BE THE CHANGE YOU WANT TO SEE

“The climate time bomb is ticking,” warned UN Secretary-General António Guterres at the launch of the latest International Panel on Climate Change (IPCC) update earlier this year. But we still have time to defuse if we act now, he urged – and that ‘we’ means everyone, including financial services.

Environmental, social and governance (ESG) opportunities and risks are becoming increasingly relevant for financial institutions as political, regulatory and consumer pressure grows around global warming and social inequality.

Making business operations sustainable on both these counts clearly has benefits for the world, but there’s evidence that it delivers better economic performance, too. Not least is an estimated $125trillion investment opportunity – the amount required for initiatives to mitigate and adapt to climate change globally, with roughly a third of that needed within the next seven years. So, are banks doing enough?

Launching Mobiquity’s A Global Benchmark For Sustainable Banking report late last year, Peter-Jan van de Venn, the company’s director for fintech, said: “While there has been some good progress on placing sustainable banking at the top of the boardroom agenda, the report shows that there is still an issue with banks saying and not doing.”

That’s despite 129 of the world’s top financial firms, representing about 40 per cent of global banking assets, coming together under the UN-convened Net-Zero Banking Alliance (NZAM) and promising to align their lending and investment portfolios with net zero by 2050. Some, like HSBC, have set their own bar higher, with a target of 2030.

Mixed Messages

Since the Alliance was launched in 2021, of course, we’ve had economic chaos sparked by the pandemic and the Russian invasion of Ukraine. It was against this background that the Mobiquity report, its second annual litmus test of banking boardroom attitudes in the UK, Australia, the US and the Netherlands, found evidence of foot-dragging.

Let’s take the UK, as an example. While all the UK bank chiefs that Mobiquity surveyed claimed sustainability is integral to their business strategy, 41 per cent still didn’t measure their environmental impact as part of sustainability targets. And, as van de Venn observes, if you don’t monitor and measure your impact, how can you understand where you’re succeeding… or failing?

The report also found that greenwashing – companies making false or misleading claims about their environmental credentials – remains a systemic problem among banks everywhere, but among UK banks in particular.

Keeping a low-emissions flame burning for sustainability is hard when even the UK’s central bank has reportedly put its efforts on the backburner. In March, the Bank of England (BoE) announced plans to reduce spending on climate change work due to increasing cost pressures. Instead, it will redirect the cash to core functions such as financial stability, markets and developing a digital currency for the UK.

That’s in sharp contrast to the BoE’s strong emphasis on climate during Mark Carney’s tenure as governor between 2013 and 2020. Carney went on to become the United Nations’ Special Envoy on Climate and Finance, and while his successor, Andrew Bailey, continues supporting some initiatives, such as the Network for Greening the Financial System (a group of central banks and financial supervisors that aims to co-ordinate best practice on green

Banking reimagined: A committed transformation is required to tackle sustainability issues finance and makes recommendations on banks’ roles in climate change), the tone at the top is now very different. In fact, the message the bank is sending is completely contrary to its warning just a year ago that banks and insurers that fail to manage climate risks as a ‘first order’ issue could take a 10-15 per cent hit to annual profits and face higher capital requirements.

Mobiquity’s survey of 602 C-suite banking executives across the four countries didn’t cover sustainability at the level of central banks, but its findings appeared to reflect a similar slippage in commitment.

“The intent is there, but we see there is still a way to go to actually implement,” van de Venn tells us, adding that there are two major factors that will eventually drive climate action within financial services.

“One is that regulation will change. Banks will be forced to work more on ESG. But there is another force. That is a new generation of consumers and employees who want to connect to brands that have a purpose – and ESG is, of course, having a purpose,” he says.

The UK’s Financial Conduct Authority (FCA) already encourages UK-listed companies to publish their net zero transition plans for financial years from January 2022 onwards. In the UK also, both the Financial Reporting Council and the Pensions Regulator joined the Treasury’s Transition Plan Taskforce (TPT) in March to motivate banks to make sustainable targets a reality. The TPT is expected to come up with a gold-standard framework for net zero transition plans for organisations in all sectors this year.

Running parallel with these is the mandatory requirement for climate-related financial disclosures by big banks, in line with the Global Task Force on Climate-related Financial Disclosures, which is at various stages of implementation across the world, including in the US where ESG is becoming a political hot potato in the run-up to the 2024 presidential election.

Despite all this activity, the Mobiquity report showed a perceived lack of universally recognised regulation and enforcement among bankers was the greatest barrier to banks being sustainable in the UK as well as in Australia and the US. show greener investment choices; use big data to measure the environmental impact of banks’ assets; and leverage big data scraping with smart decision-making tools to reduce management costs.

In his contribution to the report, Dr Ben Caldecott, Director of the Oxford Sustainable Finance Programme at the University of Oxford, pointed out that: “Supervisors and central banks have not been universally impressed by industry efforts to date. And policymakers and wider societal stakeholders have been widely critical of the banking sector’s genuine commitment and authenticity when it comes down to meeting the net zero commitments made [at COP 26] in Glasgow.

And while all that additional computing power, in itself, has an environmental cost: “Moving that to the Cloud is something that will also help banks reduce their carbon footprint,” says van de Venn.

He maintains that using technology in such a way can be good for the planet and good for business, citing the example of a Dutch bank that is working with Mobiquity on a programme that helps its clients measure and reduce their carbon footprint.

“If the bank can find a way to monetise that, or even use it to reduce costs, while reducing their and their customer’s carbon footprint at the same time, it makes for an interesting business case,” he says. The report urged banks to invest in not only the right commitments are genuine when many of the same banks making them collectively provided $742billion in finance to the fossil fuel industry in 2021, little changed on 2020.

“They argue that it is hard to believe net zero

“In sum, banks should expect greater scrutiny of net zero targets and their implementation, and this will be combined with a tougher and more sophisticated approach from supervisors on climate-related financial risk.”

So, for those who cited a lack of regulation as a reason for slow progress, it could be a case of ‘be careful what you wish for’. As van de Venn pointed out, though, while regulation is the stick, the carrot for change will continue to be customer demand.

“Banks have to understand the impact on their reputation and their brand, in terms of ESG. The question is, what can they do about it?” He believes much of the answer lies in technology.

The report outlined various alternative ways of reducing a bank’s own and others’ carbon footprint by using artificial intelligence (AI), advanced data analytics, tokens, and distributed ledger technologies (DLT). Individually and collectively, they can be used to analyse a bank’s portfolio on sustainability/ESG; measure the impact of green financial products; support consumers to buy sustainable products and technology

‘but also an A-list team of talent to support the execution of sustainable strategies’. Transitioning to a sustainable business needs to be part of a bank’s culture, believes van de Venn.

“These are big institutions, so it will take time, but it is important that they create a culture of thinking that sustainability is not just a necessity because of regulation, or because it’s important to the bank’s brand. This is also about more than their carbon footprint; it’s about inclusivity. In the longer term, it will be a competitive advantage, because the next generations will focus more on brands with a purpose. You can’t start early enough serving that purpose if you want to have a [financially] sustainable future as a bank, too.”

The 2023 edition of Mobiquity’s Global Benchmark for Sustainable Banking will be published this summer.