Sustainability has long been on the corporate agenda, but in the banking space, it’s become a more pressing point to address in recent years. Banks are increasingly under scrutiny to show their commitment to the environment, with pressure coming from all sides: regulators, the public, investors, employees and clients.
Climate change risks are hugely important for banks. Not only are banks the largest source of funding for the world’s businesses – big and small – but they also fuel the global economy with capital investment. What our society, economy and sustainability look like in the future hugely depends on where banks put their money.
Banks need to consider their brand too. Gen Z customers especially are far more socially conscious than previous generations – nearly 90% would be willing to pay 10% more for a product or service if it was more sustainable. Plus, green investment strategies are slowly but surely gathering pace. Banks with strong, socially conscious credentials can have a positive impact on customer numbers, investments and attracting talent.
But with all that in mind, are banks really taking sustainability seriously?
How can we distinguish between greenwashing and real intent?
Greenwashing or Clean Green Intentions?
Nearly every major bank today has a climate or sustainability strategy or commitment on their website. But when speaking to banks, the vast majority (70%) saw ESG as means to “improve market reputation and credibility,” with half recognising its benefit to the sales sheet and 44% using it to attract younger generations.
But corporate-driven intentions don’t necessarily mean lack of meaningful progress. Many banks are already starting to prioritise sustainable investments, and an estimated $300 billion (£252 billion) flowed into ‘sustainable’ assets in 2020.
ABN AMRO is one such bank making positive changes already, with Tjeerd Krumpelman, Head of Group Sustainability, commenting: “In 2017, we flipped things around for clients, saying that sustainable investing should be the norm. Whenever people come to the bank as a client, the standard offering is now sustainable mandates. And clients appreciate this. They understand.”
“A Lot of White Noise and No Real Substance”
The European Central Bank set out its ambitious roadmap in summer 2021, defining new policies, risk assessments, and regulatory requirements for banks. But it seems the changes fell on deaf ears. In March this year, the ECB threatened to name and shame those who hadn’t yet met its climate risk disclosure, claiming there was “a lot of white noise and no real substance”.
Recent Avanade and Efma research found this to be the case too. Two thirds of major European banks are only just getting started, while only half will finally be ready for regulatory reporting in the next six months. Only one in four have a climate risk model ready now. A third (34%) plan to be in that position in six months and the rest (54%) will not be ready for at least a year. What’s more, 57% will not hit net zero carbon operations until 2025, while only a small proportion (15%) stated they had already achieved this position.
It’s Not Easy Being Green
Sourcing and integrating climate risk data into banks’ risk management framework is integral to success, but also the biggest challenge. Data is fragmented, inconsistent and from multiple sources – moreover, there’s a lack of consistency in how banks are making ESG disclosures, and no clear way to manage and use the data.
Unsurprisingly, technology is going to be key. And while banks may be holding out for a clearer process on how exactly they need to be working in ESG policies, they can’t wait too long.
As Deutsche Bank’s Henrike Isabel Pfannenberg, Head of ESG and Impact Transparency, said when discussing the data challenges versus the urgency to start meeting reporting requirements: “We cannot and will not wait for perfect data.”
Regulatory requirements are here and now, and required reporting is only likely to grow in granularity. The most successful banks that will emerge from this will be those that, like Deutsche Bank, make a start as soon as possible.
The real point here though is not to forget the huge weight the climate crisis bears on all of us: banks’ yield significant power and sustainability can’t be a side project for much longer – it needs to be a corporate priority.
By Nic Merriman, Financial Services Lead at Avanade.