The glaciers are melting, extreme weather events are intensifying, and there is increasing awareness of and debate on social inequities and injustices. Today environmental and social issues are disrupting business and even resulting in loss of lives and livelihoods. Consequently, there is now greater scrutiny and strident demands for corporate accountability on these fronts. Regulators around the world are now focusing on Environmental, Social and Governance (ESG) matters with standardized frameworks to guide corporate action. Many regulators, such as those in Europe, have started making it mandatory to report ESG related data as part of annual disclosures. The banking sector too is not exempt from this. Banks have a crucial role to play in helping the world reach its goal of net zero emissions.
The Net Zero Banking Alliance is an industry-led initiative that has a group of banks that currently represents over 40% of global banking assets. They are committed to streamlining their lending and investment portfolios with net zero emission norms by 2050 and aligning their goals with the United Nations sustainability goals. It is also important to note that demand far exceeds supply for sustainability related products across the globe. According to Bloomberg the combined volumes of sustainability-rated debt instruments have grown by 80 percent per year, from $155 billion in 2017 to more than $1.6 trillion in 2021.1 McKinsey estimates that sustainable trade finance and cash management revenue will grow by 15-20% to reach $28-35 billion in 2025.2 As the primary custodians of financial transactions, and one of the strongest pillars of the global economy, banks have a critical role to play in driving the sustainability agenda.
Integrating sustainability-based features into core products must be the way forward for banks. They must now transform their portfolio into one that is value based and ESG compliant. Such a portfolio could potentially include loans for solar, electric or hybrid vehicles, lower rate mortgage products aimed at consumers who buy homes which adhere to energy standards, lending to businesses that focus on renewable energy and other sustainable activities which are ESG compliant. Financing Green Building projects at lower rates and supporting local retailers and suppliers who meet carbon emissions and sustainable standards at favorable lending rates could also be part of the offerings.
Interestingly, this focus on ESG has led to the emergence of a new kind of bank that puts sustainability at the core of its strategy and builds products around it. One such neo bank is the community bank Climate First bank in Florida. Launched in 2021, this bank has been carbon neutral from the first day of its operational existence. An integral part of its core strategy is to abstain from investing in or lending to extractive businesses. They also launched a lending program for customers to get solar loans. Applications take all of 3 minutes and customer get the answer in less than a minute.
ESG-based product differentiation is only possible if there is a robust technology platform in place. The Climate First bank can process solar loans in record time only because it has a powerful technology core. Banks must put in place state-of-the-art technology solutions with advance data processing capabilities that can deliver intelligent insights on customers, help in effective segmentation for targeted ESG products, and help the bank go to market quickly with new sustainable products. The platform must also be able to bundle ESG compliant products with other fast-moving ones to build attractive offers for customers.
Banks on this ESG-based transformation must move forward with the understanding that ESG is not just another compliance point or an expanded form of CSR. It is a business transformation that requires sweeping changes in mindsets, beliefs, and convictions across all levels of the organization. ESG benchmarks the demand of an entity not just to look at their primary business areas but also the impact of their upstream and downstream supply chains. Banks must focus on embedding ESG awareness into their business values, products and across its supply chain. ESG must be treated as a business opportunity to invest in assets which are carbon neutral and sustainable.