Sustainable banking: Why banks must act now

The call for sustainability in banking is nothing new. Banks are fully aware that they need action plans that drive increased efforts towards a net-zero future.

Leading institutions are putting forward ambitious plans to reach net zero by 2030, 2040 and 2050. Banks such as HSBC, which recently launched a three-pronged strategy to deliver systemic change by 2050, are attracting widespread attention with their commitments.

But as leading banks respond to consumer calls to implement net-zero targets and comply with stricter regulations on sustainable practices, the question is whether they can meet demand and take action quickly enough.

Banks: It is time to implement sustainable promises

Oli Cook, CEO and co-founder of ekko, believes that while banks are aware of the need to comply with sustainability requirements, most are “too slow to respond to demand and take action”.

He continues: “Customers have long been demanding the opportunity to make a difference, and now increasingly want brands and banks to help them do this in the simplest but most effective way possible. There is a lot of focus on internal processes within banking institutions, and these first steps are great.”

But as Oli puts it, banks can do much more. “Banks could use their connections with the millions of companies and people who do business through them to create positive change,” he says, “and turn ideas and goals into impact. I think this is where we’ll see the first frontrunners emerge.”

Normative’s Head of Science, Sustainability and Climate Research, Dr. Alexander Schmidt, is also dissatisfied with banks’ current efforts to put bold plans into action.

“Despite an initial increase in net zero commitments, particularly after COP26 and the creation of GFANZ, there was later a levelling off as institutions became aware of the complexity of their net zero targets,” he says.

This is a key issue given the critical role financial institutions play in implementing the global transition to net zero emissions.

But today, institutions are at a crossroads when it comes to how best to implement their net zero initiatives. “There are two paths,” says Dr. Alexander. “Either a reactive path of continuing business as usual with a focus on mere compliance while postponing critical investments, or a proactive path of taking a leadership role, systematically assessing climate-related risks and fundamentally adapting operations.”

“The latter not only ensures long-term growth and resilience, but also enables institutions to take a leading role in the transition to a global net-zero economy.”

For Dr. Alexander, it is clear that choosing a proactive path and following a transition plan is not only important, but crucial to the future security of the operation.

In fact, financial service providers also have to protect themselves from accusations of greenwashing.

“Choosing the proactive path to net zero creates long-term resilience and growth for financial institutions – and is therefore the only viable option,” he adds.

Why banks must take a leading role in the energy transition

Of course, banks that delay the implementation of credible transformation plans not only face future risks, but also put themselves at a competitive disadvantage. The institutions that take the lead in transformative change have made optimal use of the various opportunities that support the energy transition.

“This includes green finance, phasing out fossil fuels, advising clients on sustainability and promoting transparency in environmental practices,” says Pablo Orvananos, Global Sustainability Practice Lead at Hitachi Digital Services.

“One area that is often overlooked by banks is the decarbonization of their own IT infrastructure,” he continues. “IT emissions contribute around 3.9% of global CO2 emissions, surpassing emissions from aviation. Banks should systematically assess their entire IT ecosystem (including data centers, colocation and cloud services) to identify and reduce their carbon footprint.”

In addition, banks have a crucial role to play as intermediaries of capital flows, as they must redirect flows of funds in a precise and targeted manner in order to achieve the transition to a net-zero economy.

“Energy is responsible for the majority of all man-made greenhouse gas emissions,” says Dr. Alexander. “The financial sector will play a key role in bridging the financing gap to scale up existing green energy solutions and realize their full potential.”

It is encouraging that Dr. Alexander observes that banks are taking the first steps in this direction.

“By offering sustainability loans, banks create incentives for companies to reduce their own carbon footprint,” he notes. “Through such mechanisms, financial institutions provide financing – either directly or indirectly – for green energy projects, promote sustainable practices, consider climate-related risks in their lending decisions, and work with various stakeholders to develop supportive policies and frameworks.”

“By leading these efforts, banks are not only contributing to a sustainable future, but also responding to the growing global demand for green finance.”

Despite some positive initiatives implemented by several financial institutions, too many financial institutions’ portfolios still do not comply with net zero principles.

“Even among those who claim to be in line, on average only 25% of assets under management are actually covered by their respective net zero targets,” Dr Alexander quotes from a report by New Climate.

Accelerating Net Zero Initiatives: The Role of AI

Could the introduction of artificial intelligence help advance sustainability plans of financial institutions that are not yet aligned with net zero principles?

Hitachi’s Pablo believes that while AI can help significantly with data analysis and forecasting, banks first need to implement the right AI implementation strategy.

“A well-thought-out approach to sustainability, supported by clear objectives, effective strategies and strong stakeholder engagement, is essential,” he says.

“AI can complement these efforts by providing insights and optimization opportunities, but it should be viewed as a tool rather than a panacea. Ultimately, the success of sustainability initiatives depends on the quality of the overall strategy and its implementation.”

Dr. Alexander further explains that combining AI with human intelligence is crucial to achieve the desired results. At the same time, the input data must be accurate to achieve complete success in implementing AI in sustainable strategies.

“The algorithms can analyze huge data sets and determine the most cost-effective approach for a particular impact category,” he says. “Human intelligence can then help companies understand the data and decision recommendations generated by the algorithms.”

“This ensures that the insights generated by AI are correctly interpreted and aligned with the company’s sustainability goals. Therefore, AI can be an effective tool to support sustainability initiatives, but it should be viewed as a means to achieve a specific goal and not as an end in itself.”

Can financial institutions really achieve their net zero targets?

While Hitachi’s Pablo is optimistic that net-zero targets will be met, “it will be difficult to achieve unanimity across the board.”

He notes: “Banks face challenges in achieving their sustainability goals due to outdated systems, concerns about risk management, unclear metrics and fear of short-term earnings losses.

“Overcoming these obstacles requires innovative solutions, robust risk assessment frameworks, transparent metrics aligned with sustainability goals and a shift towards long-term profitability strategies.”

However, the speed with which banks are overcoming these obstacles is not fast enough for ekko CEO Oli. “We need to move faster,” he says. “As an industry, we need to be bolder and faster if we want to achieve our goals and deliver what our customers rightly expect from us.”

But how can we speed things up? For Dr. Alexander, it is a change in mentality: “The financial services sector must take a long-term perspective in its decisions to further achieve its sustainability goals.”

“When you consider the long-term consequences of their decision, it becomes clear that there is only one viable way forward – and that is to proactively participate in the transition to net zero emissions.”

He concludes: “Many institutions currently have an incentive to pursue short-term profits, which jeopardises the timely transition of the global economy to a net-zero economy.

“Some financial institutions have already taken proactive steps towards sustainable banking. However, it is likely to be difficult to reach unanimous agreement due to competing interests of the stakeholders and the lack of a globally agreed incentive structure set by regulations.”

**************

Be sure to check out the latest issue of FinTech Magazine and register for our global conference series – FinTech LIVE 2024

**************

FinTech Magazine is a BizClik brand