Alongside this activity, the regulatory bodies led by the European Banking Authority, are increasingly demanding that the banks, and other financial institutions, show tangible, measurable evidence. Such as their ‘green asset ratio’ to show how they are actively engaged in meeting environmental, social and governance (ESG) goals.
There is a now a palpable expectation – from government, stakeholders and wider society - for banks to fundamentally change how they operate to meet 'green’ targets.
The good news is that a recent survey by the Fraser of Allander Institute, found that 77% of businesses in finance and insurance had set net-zero targets. Yet moving from commitment to action is far from straightforward, with even the GFANZ still to define exactly what ‘net-zero’ means in the context of holding the finance sector to hold organisations to account.
The real test of whether the sector can maintain progress is in what happens next.
Our own research underpins the importance of a bold sustainability agenda with ‘green’ lending front and centre. Currently, we are seeing stand-alone ‘green’ products designed for short-term use. Green mortgages for instance demonstrate a commitment to sustainability in home ownership, but their advantageous terms are not sustainable for the banks’ operating models in the medium term.
Such products may encourage organisations and customers to adopt positive behaviours, but they often merely scratch the surface in the delivery of long-term solutions or fundamental change which a more transformative approach will create.
The report, Retooling the bank for sustainable lending, however, concludes that it is entirely possible to transform the lending value chain to address ESG criteria in lending decisions.
And those ready to lead in sustainable finance will strengthen public trust, stay ahead of regulatory expectations and have significant growth opportunities. Looking at the potential globally, our report found that sustainability-linked lending skyrocketed from $5 billion in 2017 to $120 billion in 2020.
Acknowledging that green lending is still in its infancy, there are nonetheless three key actions to take that will make the biggest difference. The first is to transform the lending value chain by putting in place policies and procedures that reflect ESG principles. Product specifications, documentation and collaterals for a bank’s services and operations all need to be adjusted according to industry specific capabilities of borrowers, which involves far more than putting a ‘green’ label on an existing product.
The second is setting up an ESG data platform and methods to gather, measure, assess and report back relevant information. Banks can select third-party ESG score methodologies for assessing listed companies. Alternatively, they can develop their own and certify this with an independent institution. They could also blend these approaches.
Either option represents a step change for banks and a whole new area of risk, which in turn leads to the need to have new conversations about the potential creation of additional cost centres. An ESG central data utility would certainly facilitate accessing, validating and managing internal and externally sourced ESG data. Such a structure would take care of data management, definition of data policies and data frameworks, and running ESG data operations.
The third critical action to take is reskilling the workforce. Where banks have grown expert in accumulating and assessing credit data, the same now must be true for ESG data models. Managers will need to be equipped with training and industry knowledge so they can make financial decisions based on both ESG and individual client/borrower considerations.
With the unquestionable impact on banks’ bottom line from the implementation of a new working model, there is still a long way to go. However, when addressing long-term challenges such as climate change the banks undoubtedly have a key role to play and short to medium difficulties must be looked at from an ambitious and bold perspective.
If not, they could find themselves on the wrong side of the public opinion and falling behind their competitors.
Stuart Chalmers, Head of Financial Services for Accenture in Scotland