How is green finance reshaping the banking industry?

Having already swept through numerous industries around the world, the sustainability revolution is now taking the banking sector by storm. Each day brings new announcements from banks, fintechs and solution providers.

The sustainability trend presents the banking industry with unique opportunities to deepen customer relationships and, at the same time, is challenging players to innovate through the development of new products and services that address specific environmental goals.

What and why?                                          

From utilities to manufacturing, numerous other industries have long been responding to consumer demand for greener products. Now attentions have turned to the world of finance. According to research by Deloitte, three out of every five banking customers in the U.K. said they wished their banking provider did more to “create a positive, social and environmental impact”. The industry is right to respond.

Getting closer to the customer

As environmental impact becomes a core consideration for more consumers, both fintechs and established banks have started to appreciate the power of reflecting shared values. New fintechs that put sustainability at the center of their business models are now emerging. Incumbent banks are also launching new products to meet demand.

While giving back to the planet is a central motivator for banks to go green, so is the chance to get closer to their customers. At one of Mobey Forum’s recent Member Meetings, we were joined by a guest speaker from Tomorrow Bank – a German neobank focused on sustainability – who presented data that showed how shared values have created trust and engagement with their customers. Average customer deposits at Tomorrow Bank, for example, are four times higher compared to the industry standard for a neobank. What’s more, over 80% of their customers follow them on social media. These are social engagement metrics that many banks can only dream about.

Green bonds and zero emissions are high on the agenda 

What green finance products are available? Green bonds and investment instruments are already offered by most major banks. Both Nordea and NatWest, for example, have launched carbon calculators that estimate the carbon footprint of their customers based on spending data, while BBVA and HSBC are offering payment cards that are made from recycled materials.

Elsewhere, banks like Barclays and ABN Amro are offering better mortgage rates to customers building environmentally friendly houses. Danskebank is also offering a ‘green mortgage’ that offsets its own carbon footprint. More favourable terms for sustainable companies will likely be available soon, as lending to low-carbon corporate customers poses a lower risk to banks.

It’s not just product and service development either. Banks are really starting to take sustainability seriously. A great demonstration of this made the news in Spring, when it was announced that an industry-led and UN-convened Net Zero Financial Alliance, comprising of 43 banks from 23 countries, is going to be established with the sole aim of accelerating the transition to net zero emissions by 2050.

Key challenges limiting further innovation?

Setting up green and sustainable initiatives in banks, however, requires the right mindset and corporate culture. Banks’ senior management teams need good awareness and understanding of the topic, particularly with more pressure mounting from the regulators. The EU is currently examining how to make sustainability considerations an integral part of its financial policy. This includes channelling private investment towards a climate-neutral economy, creating an EU-wide classification system for sustainable activities and ensuring that financial services providers and financial advisers deliver on customers’ sustainability wishes.

With that in mind, it should be noted that customer interest levels do differ. According to a number of our member banks that have already launched sustainable products, some customer segments are highly enthused, while others are resistant and feel like their bank is imposing values on them. Convincing more customers to move away from their traditional bank products and services to more sustainable alternatives may not be a straightforward task, and could well backfire.

Transformation is another hurdle. Innovation of new financial products that utilise data – such as carbon calculators – require banks to have a modern approach to big data. Progress is being made here though in the trading world, where accounting pioneers are working to help stock markets account for the impact that companies have on the  environment by incorporating this factor into financial statements.

The outlook is green

While these challenges persist, the sustainability trend in banking is undoubtedly moving from strength to strength. Over the next 12 months, we can expect to see more banks participating by creating innovative green solutions that both reduce their carbon footprint and help their customers live more sustainably. This is a welcome shift and a substantial win for banks, consumers and the planet.