With the impending risk of climate change and its economic and financial impact, environmental sustainability has become a societal responsibility and business reality. However, financial institutions must do more to incorporate sustainability into their business strategies.
Banks are central to decarbonising the economy. While there’s been a fundamental shift towards more green-conscious habits in other industries, there is a growing sense of urgency to prioritise sustainability and reduce carbon emissions in the financial sector. As Giki co-founder Jo Hand said, “The overall carbon footprint of employees at a professional or financial services firm can be up to ten times larger than their immediate operational footprint. While this may sound like a huge obstacle to overcome, it means that companies from sectors including FinTech have the potential to make a massive positive impact on the planet.” In fact, an EY report found that 52% of banks view environmental and climate change as a key emerging risk over the next five years, up from 37% one year ago.
Several major banks, including Bank of America Corp., Barclays Plc and Morgan Stanley, have committed to measuring and reporting the carbon emissions resulting from their lending and investments. This is an issue which requires immediate attention as greenhouse gas emissions associated with financial institutions’ investing, lending and underwriting activities are more than 700 times higher on average than their direct emissions, according to a report by climate nonprofit CDP. While banks generate emissions from heating their buildings and flying executives to meetings, “almost all climate-related impacts and risks of global financial institutions come from financing the wider economy,” CDP said.
Meniga CMO & VP business development Bragi Fjalldal said, banks must take responsibility towards sustainability. “It is really more than just about ‘house cleaning’ – it is a matter of social responsibility and risk management. More importantly, there are significant business opportunities for banks to serve this rapidly growing demand for eco-friendly financial services. From carbon footprinting, green savings and investment products to carbon offsetting for individuals and SMEs.” As we enter the era of sustainability, and with targets set for the UK to be Net Zero emissions by 2050, it is now indeed critical for financial institutions to begin making small, incremental changes within their organisations to deliver on sustainability goals.
Climate clock ticking increasingly loudly
Financial institutions must make sure they have a rounded strategy and plan put in place that is well socialised throughout the organisation, to engage all employees and clients in what they are doing. More recently, the Bank of England said its carbon emissions temporarily plunged by 74% – smashing through its target to reduce its footprint by 63% by 2030. One reason was due to the Covid-19-induced lockdown which caused travel restrictions and, as a result, policymakers were unable to jet around the globe. Furthermore, the BoE also plans to set targets for the overall emissions of its holdings and invest in green corporate bonds where possible. It has recently unveiled its first-ever climate change stress tests, which will scrutinise the resilience of Britain’s biggest banks and insurers against global warming risks over the next 30 years.
However, reducing air travel might not be nearly enough to tackle the global climate crisis. Verne Global EVP business development Nick Dale said, “Green efforts like banks reducing staff air travel are a start, but when it comes to meaningful impact, banks and financial institutions need to take a hard look at their carbon footprint outside of their direct operations. These indirect carbon emissions, defined as Scope 3 emissions by the Greenhouse Gas Protocol Corporate Standard, are often a significant source of a company’s environmental impact.”
For starters, even though AI and high-performance computing technologies are now commonplace, at both the front and back of the house, “such technologies can also be notoriously power hungry,” Dale said. While the rapid movement towards digitalisation is inevitable and profitable, it indeed comes with a few liabilities. Training AI models can generate as much carbon as building five cars and driving them for their lifetimes, per an MIT Technology Review report.
As a result, to counter the damage caused by their high intensity computers, finance firms can make planet-friendly choices about where they locate their high intensity compute. Dale added, “By housing high intensity compute in data centres powered by renewable power, in places like the Nordics, where geothermal or hydroelectric power is abundant, or accessing cloud computing powered by these types of renewable resources, companies can reduce their carbon emissions considerably. And if done in certain locations with the right partner, using renewable energy not only saves the planet, it can also benefit the bottom line – something those in the finance sector can easily get on board with.”
When it comes to technology, there are other simple steps that can be taken to deliver a significant impact. Head of sustainability and social inclusion at Circular Computing, Steve Haskew believes that organisations putting a stop to arbitrary repurchases of their technology assets and replacing it with necessary purchases of remanufactured tech such as office laptops could see their carbon emissions reduced by a significant amount. Referencing recent research, he said a slew of companies buy new laptops on arbitrary three-year cycles. “By purchasing remanufactured laptops as needed, organisations in the UK could save £7.7bn across a nine-year period to 2030 – the original green target. It would see carbon emissions reduced by a staggering nine million tons, the equivalent of taking 193,000 cars off the road. It would also save 5.4 trillion litres of water – the equivalent of 10% of the North Sea – over the same period,” he added. “It’s therefore imperative that these organisations make changes to processes and purchasing cycles like this to gain huge benefits and contribute to a sustainable future.”
How tech can be the solution to go green
Despite its drawbacks, tech can be utilised in ways which help escalate climate-friendly strategies. Whatever way you look at it, tech must be at the core of how the finance and investment industry effectively manages climate risks, fully integrating these risks into financial risk management frameworks as well as stress and scenario testing. Inevitably, achieving this with manual processes is costly, takes a considerable amount of time and requires additional resources to be spent. Diginex CEO Mark Blick said, “Using software to collect and analyse company information will make it easier for banks to assess and offset its carbon footprint, engage with their clients own decarbonising and audit GHG emissions data.” For instance Blockchain technology lends itself as it is able to provide a reliable and regularly updated trail of activity.
Blick added that deploying modern technology can “avoid banks taking a scattergun approach – cutting certain practices that look like the main offenders while ignoring the less obvious ones. Simply put, by understanding the main emissions drivers, the financial sector can make genuine and lasting changes to their environmental impact.”
For starters, financial firms contend with a seemingly unmanageable volume, variety, and velocity of data. With cloud migration, financial corporate environmental initiatives can also gain traction. Cloud solutions are seemingly critical for preserving, monitoring and analysing this data, to remain compliant, with sustainability now at the core of company infrastructure. As HeleCloud CTO Walter Heck put it, “A sustainable “Green Cloud” will best position firms to deliver on new commitments, such as carbon reduction and responsible innovation. Historically, the financial industry has driven financial, security, and agility benefits through the cloud, but sustainability is becoming an imperative for continuity, growth and profitability.”
Moving to the cloud means going green in more ways than one, with savings of up to a billion dollars, as well as by significantly reducing carbon emissions. When financial institutions migrate to the Cloud from on-premises infrastructure, they reduce carbon emissions by 88% because data centres can offer environmental economies of scale. Organisations tend to use 77% fewer servers, 84% less power and tap into a 28% cleaner mix of solar and wind power in the Cloud versus their own data centres. A recent study conducted by the Carbon Disclosure Project found that by the end of 2020, large UK companies that use cloud computing could achieve annual energy savings of £1.2bn and carbon reductions equivalent to the annual emissions of over 4 million passenger vehicles.
In fact, a recent IDC report revealed that if all operating data centres were designed for sustainability by 2024, having adopted cloud solutions to enable smarter data centres, then 1.6 billion metric tons could be saved. Heck added, “‘Green cloud’ is not a new concept, but customers, regulators, and investors are beginning to take notice of the impact of hyper-scale computing can have on CO2 emissions, and it’s starting to factor into buying decisions.” By reducing unnecessary dependencies that consume extra storage or computer resources, FSI business leaders can optimise automation and coding to cut process time and increase efficiency. “Ultimately, cloud computing is more energy-efficient than any other alternative and facilitates environmentally beneficial services and economic growth,” he added.
Heck is hardly alone to believe that tech is an essential part of the Net-Zero process. According to former Head of Asia for the UN-supported Principles for Responsible Investment, CEO of the Association for Responsible Investment in Asia Jessica Robinson, the biggest challenge is that many financial institutions are simply not committing enough internal resources which includes AI and ML software to do the work and build the systems that are necessary.
There is clearly a fundamental gap in the market in terms of tools that not only allow users and banks themselves to clearly understand the impact that they have on the environment but also empower them to do something about it. Fjalldal added that by estimating customers’ carbon footprint through technology based on their spending data, banks can enable people to understand and monitor their individual carbon footprints in a simple and transparent way. Furthermore, banks can encourage clients to take a greener route in financial decisions by putting eco-friendly financial services products and emission offsetting investment projects at their customers’ fingertips.
Clearly, going digital might help FIs to escalate sustainability goals. Apart from boosting AI-based methods, banks can capitalise on various other FinTech services. For instance, as the world is slowly moving towards a cashless society, banks can cut plastic and paper consumption by graduating from physical to digital credit and debit cards. According to CleverCards CEO Kealan Lennon, while cash and physical cards have a place in society for the foreseeable future, the massive shift to contactless and online payments options, seen in the pandemic, has made it clear that the future is digital. In the UK, there are 97 million debit cards currently in circulation and an estimated 1.1 billion in the US. “Between these two countries alone, that equates to 6,000 tonnes of plastic. And that’s before we factor in the new polymer plastic bank notes,” he said. “While reducing their carbon footprint may be an objective, the bigger incentive for banks and financial institutions is likely to be driven by business demand.”
Building on banks going digital, Atom Bank Chief Customer Officer Ed Twiddy believes that while banking traditionally is a bloated and expansive industry, with large offices and floor space to accommodate employees in brick and mortar locations, it is increasingly moving on people’s screens. “Circa 76% of people in the UK use online banking regularly, reinforcing a widespread move away from the physical location being critical to providing services and – for many, but not all – also from running and building a data-centric business, such as a bank,” he said. Highlighting a few initiatives introduced by Atom Bank, he said that the bank uses a system that recycles rainwater that falls onto the roof, running it via the downpipes where it is intercepted and stored in tanks. This water is then used in grey water systems to reduce use of mains water. The roof also houses an array of solar hot water panels, these warm the recycled rainwater before it enters the heating and hot water system, reducing reliance on electricity to heat the building.
Another key step banks can take is to engage with their staff through an employee sustainability programme. It is estimated that around 70% of employees said they were more likely to work at a company with a strong environmental agenda, and more likely to stay there long term. Over the last decade, many employees in the FinTech sector have been fighting for greater action from their companies on climate change. Hand said, “This will help thousands of people reduce their own personal carbon footprint, which would straightaway have a significant impact in terms of cutting emissions. Further to this, employee engagement will build knowledge and help implement company-wide sustainability priorities. Programmes like this are also key in delivering impact data, which shows where the most progress has been made on emissions and accelerating further action in areas that may be lagging.”
Why push ESG investment?
A key responsibility for banks when looking at greener strategies is driving capital at scale towards low carbon, clean tech solutions and energy-efficient assets, or steering financial flows towards environmentally friendly projects. Western Union Business Solutions FX & Macro Strategist George Vessey said, “Low carbon investment opportunities include green real estate, green bonds, renewable energy and sustainability projects. Investing in companies that make a positive contribution to addressing climate risks is also important. Reduce the weights of carbon-polluting companies in portfolios and instead search for companies that are leaders in their sector in relation to environmental and sustainability management practices.”
Robinson added, “Financial institutions need to do a better job at pricing in climate risks and ensuring full transparency for the capital markets.” She detailed that climate scenario analysis serves as a ‘what-if’ analysis and is a useful tool to quantify the potential exposures of an institution to transition and physical risks. “Technology platforms must be built to support this, providing real-time data and feedback,” she said.
There is already a huge shift in investment priorities with asset managers divesting from companies lacking long-term value by failing to disclose information about their decarbonisation efforts. The evidence is that global funds linked to environmental, social and governance principles took in nearly $350bn last year, compared with $165bn in 2019 and, since the beginning of 2020, the EIP Climate Tech Index20 has outperformed the Nasdaq by approximately 2.8 times, revealing the overwhelming appetite of investors to back climate-conscious companies.
Regulatory mandates
Apart from the obvious benefits of a better environment, regulatory bodies are making it increasingly essential for FIs to prioritise sustainability. Banks now face the challenge of keeping up with an increasingly complex array of oversight regulatory commitments. Each set of regulations enforced by watchdogs require policy-setting, compliance, monitoring, and examination. Firms will need an efficient way to manage it all so that the needs of consumers can remain top of mind.
Last month, the European Commission released its European Green Deal, which aims for climate neutrality by 2050. This comes just six months after the UK committed to the same goal. The upshot is that businesses may have to get to net-zero greenhouse gas emissions themselves if they expect to continue participating in some of the world’s biggest economies.
These latest actions cap off a four-year period that began with the execution of the Paris Agreement, the landmark accord to limit global warming and achieve a sustainable low-carbon future. Since then, a number of governmental entities and industry consortiums in the region have attempted to define the financial system’s role in the shift to a lower-carbon economy. They include the Financial Conduct Authority and the Central Banks and Supervisors Network for Greening the Financial System (NGFS). With the UN climate change conference Cop 26 looming later this year, financial services are in the firing line to drive the innovative change that’s needed to meet net-zero commitments.
The financial services industry has been innovating to address this opportunity, with green bonds and socially responsible funds being the most effective markets to date. Already, issuance of sustainable debt has surged past $1tn according to BloombergNEF—and there’s plenty of room to grow. ClimateCare Director of Corporate Partnerships Oliver Forster said, “As [banks] journey to Net Zero, they should compensate for any unavoidable emissions through high quality carbon offsetting projects. Offsetting is not a substitute for emissions reductions in an organisation, but it is an essential part of the equation. We need to both reduce and compensate for emissions in every way we can. And we need to do so today.”
The financial industry is clearly in a moment of reckoning when it comes to sustainability. Forster concluded, “While Net Zero targets set for 2030, 2040 or even 2050 may seem a long way away right now, financial organisations are already taking action to manage future price and supply risk to meet them. Companies that fail to act now will find it ever harder and more expensive to reach their Net Zero goals. 2020 is the decade for action on climate change.”
Copyright © 2018 RegTech Analyst
