – actively engaging their local enterprise partnership or growth hub in the last three years. This compares to just 16% of all other small businesses. With such a clear benefit to businesses, these external networks must not only be protected but prioritised by any Government plans to rebuild the economy post-COVID.

Similarly, of the top performing SMEs in the country, 30% have obtained external credit in the past three years, compared to less than a quarter (24%) of all other businesses. This figure drops even further for the weakest performing businesses – those in the ninetieth percentile – where just 12% of businesses have obtained external financial support in recent years.

Chris Weller, Chief Commercial Officer, Allica Bank, said:

“At Allica Bank we understand that no two businesses are the same. We also know that no-one knows a business as well as its owners and managers. But they can’t be expected to be experts on everything.

“In the UK there is a wealth of external advice and support for small businesses and we urge each and every business out there to tap in to the external resources around them. Third-parties, such as business clubs, chambers of commerce, local enterprise partnerships and trade bodies, can be invaluable sources of advice and further resources. And although they have excelled in their given field, business owners may still lack knowledge in many other areas of running and growing a business. Therefore, engaging with third parties can give business owners the kinds of insight – and fresh perspectives – they need to succeed.

“As the economy and the country comes to terms with the impact of the COVID-19 pandemic, it is important these vital SME resources are protected and given the funding they need to continue providing invaluable insight and support to small businesses up and down the country.”

Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics.

As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.

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