Modern Bankers in an age of sustainable banking: Three take-aways

Banks play a crucial role in driving the sustainability transition. Their greatest influence lies in guiding clients towards adopting more sustainable business practices. By redirecting financial resources, banks can significantly speed up the shift towards a greener economy. Yet, to be able to double-down on this role, the financial business case needs to become clearer. Until now, sustainability has been a regulatory-driven and mainly considered as a cost driver.

The business case can be made: with the market for sustainable finance products expectedly growing from 5.4 trillion now towards $31.1 trillion in 2032, the sustainability transition offers a great opportunity for banks. A bank committed to sustainability must understand the clients that drive this growing demand. Bankers, being the main connection between the bank and the client, will be key to understand these clients.

Banking will become more multi-faceted, and more complex. Before, a banker could focus on core banking parameters, such as cashflow and collateral. Now, additionally, they need to advise clients what it means to transition to a sustainable future, how to integrate sustainability best practices and accurately report on mandatory ESG disclosures. In this article, we address three important sustainability related focus points for bankers. We believe that taking these client focused considerations into account, leads to a positive business case for sustainable finance. The focus points are:

1. Bankers need to understand the clients’ sustainability ambitions to align with the bank’s strategy
2. Bankers will have to offer tailored sustainability advice to clients
3. Bankers need to effectively gather essential clients’ sustainability information in a non-invasive way

In the rest of this article, these focus points are explained in more detail.

Bankers need to understand the clients’ sustainability ambitions to align with the bank’s strategy

Many bankers already have sustainability related conversations with their clients. Each client is unique; some clients have significant sustainability ambitions, and some are happy with the way things are going now and are reluctant to change. If a bank has an ambitious sustainability strategy, it is important that it attracts clients that have an aligned ambition. Such ambitious banks shift their focus from the ‘traditional creditworthiness view’ towards a new balance, where the clients’ sustainability ambitions and actions are also considered.

At Capgemini, we developed a simple matrix to show this shift. We combine two important variables when it comes to the bank-client relationship towards sustainability. We take the traditional creditworthiness of the client^[1], and combine it with the ‘sustainability ambition’. These sustainability ambitions are the eagerness of the client regarding making a sustainability transition^[2], and is placed on the x-axis in the figure below.

We classify clients on this axis and divide them into a matrix. This helps decide which client type the bank should focus on, and which approach to take for existing clients.

If a bank itself has high ambitions regarding sustainability, it wants to have equally green clients in their books, whilst ideally also being highly creditworthy.

For the sake of grouping them, we have named the high creditworthy and sustainability ambitious clients “Superstars”. Less creditworthy but ambitious clients we call “Idealists”. High creditworthy, but low ambitious clients are “Grey Geese”. If they are neither willing to be sustainable, nor sufficient in their creditworthiness, we call them “Strugglers”.

Of course, all banks with an ambitious sustainability strategy would rather have the Superstars in their portfolio, meaning that there is high competition among banks to bring in these types of clients. When a bank not only wants to focus on this highly competitive client segment, it can also choose to focus on another segment. It can choose for the idealists, which have high sustainability ambitions, but a lower creditworthiness. In this case a higher risk acceptance might be warranted. Ideally, the bankers can push clients towards the Superstars quadrant by offering financial advice. In the same way, there are possibilities for green^[3] banks to target Grey Geese. These grey clients can be persuaded by bankers to heighten their sustainability ambition.

The best focus area for a bank is mostly dependent on the bank’s sustainability strategy but is also influenced by which type of client is most dominant in its current portfolio. An assessment should take place to find the sweet spot for the bank, and if a focus should take place on a specific client segment.

Bankers will have to give tailored sustainability advice to clients

Apart from understanding which client to focus on, acting upon sustainability ambitions is extremely difficult. Helping a client with their sustainability transition will be a new skill bankers have to develop. A banker needs to understand the financial position of a client and become versed in sustainability. Generally, they need to focus on three steps.

1. The climate risks which the client is exposed to
2. The latest sustainable sector developments for the clients they service
3. Relevant sustainable banking products for the client’s situation

Below examples of these steps:

Climate risks

A banker needs to understand the climate risk exposure of the client. This is to ensure the client’s business continuity in a changing climate. For example, a banker can point out that if a client has three textile suppliers that are all in the Bangladesh coastal region and deliver 90% of its inventory, more frequent and intensive flooding might be a business continuity risk. Another example is the risk that carbon prices are imposed or heightened for a relatively carbon intensive steelmaker. Bankers need to have a holistic view on these risks, and help clients mitigate them.

Sector developments on sustainability

Mitigating these risks is very sector specific. Improving the impact of a fashion boutique store is very different from “greening” steel making. On these matters, sector expertise is of the essence. Bankers should understand the latest sustainability related developments within a sector. Shipping bankers should know the latest ship legislations, which technology could aid the shipping company lower their emissions, and which options should be most beneficial in the client specific situation.

Sustainable banking products

Subsequently this knowledge should be combined with financing expertise. There are a lot of new questions bankers can ask, and again, these will need to be highly sector specific. Let’s start with the most important question: “Is a client helped with the financing of their transition?”

Let’s take the example of a bakery:

Would a bakery be better off with a new and efficient electrical oven, instead of a gas-powered one? Can we finance that favorably for the client, and will the client be left with sufficient free cashflow? Is the investment in an electrical oven worth it, considering the expected remaining time in business and the resale value of the oven? Are there additional subsidies the client can be helped with? Can the baker install solar panels to lower the oven’s energy costs? What is its energy contract currently, and can it be improved? Favorable financing, and “wiggle room” for bankers to tailor towards the sustainability need of a client often materialize via different products a banker can offer a client. Whether it is a Sustainability Linked Loan, a Green Loan or a Sustainable Mortgage, bankers need to know what they can offer. This also requires effort from a banker.  

Ideally, a banker becomes an expert in sustainability and can help the client with both the financial case as well as the new sustainability challenges. Yet, this asks a lot of a banker. Not all bankers will be able to become fully comfortable with this new area. In practice, we see that banks sometimes set up a support team. This team supports bankers with specific sustainability related questions. The degree of involvement depends on the amount of help the bankers need regarding sustainability: the support team can join for every client visit, so the responsibilities are split, or only jump in when for example setting highly specialized targets for Sustainability Linked Loan.

Bankers need to effectively gather essential the clients’ sustainability information in a non-invasive way

Banks need to understand the sustainability impact of their portfolio. Part of this need comes from regulatory pressure. Regardless, most green banks have also made voluntary commitments to lower their impact on the climate.

Understanding the sustainability impact of the portfolio requires a lot of new information. Information such as the client’s greenhouse gas emission, or the EU Taxonomy’s ‘greenness of activities’, has traditionally not been something a bank was interested in. After all, it did not convincingly impact the creditworthiness of clients. Likewise, lowering sustainability impact of a bank’s portfolio has not been a goal in the previous decades.

This means new data challenges arise. As mentioned before, the targeted climate impact reduction goals can only be reached when banks can finance clients on more sustainable business practices, or to only finance (relatively) green assets. This requires detailed and frequently recurring sustainability information on client and asset level.

Understandably this requires a lot of effort. Luckily there are more benefits apart from regulatory adherence. Having detailed information allows for more sustainable product innovation, picking the most transition-worthy clients, a lower exposure to stranded assets and many types of other benefits, ranging from more sustainable brand recognition to being more attractive for sustainability-conscious talent.

Sustainability related data requirements and methodologies are not yet standardized. This is currently visible in relatively a lot of variation in client outreach. This frustrates clients and bankers alike, and hampers sound data gathering. Even though clients can have strong sustainability ambitions, it does not mean that clients accept an endless barrage of either vague or oddly specific ESG questions from a banker.

This creates a squeeze, as a lot of client specific information is also necessary for ESG reporting and for example tracking the bank’s decarbonization pledge. However, these issues can be mitigated. Two key factors play a role in making the client outreach journey smoother; make sure it is client centric and efficient.

Below two best practices:

1. Client centricity entails that it is clear why the bank asks certain questions, and how the client benefits. Also, it is important to make sure the client understands the questions asked, as the clients are not ESG experts themselves. They are entrepreneurs or business leaders. Therefore, it is also the perfect opportunity to help the client with their transition. See below an example for an agriculture (horticulture) client: 

2. Efficiency can be subdivided in finding a methodology that circumvents client outreach from bankers and making sure information that is requested is used and stored properly, so that bothersome recurring requests are limited.  
   • Using public or third-party data is a more and more common way to retrieve ESG data. Either client specific or location-based information can be derived from an external party. The amount of information offered is growing fast, both from data vendors as well as from more raw data sources, such as national statistics organizations. Alternatively, climate impact estimations are allowed to be made, based on generic client data, such as industry or country of incorporation of the client.
   • Storing and using information properly is key to unburden bankers. This prevents repetitive questions. Yet, as ESG data within the bank is rather new, it is not a given that this is immediately well-implemented. With Capgemini we have designed and implemented data management best practices regarding Sustainability Data. Some key components are as follows:
     • First, a solid process should determine what is considered sustainability data and what is not. This solves multiple discussions before they start. An example is the greenhouse gas emission of a collateral. Is it specific ESG data, or an additional data attribute relating to a collateral – and should remain with the collateral data owner?
     • Secondly, a separate role should be created for an ESG data owner within the Data Office. This person is responsible for the ESG data. This is the go-to person in the organization for ESG data management; whether it is missing data, a prioritization issue, or a decision on a new ESG data system, the ESG data owner should be the main character.
     • Next the ESG Data Use cases need to be clear from a business perspective. This way, it is clear what needs to be implemented. There is a big difference in data needs for reporting or for portfolio steering.
     • When the use case is clear, it needs to be operationalized. Operationalization consists of several activities, such as bringing the use case from words into output data attributes (data that ultimately is being used by the end user), finding the best methodology to get the used data attributes, and distilling such a methodology back to supporting data attributes (input data attributes). The methodology can also be influenced by whether data is already available via existing processes. A final step is converting these attributes into IT requirements, including description, format, frequency of use, etc., and finding the right IT environment to store this information^[4].
     • If available, using the existing data architecture -such as a data marketplace – for central storage and reuse, will ascertain that data will not be requested twice, or that old data will be used.

When data gathering is both client centric and efficient, the client relationship is better, and time is saved. This enables the banker to help clients take the next step in their sustainable transition.

Conclusion

The role of bankers is changing quickly. This requires a lot from bankers themselves, and they will need to acquire new skills. They ought to be helped. The banks’ strategy ought to give clear guidance on what a banker should be able to do for different types of clients.

The bankers should also be helped by a strong data governance regarding ESG data, which ought to give good client data without overburdening the bankers with client outreach questions. This gives focus towards the company and the employees.

Capgemini can both help in the customer and employee journey’s and is a frontrunner on managing ESG data. Furthermore, Capgemini has sector sustainability experts which can support bankers on the latest trends and their applicability to real customers.

To find out more, do not hesitate to request a meeting with our expert, Diederick Levi.