The moment has arrived for banks and fintech to pay their debts – environmental debts – after years of collecting them. With sustainability being one of the most essential aspects of strategy and concern, many of them have evolved into ESG. What do they, and we as customers, need to do to ultimately care for our most precious resource: the Earth? 

In recent years, the younger generations of investors have started a 21st century-worthy trend: put your money where your values are. As a result, brokerage firms and mutual fund companies introduced financial products that follow the ESG criteria. When compared do CSR practices that used to be all the rage in the beginning of 2010s, ESG is a more actionable step companies must take to reassure their place in the new business order. Otherwise, customers and investors will hold them accountable.

According to the latest report from the US SIF Foundation, investors held $17.1 trillion in assets chosen according to ESG criteria at the beginning of 2020, up from $12 trillion just two years earlier. Britvic, a UK firm, refinanced its $520 million loan facility with several commercial banks through a sustainability-linked deal, offering lower rates to companies that meet their various ESG targets. These initiatives sound promising, but the trend is still gaining momentum and it’s not going to be easy.

While some finance and banking companies take a serious approach to sustainability, sixty of the world’s largest commercial and investment banks have collectively put $3.8 trillion into fossil fuels after The Paris Agreement was signed. This shows that the ESG transformation of the banking industry will be a long and bumpy road. The good news is that organisations have been developing benchmarks and establishing objectives that help businesses and institutions take their course towards sustainability. 

How ESG works

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use as a trusted barometer for sustainability of potential investments. Banks investing in ESG can become more desirable to stakeholders and gain significant advantage against their less sustainable competitors. 

Environmental criteria

Environmental criteria consider how a company respects the natural environment, including such factors as energy use, waste management, natural resources or biodiversity. Sustainable companies attempt to minimise their environmental footprint in terms of carbon emissions and using sustainable energy resources. ESG-focused banks also aim to preserve the natural environment by ethical treatment of flora and fauna and mindful use of natural resources. For example, every $1,000 moved from a big bank to a US-based bank Aspiration can have the impact of removing up to 6,000 miles worth of carbon emissions from an average car. 

In line with the more ambitious objectives of the Paris Agreement, the banking sector is promoting a net-zero emissions alliance (Net-Zero Banking Alliance, or NZBA). Through this agreement, member banks commit to making all their credit and investment portfolios neutral in net greenhouse gas emissions by 2050.

Social criteria

Social criteria examine how a business manages relationships with people involved: employees, suppliers, customers, and communities where the business operates. They scrutinise the matters of health and safety and welfare standards to ensure the workforce is treated with dignity and inclusivity in mind. Investors also want to know whether companies assure product safety for consumers and comply with data privacy and security standards. Lastly, ESG-oriented businesses actively support the communities in their operating areas.

As part of its Green Fintech Challenge 2021 and in collaboration with the City of London Corporation, the UK Financial Conduct Authority (FCA) accelerates innovation and develops fintech projects that help consumers to be informed about the sustainability of the products they buy and find options that are aligned with their needs and preferences.

Governance criteria

Governance deals with issues related to a company’s functioning in legal and fiscal areas. This includes board diversity, accounting transparency and audits, internal controls, and shareholder rights. 

One of the leading companies in the field of social and governance sustainability is the US-based Amalgamated Bank. Among many brilliant initiatives, they were the first union-owned company to have a public offering and the union, Workers United, is still its largest shareholder.

How AI and Big Data drives sustainability?

As the challenges of sustainability are well documented and in publicly shared, it’s high time to act for those that haven’t already done so. For many, a question remains: what’s technology got to do with it?

It’s within the technology’s role as an enabler for fast-tracking solutions where it becomes a vital tool for meeting sustainability goals. Artificial intelligence (AI), advanced data analytics, tokens, and distributed ledger technologies (DLT) are some of the most promising fintech solutions for a sustainable finance industry. In its report ‘Fintechs and the ESG Data Challenge’, BNP Paribas highlights a plethora of technological solutions that can move companies closer to their sustainability goals.

Big data is a powerful tool used to measure the environmental impact of companies’ assets, such as carbon emissions or the traceability of their supply chain. It also helps analyse the exposure of equity and fixed income portfolios to different risk scenarios related to climate transition. It provides investors with benchmarks they can compare their own portfolios against.

Through the AI analysis of unstructured data, it’s possible to assess real-time public opinions regarding sustainability. Using these types of tools, BBVA Research’s report ‘Understanding the sustainability framework using Big Data’ identifies the societal debates and concerns related to this issue to better understand what, how, when, and where people talk about sustainability. AI also helps with to assess whether the activity of a company has a positive or negative impact on each of the Sustainable Development Goals (SDGs).

Distributed ledger technology platforms help monitor compliance with the SDGs. For example G17Eco, a project of the fintech World Wide Generation with the support of the Government of the United Kingdom and the City of London, supports businesses in making data-informed decisions related to sustainability factors by aggregating, analysing, and presenting the latest global SDG data.

What’s next? 

Technology enables us to monitor the contributions our actions have in the bigger picture. As it continues to increase our capabilities, we can go beyond the transparency and measurement of our activities as businesses (e.g. measuring the carbon footprint across your supply chain). We can now look to utilise tech such as AI to understand the predictive and prescriptive models we are likely to face and the corrective course of action we should take.

With all of these opportunities and big plans in mind, we must remember that the challenges of sustainability are systemic. Technology is both an enabler and a constraint, but it does not have the motivation to do good or do bad. Although it plays a vital role as an enabler of change, this change requires motivation and regulations at a greater scale. It relies on a collective approach to move the needle on the issues that we’ll keep facing. As a result, the role it plays for meeting sustainability-related goals is dependent on what we – as the creators and users – are able to utilize it for. 

Sources: https://www.goingzerowaste.com/blog/ethical-and-green-banks/
https://www.euromoney.com/article/28tezrdx1bamatvw7dx4x/awards/awards-for-excellence/the-worlds-best-bank-for-sustainable-finance-2021-bnp-paribas
https://www.thegoodtrade.com/features/green-banking
https://www.sustainablejungle.com/sustainable-finance/socially-responsible-banks/ 
https://www.cnbc.com/2021/03/24/how-much-the-largest-banks-have-invested-in-fossil-fuel-report.html 
https://youmatter.world/en/definition/corporate-governance-definition-purpose-and-benefits/