The COVID-19 crisis is both stressing and stretching the global financial services (FS) ecosystem. It has necessitated personalized digital solutions, a flexible infrastructure, and visionary leadership. Therefore, it’s not surprising to find global financial institutions squinting through today’s new-normal lens and viewing sustainability as a strategic priority, versus simply a nice-to-have ambition.
The United Nations’ 2030 Agenda for Sustainable Development lays out 17 goals that tackle human needs in both developed and developing countries. Broad and ambitious in scope, the Agenda addresses social, economic, and environmental dimensions, as well as aspects related to peace, justice, and effective institutions (Figure 1).
Impact of environmental risks on financial services
Long before the pandemic, weather-related crises posed physical and transition risks for financial institutions. California wildfires sparked by the power equipment of Pacific Gas and Electric led to the company’s 2019 bankruptcy, illustrating how environmental threats can impact credit risk for banks, in a classic example of physical risk.
Banks also face credit risk from exposure to companies with rigid business models that cannot transition to a low-carbon economy flexibly. Transition risk situations can result from changes in policy, technology, or consumer preferences.
As traditional branches reduce physical touchpoints, FS executives must reassess and realign their key performance indicators to reflect the new COVID-19 reality.
While there is no historical guidance for what may happen next, we believe the time is right for firms to reinvent their business models comprehensively so they can compete aggressively – with optimized positioning and agility – as virus threats are mitigated.
Why is sustainability becoming essential for FS?
Leadership in both public and private organizations across industries has recently begun to prioritize sustainability, with many FS firms now following suit.
Public sentiment, clients, and regulators increasingly back environmental, social, and governmental (ESG) initiatives
As more investors seek responsible financial instruments, such as green bonds with proceeds earmarked for climate- and environmentally friendly projects, it’s time for FS firms to step up.
- The largest underwriter of green bonds globally, Bank of America, plans to minimize its environmental footprint with operational goals to be met by the end of 2020: achieve carbon neutrality, utilize 100% renewable electricity, and reduce water use by 45%.
Early FS sustainability initiatives are boosting profitability, differentiating brands, reducing costs through the management of resources, boosting employee satisfaction, and attracting customers with ESG preferences.
- Allianz SE incorporates ESG factors into its proprietary investment processes and offers responsible investment solutions to asset management clients.
A lever for innovation
We believe inventive FS firms will understand the strategic value in dedicating time and resources to leading-edge technologies, data, tools, and methodologies that measure and manage their exposure to environmental risks. Platform banks with a modern digital tech stack can capitalize on the potential of FinTech innovations to build key sustainability capabilities.
- DBS `bank captures and integrates key sustainability data with its existing trade finance products to create an end-to-end, cross-border, commodity supply chain network in collaboration with global agri-commodity trading and processing company Agrocorp.
Sustainability initiatives: the marriage of profitability and positive societal impact
Increasingly, firms are supporting ESG portfolio screening and responsible investing. ESG investing grew to more than USD30 trillion in 2018 and is estimated to reach $50 trillion over the next two decades.
In September 2019, 130 banks with combined assets of more than USD47 trillion (across 49 countries) launched the Principles for Responsible Banking. The Principles provide the basis for a sustainable banking system and help the industry explain how it positively contributes to society (Figure 2).
FS sustainability frontrunners
We agree that low-carbon financing was a positive first step, but now FS firms must intensify efforts to build a sustainable ecosystem. An integrated and holistic system can contribute to climate, health, and social care in the form of goods, offers, and operations.
Banks are funding clean energy projects through positive screening as Deutsche Bank pledged in May 2020 to roughly double its green financing activities over the coming five years, to a total of EUR200 billion by 2025.
Many banks are infusing green into their products (i.e., recyclable cards, loyalty points for low-carbon lifestyles). Spanish multinational FS company BBVA recently launched cards made of recycled plastics, as a part of its commitment to fight climate change.
Green IT projects are leveraging eco-friendly technologies such as algorithmic performance, asset and resource management, server consolidation, and smart recycling. And that opens opportunities for IT-intensive FS players to create sustainable impact by transforming their technology value chain.
As businesses and individuals shift from pandemic disruption to recovery, we predict that their priorities and collective outlook will likely focus on long-term sustainability and ESG criteria.
Firms that demonstrate a consistent and meaningful ESG vision that ties to the beliefs of stakeholders, employees, and clients will join the overarching global movement for positive change. FS frontrunners will be those that prioritize sustainability. Laggards risk customer retention, continued business disruptions, higher operational costs, lower profits, and competitive disadvantages.