Sustainability is critical to the survival of our planet. Therefore, all businesses, including financial services, have a responsibility to improve their ESG stance, not least because their customers expect it. By becoming more sustainable as an organization, and also in the way they invest, banks can enhance brand value, customer loyalty, financial returns, and compliance. While this is not an easy transition, technology can support them throughout the journey to a sustainable future.
Why ESG for Banks?
As ESG ratings for banks have now become the measuring point or the right standard, banks would do well to invest and improve their infrastructures and processes aligned with ESG requirements. ESG in banking now underpins many facets of the banking industry’s operations and this is an indicator to potential clients as to the reliability of the business. It creates a compelling argument for banks to report on their sustainability performance in an objective, measurable way. In fact, the recent developments in the business world show that investors use the ESG criteria to decide on the right bank to make an investment in the first place.
So, how banks can become an ESG-powered ecosystem? How can banks develop a lasting ESG strategy? As the business world has been progressing towards building banks concerned about protecting the environment, promoting equity, and creating trust, banks are evaluated in terms of their societal responsibilities and the endeavors they put in place to go green.
To understand what is ESG in banking, critical goals like becoming carbon neutral in all of their global operations, converting everyday financial processes to renewable energy sources, and achieving net-zero carbon status are at the forefront of banking industries. In order to expand their business and enhance their reputation, banks should strategically build roadmaps to ensure corporate sustainability and climate change efforts.
ESG in Banking: Building a Sustainable Future
ESG is all about taking responsibility for broader challenges around us. When banks embed ESG controls across multiple functions, they can not only deliver a modern and frictionless customer experience, but they can also build a community that is rooted in respect, trust, and long-term value.
As banks are rapidly developing their environment to accommodate customers who demand around-the-clock service delivery, it takes the conversations around the environmental impact of global operations to enable compliant, resilient operations.
The end results are long-lasting and capable of proactively rebuilding trust in banking institutions, providing a platform to responsibly use natural resources. ESG also helps banks to use sensitive customer data discreetly and also use technology to ensure privacy and security. It also encourages ethical conduct across the business lines and brings out transparent reporting.
While banks are concerned about mobilizing customers to trust them, despite the banking industry’s multiple disconnected systems, ESG can redefine their operations. And finally, ESG-compliant banks are proven to be less vulnerable and more stable, and the commitment to reducing the footprint of banking operations can help banks tackle urgent societal challenges that deliver new solutions.
Managing ESG risks
In an internal operations scenario, the data challenge can hamper a bank’s ability to respond to ESG-related risks and opportunities. The traditional risk models that banks use for underwriting, valuation, asset-liability management, liquidity forecasting etc. are proving less effective in conditions of environmental stress. Banks have to learn to factor ESG information in credit risk models that were built for data, such as demographics, financial health, occupational status etc. Here, they can apply machine learning and analytics to understand ESG data and filter the noise. Banks will also need to revisit the assumptions in their credit risk stress testing frameworks. Once again, a data analytics platform is required for building, testing and iterating new risk models; other digital solutions will be needed for sharing ESG-related risks to shareholders and regulators as part of sustainability reporting.
Tech to the rescue
Technology helps financial institutions deal with the physical impact of climate change.
Banks will have ongoing needs linked to ESG even during normal times. Fortunately, there are a variety of intelligent technologies that can help them deal with these issues. For instance, banks can use an analytics platform to capture, process and visualise data from ESG initiatives to assess performance, and share the insights with various stakeholders. Best practice ERP solutions can record and calculate carbon emissions, and help capture satellite images to look out for natural disasters. APIs drive open banking and ecosystem collaboration to spur ESG-linked product innovation, creating differentiation and revenue opportunities.
