Sustainable finance: Navigating between customer expectations and regulations
Sustainability should be part of all banking business. Do you agree? If you don’t, you are part of a clear minority because sustainable banking is not only a trend but the future of the financial sector (flow / Deutsche Bank, 2021), with the corresponding keyword being sustainable finance.
- Sustainable finance describes the inclusion of sustainability criteria in the financial sector.
- To remain ready for the future, banks must align their business activities and products sustainably – as the developments in recent years have shown.
- Through an operational solution, the partnership between BSI and PPI demonstrates how banks can tangibly consider ESG criteria, thus making a positive contribution to society in the long term.
What is sustainable finance?
With the signing of the Paris Agreement, 2015 became a turning point in global climate policy. While before, companies, institutions and organizations had often implemented measures to combat climate change on a merely superficial level, there has been an increased commitment since 2015. Today, the European Commission’s “Green Deal” and the UN’s Sustainable Development Goals (SDGs) are well-known worldwide.
This development has not sidestepped the financial sector. From a practical point of view, we speak of sustainable finance or sustainable banking in the context of banking, which constitutes the inclusion of the so-called ESG criteria in all financial-market decisions.
On a side note: ESG is an acronym for Environmental, Social, and Governance. Companies develop financial products and services and position them in the market based on those criteria, among other factors.
There is still room for improvement, however, not only in the day-to-day banking business but in the overall economy as well: Only 63% of the companies surveyed by Refinitiv take measures to reduce their emissions, and only 35% of them have specific emission reduction targets (Refinitiv, 2019).
Sustainable finance as a foundation of the business strategy
Let’s return to the financial institutions that play a key role in achieving climate targets in the context of sustainable finance. Why do they play this key role? Because it is they who have the power to direct the flow of funds into sustainable projects and institutions.
This concept also applies to the capital markets where you have impact investing, green bonds and automated investments based on ESG criteria and the SDGs. The sustainability business is booming, as confirmed by a survey conducted by the Global Sustainable Investment Alliance: About 35 trillion US dollars were invested in sustainable capital investments in 2020, which is about 15% more than only two years earlier (GSIA, 2020).
The question banks in the European Union face is not so much whether to pay attention to sustainable banking but how to be sustainable. To provide some context: The EU requires financial institutions to align their operations with defined sustainability criteria, and those who do not comply will lose their license from the financial supervisory authorities.
A clear commitment: 9 out of 10 European institutions attach great importance to taking environmental, social and corporate governance criteria into account when selecting new executives (Coalition Greenwich, 2021).
At BSI, we demonstrate, together with our partner PPI, which operational solutions companies must create to meet the ESG criteria in banking. As part of BSI’s Sustainable Finance Breakfast, we presented three use cases from a bank’s various product segments, bearing in mind the social commitment of financial service providers. For all three, the basic BSI x PPI infrastructure is easy to implement.
The use cases are the result of asking customers about their ESG preferences, the optimization of ESG risks in the credit portfolio and the support of customers in their ESG reporting. Our technology is used equally in all three cases and stands out with the efficient interaction of these three tools:
- bsi.crm: Our CRM is a central hub and storage tool for all relevant customer information.
- bsi.cx: bsi.cx is the dispatcher that supports personalized engagement and the integration of external data.
- ppi.finsu: “Finsu” stands for financial sustainability and is a basic tool for collecting and evaluating all ESG-specific information.
Sustainability in traditional banks: BLKB
BLKB, short for Basellandschaftliche Kantonalbank, is investing CHF 50 million to establish a start-up called Radicant that is based on a community platform focused on sustainability.
As a matter of principle, sustainable finance is an important keyword at BLKB. As a case in point, the bank concerns itself with the ESG criteria in every respect and aims to reduce its financed emissions to zero by 2040. In addition to its regional commitment to the environment and efforts to reduce its own ecological footprint, the bank also applies the ESG criteria to its day-to-day banking business. As early as 2014, BLKB started to offer its customers ESG-optimized investment products exclusively. in 2020, the bank also started to review the ESG scores of companies in risk sectors before granting them credit. At the same time, it promotes energy-efficient building investments by offering energy mortgages.
By doing so, BLKB’s management demonstrates what developments in the financial industry have shown for years: That the focus is shifting to sustainability. For companies to be competitive in the long term, they must devise new ways based on AI, ML and big data.
Three challenges in sustainable finance and their potential solutions
At the same time, sustainable change and sustainable banking come with three major challenges.
- A lack of expertise: Banks often do not have the necessary expertise to deal with the topics appropriately. External consultants or investments such as those made by BLKB might be viable solutions.
- Regulations that are difficult to comply with: Which products and partners meet the criteria? With smart algorithms, AI can provide a remedy in this area.
- Data processing: Collecting the data is not the biggest hurdle. Instead, the transformation from big data to smart data is going to be intriguing, and agile solutions like those developed by BSI can help in this area.
As the three challenges described above establish equally, a willingness to change and the essential expertise are necessary to create sustainable change in every sense of the word.
Conclusion: Sustainable finance, ESG, and the like are not trends
Countless studies, regulations and social and political developments show that sustainable finance is critical if banks want to be ready for the future. This applies to their relationship with their customers and to how they position themselves as forward-thinking employers.
Are you interested in the opportunities sustainable banking holds? At BSI, we work with smart tools and solutions specifically tailored to your customers’ individual banking needs.
We look forward to hearing from you.