By Zachary Scott, Managing Director, Financial Services, Publicis Sapient
Since 2019, the UK has reinforced its efforts to combat climate change, intending to execute a carbon net zero reduction by at least 100% by 2050.As a result, a considerable shift in policies, operations and initiatives has reignited across critical UK sectors such as housing, automotive, financial services and retail.
Collaboration is at the heart of a sustainable future. With this mantra spearheading a global approach, it has become critical that supply chains across all industries adopt new technological and financial solutions. Currently supply chains contribute to a large proportion of global carbon emissions.
Not surprisingly, financial service firms have been heavily impacted by the shift, adding a heavy responsibility to eliminate bad behaviours and promote good practices within both internal and external stakeholders across the sector.
The focus on environmental, sustainability and governance (ESG) within the sector has increased each year, but there is more that the financial service firms need to do to drive greater impact for the societies they operate within. There are many ways to accelerate change as a financial service, but what we’re starting to see at the heart of this change is what we like to call ‘banking on purpose’, which connects both board and consumers in their vision for a greener future, while also driving greater prosperity for the communities they support.
Financial services have always played a vital role in the markets where they operate, helping to support societies and allowing them to prosper. However, as issues surrounding ESG have become more transparent to businesses and the general public since the COP26 conference, there is mounting pressure to add a purpose to banking and financial services that go beyond transaction handling and lending.
The sector’s commitment to driving change through ESG has led to added pressures from regulators to provide thorough monitoring and reporting of lending practices, in part to mitigate the risk of greenwashing within the sector and provide a clear insight into the impacts of new initiatives.
Retail and commercial banks across the globe are already affecting change with the promotion of sustainability, voluntarily doing more to address the needs of customers. Lloyds Banking Group’s ‘Helping Britain’ Prosper’ vision tackles the challenges of ESG head-on, securing more sustainable returns and capital generation by outwardly focusing on housing access, inclusion, education, and regional development while targeting a reduction of their own carbon emissions by >50 percent by 2030.
By prioritizing their own support in the areas of renewable energy financing, low carbon transport, sustainable farming, investments and pensions, Lloyds are transparently offering real-value solutions to real pain points in the UK economy. While satisfying individual groups of valuable consumers, the investments align succinctly with a sustainable financing portfolio, with over £52 billion in pledged investment by 2024 as part of their ESG strategy.
Why is sustainability in banking important? With an increased awareness of environmental sustainability in the banking and finance sectors at both board and consumer levels, the negative impacts of fossil fuel usage and its financiers are being dragged into the spotlight more than ever. HSBC fell foul to such practice in 2021, rapidly gaining a reputation as one of the biggest enablers of fossil fuel use around the globe. The London-headquartered bank had reportedly allocated $130 billion in funding for Canadian oil pipelines, gas farming in war-torn Mozambique, and other such projects. As a result of their investments, the bank was faced with an activist shareholder revolt, which has been a wake up call for similar world banks to really ‘put their money where their mouth is’ at a strategic level.
However, there are lessons to learn, and lessons that have been learned, from these ‘dirty investments’, and it all goes back to restructuring strategies to tell the story of ‘banking on purpose’. Banks are now required to report on their environmental impact to independent regulators. This dramatically changes what banks can invest in, and how they operate as their impact on the environment is regularly under scrutiny. With HSBC leading the line from their own mistakes, it is now the time to start phasing out the bad lending practices, and to begin to review the lending frameworks and decision making in line with environmentally friendly and justifiable operations.
Until recently, world banks have been primarily set up to lend on a value-driven risk vs return basis. However, decision making is starting to change to align with ESG considerations. While return on investment probability is still a considerable factor, delving into the environmental impacts and insightful lending across portfolios is more crucial than ever before when it comes to maintaining reputation at a consumer, shareholder and board level.
In terms of sustainable banking initiatives, to ensure that they stay sustainable while still attracting a competitive level of business, world banks need to be able to accurately track their environmental impact, and make adjustments to their approaches. To do this, banks will require new data models and ways of working which will have a significant impact on how they currently operate. With pledges from the likes of Lloyds Bank and other banks of similar stature, the phasing out of old practices is officially underway.
Customers of retail banks have shown significant demand for green finance products, with 45% seeking sustainable credit & debit cards, and 31% seeking green loans and mortgages. Whilst green mortgages sound useful it’s worth noting that simply providing them is a minimum in terms of overall ESG offering. 83 percent of new-build houses in the UK are eligible for a green mortgage, however circa £2.9 trillion of UK housing stock is not eligible for a green mortgage, meaning that there is a significant opportunity for banks to serve these homeowners. The average energy efficiency rating for UK housing is D, which is really poor, and results in a major generator of UK carbon emissions. Because green mortgages are only for the new-build homes which have an EPC rating of A or B, they do little to solve the real problem – which is how to raise the average efficiency of the majority of UK homes. To do this, banks need to find ways to incentivise raising the EPC rating of UK homes which is a much more proactive way of driving impactful change. This could be by supporting customers to understand and finance the renovations they need, by connecting suppliers with the right know-how, or financing the supply chains needed to scale these renovations. Embedding consumer-focused ESG initiatives like these into their offerings rather than having them be a side project or after-thought is the difference between banks saying “we support ESG” to practically actioning it.
NatWest have introduced their own carbon tracker feature that applies consumer transactions to a regulated emissions factor and estimates the carbon footprint produced throughout the end-to-end process. Embedding this initiative at a consumer level, as well as suggesting ways to reduce individual footprints, hopes to save one billion kilograms of CO2 emissions per year—the equivalent of planting one million trees.
In 2022, we’ve seen some of the first direct savings from sustainable usage having a positive impact on the housing sector through green mortgages. The new style of mortgage offered by a number of lenders offers discounted rates or cashback for choosing a new ‘green’ home that hits certain targets on its EPC rating. However, this is only the beginning, the emerging frontier seeks to offer more products to customers that are directly linked to EPC and carbon footprint. Services such as carbon credit tracking and offsetting are vital for facilitating a holistic green finance platform.
While this works towards measurable ESG requirements, it is also gaining momentum in attracting new customers by cost saving and competitive rates and it’s something we could see appearing in a range of financial services in the future, including credit cards or even insurance.
It’s certainly a healthy start to consumer-focused initiatives and justified investment portfolios. Still, we do expect to see other benefit-rich initiatives come into play across sectors as the UK continues to move towards a carbon net zero future by 2050.
There’s a tremendous opportunity for banks to lead the way in sustainability, but there is still a lot to do to drive meaningful impact.
The only question is, will they deliver?