This year´s reporting season has brought sustainability and environmental, social and governance (ESG)-related efforts to the forefront of international banks’ annual reports, including their future outlooks and bold pledges. The message is clear: banks are emerging as a major force in reaching the UN´s Sustainable Development Goals (SDGs). We’ve seen changes in the C-suite, too. Most organizations have created new executive-level roles, such as chief sustainability officers, and are responding to calls from increasingly invested boards. With pressure to act coming from all sides, the banking industry has reached a green inflection point.
At Accenture, we’re seeing the banking sustainability imperative take on new urgency. In daily conversations with our clients, we’re observing massive changes in banks’ attitudes toward ESG. Banking leaders are currently placing a strong emphasis on the “E”, the environmental and climate risk component. Some of the largest global financial services institutions, such as HSBC and Santander, have pledged net zero emissions by 2050. They will measure emissions not only from their own operations and supply chains but, even more important, from their financed emissions. Often referred to in their lending and investment books as scope 3, these can be up to 1,000 times greater than their own emissions. In the US, the Big Six investment firms have promptly followed suit.
The banking industry has reached a green inflection point.
The sustainability conversation isn’t a new one (the Paris Agreement was signed in 2016), so why the sudden urgency? In a word: pressure. Banks are feeling it from all sides. They’re facing scrutiny from the general public, regulators, employees, clients and investors, with each group motivated by slightly different interests.
The general public expects the financial services industry to be the catalyst when it comes to achieving the UN’s SDGs. They demand transparency and accountability beyond pure economic indicators. Meeting the targets set out in the Paris Agreement will require a new contract between the banking industry and society. We predict the changes necessary will require between $5 – 7 trillion in investment funding. And that’s just the first wave of requests from the public.
Regulators and central banks now understand that climate change poses a profound, immediate and existential threat to the global economy. It follows that it’s a systemic risk for the financial services industry. Banks can no longer ignore or deny climate change science, nor the catastrophic financial and systemic costs that will come with it. As such, those bodies are increasing pressure on banks to address the sustainability imperative and to do so straightaway. The tone from the top has changed from offering advice and recommendations to mandating disclosures and actions around capital requirements, stress tests, risk modelling, disclosures and KPIs (e.g., green asset ratios). Increasingly, banks are building these requirements into their own policy, compliance and risk management frameworks.
Scrutiny and pressure from employees and clients are motivated by a slightly different interest. Our research shows 64% of talent won´t take a job with a company that doesn´t have a strong sustainability and environmental policy, and private and commercial clients now pick and choose banks with strong ESG profiles.
Finally, pressure comes from the investor community and activist groups. Institutional investors have already urged some banks to be more ambitious—in both the short and mid-term—in reducing exposure to fossil fuel assets and have filed resolutions at annual general meetings. Given the massive disruption ahead, investors will also expect banks to explore new growth and revenue opportunities.
For their own operations, banks have no alternative but to lead by example when it comes to sustainability rigor. In particular, they will need to look into their supply chain, which represents between 30 – 50% of their total cost base. We expect third party risk management to become more complex.
Banks have been slower than some other industries to join the sustainability effort. But the momentum towards sustainable banking is only increasing—and will continue to build over the next decade. At this green inflection point, we see five areas where banks can accelerate their sustainability journey:
- Sustainable banking strategy. Define your sustainability strategy and develop an action plan to deliver on it. Conduct a thorough analysis and chart a course toward becoming a “responsible bank.” Determine the business model and technology required to capitalize on the opportunity and define your value proposition to your clients. Examine your organization’s culture for ways to embed positive initiatives that recognize, reward and promote sustainability across the enterprise. This comes down to governance and change management. Embed sustainability into the right governance and start training all people now on the new way forward.
- Risk and regulatory compliance. ESG regulation is evolving at high pace and scrutiny is already moving beyond climate change and will further address the social and governance aspects. Some regulatory requirements are already in force, such as climate stress tests and sustainability disclosures. Filtering lending books against taxonomies will come next. Banks should try to get ahead of the regulatory curve. Managing ESG-related risk exposures is not only about regulatory reporting but should be seen as a paradigm shift for end-to-end risk management frameworks and policies. Bolster your data capabilities with intelligent tools to help collect, validate, and analyze ESG data and ensure you turn data to insights to actions.
- Sustainable product offerings. Banks are already seeking the competitive edge in the green funding market with innovative green products like bonds, sustainable mortgages and sustainability-linked loans. This will spark a chain reaction across multiple industries to adopt sustainability. At the moment, banks are feeling pressure, but ESG-linked products—on both the lending and the investment sides—can be a competitive advantage. Banks will need products and processes to support green initiatives, but those solutions must be efficient when it comes to process frameworks and technical architecture. Seek out advisory support from your ecosystem partners to assist with the required policy, process and technology changes.
- A smart target operating model for sustainable banking. Accenture sees a clear influence of ESG on banks’ target operating models, including front and back offices. Sustainable finance decisioning and monitoring, ESG client due diligence, investment advice and supply chain finance are just a few of the already known use cases—there’s actually a plethora of them. With ESG frameworks and taxonomies still being too volatile, and available data like ESG ratings not coherent enough or available for all clients, we expect to see massive efforts by cohorts of ESG analysts. A smart operating model for sustainability combines strong operational discipline, work orchestration and governance. It makes the most of intelligent outreach to existing clients with digital channels supported by an integrated ecosystem of data suppliers to help manage the efforts. ESG data should become an integral part of client lifecycle management, building upon the KYC and AML checks and capabilities which are already part of it.
- Green IT: Become operationally efficient by moving applications, data and infrastructure to the cloud, delivering a one-two punch for stakeholder value by reducing carbon emissions and operations costs. When approached from a sustainability perspective, cloud migration can reduce global carbon emissions by 59 million tons of CO2 per year. Accenture research calculates this reduction represents a 5.9% reduction in total IT emissions. That’s the equivalent of taking 22 million cars off the road—a massive reduction that can help us meet our collective climate change commitments.
This is a moment of critical importance. The challenge is real and the work ahead is complicated. But it’s work that we must get right. Banks that visualize and execute their sustainability agendas now will have first-mover advantage in the race to meet—and even exceed—their sustainability goals. It’s time to get to work.
In my next blog post, I’ll discuss the complexity of ESG due diligence and the data challenge when it comes to banking sustainability.
Accenture can help you achieve your sustainability goals with tried-and-tested solutions. Contact me to discuss how.