As COVID-19 prompted people to think about their impact on the planet, banks have reviewed their approach to environmental, social & governance (ESG) with fresh eyes.
KPMG’s 2021 ESG risks in banks report notes there is increasing demand from investors for sustainable products, as well as growing pressure from regulatory bodies to consider
‘Green’ or ‘sustainable lending’, which
Accenture defines as lending in which ESG considerations play a key role in credit decisions, has taken off. It gives the example of “giving a borrower incentive to meet ESG performance objectives”, such as the conditions of the loan tied to carbon emissions.
We’ve already seen a handful of banks incorporate environmental and social responsibility into their products. For example,
bunq in the Netherlands recently signed a deal with green lending platform Tulp to offer mortgages, helping customers “make their homes more environmentally friendly”.
Bunq also has a green card where for every €100 you spend, they plant a tree. The idea followed an earlier initiative by Alipay owner Ant Financial in China, which won the
UN environmental programme’s top honour. The fintech ‘gamified’ carbon footprint reduction by providing points for actions such as taking public transport instead of driving, then planting a tree when a certain number of points was accumulated, not only
promoting environmental awareness but also re-vegetating semi-arid Mongolia. What would happen if the top 20 banks followed the lead of these financial organisations? The impact would be huge.
Here are my predictions for environmental innovation in banking.
Gamification of sustainable living to improve engagement
Banks will follow Alipay’s lead with the gamification of sustainability initiatives with a real-life outcome. Customers could win rewards for undertaking sustainable or ethical activities to improve not only their relationship with the environment but also
engagement with their personal finances. For anyone who worries about their bank balance or is looking for a way to change their spending habits, this could prove a real motivator. This in turn, enables banks to better engage with their customers and create
opportunities to upsell.
Environmental impact scores to calculate interest and impact
We will see banks undertake environmental audits of customers when they take out a loan and periodically throughout the life of their loan. If the customer can improve their impact on the environment, the bank will decrease the interest rate. This would
be highly appealing to consumers looking to save, allowing banks to secure them as new customers more easily. This will extend into expenditure impact analysis, with positive potential to direct spend as well as investments.
Prompts to take out ‘green’ products and offset or influence expenditure
Linked to expenditure analysis, we will get to a stage where companies will analyse what a customer is spending on. Many banking apps already classify what proportion of spending is on each category of product or service, and some banks are already using
carbon footprint analysis to understand impact. On one level there will be increasing product offerings like say a ‘green’ credit card which could, on behalf of the user, offset their carbon emissions. Also, the ability to influence spend towards choices with
a lower environmental impact is an area where decisioning technology can come to the fore. Think of a recommendation to spend by category at the lowest environmental impact supplier.
Personalised offers and intelligence on sustainable buying choices
Banks will start trialling services – which consumers will be able to choose to opt-out of – which provide personalised offers and suggestions for what you buy based on its impact on the environment. This will give customers the option to consume more sustainably
on a regular basis.
With the customer’s permission, a bank could analyse those spending patterns, and the bank could suggest alternative products, methods of transportation etc., that are less harmful to the environment via their monthly statement. The customer could even request
that the data be combined with their location data from their mobile phone provider and expertise from a travel company to educate end-users on how a small change in behaviour or purchase choice can make a big difference to the environment. Some people will
find this invasive, but others will love it.
How will technology enable this?
All of this has to be powered by technology that is able to be easily adapted to be used to support banks in for example changing lending processes, or integrating data for decisioning and providing options to customers. It will need easy to set up low code
frameworks to make changes to processes quickly and easily, without the need for specialist coding knowledge.
The data in your current account and main cards will become more important for analysis. Banks will look to feed information into a customer decision hub and arbitrate through different options based on customer spending patterns. For example, on suggesting
spending via companies with a better ESG score or suggest spending alternatives by shop or industry category.
Modern technology can also be used to automate supply chain audit processes such as checking a client’s factories and third-party suppliers adhere to ESG principles in different locations– automating requests, escalating information to more senior people
in the bank and sending reminder notifications so that senior management confirm receipt of ethical issues with customers during investigations.
It will become commonplace that banks ask their suppliers ‘How can you help us in our sustainability agenda?’ ESG topics won’t just be firmly embedded at the top of an organisation and linked to an annual report by clients how they could be more sustainable.
Increasingly, banks’ impact on the environment will be influenced by society as a whole as well as their staff.
Like Open Banking, environmental sustainability initiatives won’t just be driven by legislation; they will arise due to customer demand. Any banks that innovate now are not only playing their part in protecting the environment, they will be able to distinctly
differentiate themselves, win the respect of consumers that also care about sustainability and welcome new ones too.