Retail Banking Could Save the World

The climate crisis is an extremely urgent and global concern. We can no longer postpone our efforts to fight the climate crisis; the time to act is now.

The financial sector holds enormous power in funding as well as the potential to bring awareness to people influencing the climate.

Historically the financial system has focused mainly on maximizing revenues, often short-term. As the world changes, we can see that new forces are pushing the financial system to adapt to new rules, focused more on customer needs, as well as on social and environmental rules.

Banks can play a significant role in promoting economic growth based on new values, including placing a greater focus on environmental responsibility and contributing to an economy with a lower carbon footprint. New regulation and policies can be a way to force companies and individuals to change their behaviour.

I believe banks could also choose to apply other strategies focusing on influencing customer behaviour. There are great opportunities within investments, housing, and private consumption, where the bank could leverage on their central role to influence the customers into becoming more sustainable while also profiting financially.

New regulation

The European Union has taken the lead in prioritizing climate goals with the aim to be the first climate-neutral bloc in the world by 2050 and is therefore creating new regulations to push banks and the economy to become more sustainable.

The foundation of this new framework is the European Green Deal Investment Plan (EGDIP) that will mobilize €1 trillion of public and private funding over the next 10 years. Further we have the EU Taxonomy Regulation, a classification tool designed to support the Green Deal objectives, as well as the Sustainable finance disclosure regulation (SFDR), which increases the requirements to disclose how financial companies integrate the sustainability regulation into their investments and how that is communicated to customers. Other new regulatory frameworks include the European Green Bond Standard (EU GBS), a new standard for green bonds, and the Corporate Sustainability Reporting Directive (CSRD), a new standard for collection and analysis of reported ESG data.

These new regulations will hopefully reduce greenwashing activities and bring much more transparency to financial companies aiming to distribute “sustainable products and services.” That should raise their credibility with customers and create larger interest and capital flows to these products.

The new regulations are thus creating a very favourable environment for financial companies and banks to further invest in customer offerings focusing on sustainability and fighting the climate crisis.

Trust

Banks have historically benefited from a high customer trust level, though current data indicates overall that the trust in financial services institutions and banks has decreased.

As the Edelman Trust Barometer from 2021 indicates, the trust for financial services versus other business has decreased substantially since 2019.

Many reports also suggest that Financial Services have difficulty attracting the younger generations and gaining their trust.

This can of course be explained by multiple factors, such as increased expectations on digital services, where larger incumbent banks may have difficulties competing with fintechs and other large tech companies.

The younger generations are more concerned about the future of our planet according to studies, and in many cases more aware of the climate crisis. By becoming more transparent and by strategically focusing on more sustainable products and services, banks could significantly increase the trust level with their customers, in particular, the younger generations with whom this may be the biggest issue.

Sustainable digital finance a great opportunity

Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.

Digital finance refers to the broad range of financial services accessed and delivered through digital channels, including credit, savings, payments, and investments. It also refers to the integration of new technology, such as artificial intelligence (AI), mobile platforms, blockchain, and the Internet of things (IoT) in the provision of these financial services.

When combined, sustainable digital finance can take advantage of these new innovative technologies to support and promote a transition to an economy with a lower carbon footprint.

I strongly believe that new technology in this sector is key to preventing and reversing the effects of climate change.

Why retail banks actually can play a significant role

Household consumption contributes to 72% of global greenhouse gas emissions, according to data from Sciencedirect. Household behaviour therefore plays an essential role if we want to have an effect on the climate issues.

What could get people motivated to act more sustainably? How could we get people to change the way that they live their lives?

By making simple changes, individuals can have an immense impact on the environmental footprint.

TietoEVRY together with YouGov conducted a study this year in the Nordics to identify what motivates people to think and act more sustainably.

The results are interesting. 40% of respondents said they lack the digital tools to help them to be more sustainable.

Knowledge is the top factor regarding what is most likely to motivate them to reduce their personal climate footprint.

Personal benefit, understanding how you will benefit as an individual, was also a key factor. Personal incentives are therefore very important if we want to create change.

People’s behaviour related to consumption is documented by the bank in all the transactions that we make on a daily basis. Our big investment decisions like buying a home, saving for retirement, or having another child, are often also facilitated by the bank. This gives banks a tremendous opportunity to create digital solutions that could affect our behaviour towards a more environmentally friendly economy. Banks have the opportunity to share knowledge, as well as to create personal financial benefits that help people make these decisions.

Areas where banks can have a great impact on end-consumer behaviour

Investments

Assets in sustainable funds had reached a record $2.3 trillion, fuelled by strong growth in the European market (Source, Reuters).

But, what makes people invest in sustainable funds? Schroders conducted an interesting study on the topic.

The most important factor is the environmental impact they could have, according to 52% of the respondents. Higher returns are important, but not as important as the concern for the environment.

It is positive and inspiring to see, that with the right knowledge, investors choose to prioritize more sustainable investment products. It also highlights the importance of environmental concerns by the customers.

This means that banks can play a crucial role. By educating their customers, banks can raise awareness about sustainable investments and thus create a huge impact.

The new SFDR regulation will also play an important role in bringing more transparency and support this positive trend.

Housing

Housing represents a significant part of household’s carbon footprint. Studies show that housing accounts for approximately 20% of the carbon footprint.

Looking at studies in Europe and data from EASAC (European Academies Science Advisory Council), a challenge within housing is that 75% of buildings have poor energy performance.

In Europe it is estimated estimate that between 1% and 1.5% of the European building inventory is renovated annually. “To meet the goals of the Paris agreement, that rate should be two or even three times higher,” states William Gillett, EASAC’s Energy Programme Director.

Econans conducted a qualitative study and survey this year to explore whether individuals would be interested in receiving sustainability advice and tips on how to make their home more energy efficient from their banks. We also asked what factors that would trigger them to decide to take action.

The results showed that the customers would be very favourable to receiving tips from the bank with regards to how to make the homes more energy efficient. 

Another interesting factor was that customers need to understand the personal benefit. How would the improvement of energy efficiency translate to savings for the customer? This is a similar conclusion as the study by Schroders on sustainable funds.

Buying a new home, or making investments in your existing home, is a life event where the banks play a crucial role. In the process of giving out a mortgage or financing a renovation to make a home more energy efficient, banks have a great opportunity to educate the customers about sustainability and facilitate this transition to more energy efficient buildings.

By using new technology, banks can explain how these sustainability actions will positively impact savings, and how they will affect customers’ personal finances.

Private consumption

A big share of today's environmental problems is directly linked to our private consumption. To reduce consumption's negative environmental impact, we must therefore change how and what we consume.

Consumers need to gain more knowledge about the impact of their consumption.

The financial sector can play a significant role in this area using data. Indeed, as we consume, all our transactions are recorded and stored within the bank. Carbon footprint is often calculated by using consumer expenditure data.

As identified for investments as well as housing, knowledge and personal benefit are key drivers. Leveraging the data, banks have the opportunity to educate the customers regarding the environmental impact of their private consumption.

Linking that information to savings that could be achieved through a change in behaviour could increase the chance of people taking action even more.

We have seen some first initiatives in the market, often through partnerships between banks and external fintech partners to leverage transaction data to educate the consumers with regards to the environmental impact of their consumption. Some examples are CoGo and Meniga delivering solutions in this space and allowing banks to display the carbon footprint for the customers.

Today these solutions are often limited to calculating and displaying the carbon footprint of the consumption.

By introducing other elements in these solutions, such as more proactive tips customers can act on, people are more likely to understand other ways they can change their behaviour to positively impact their carbon footprint and consumption patterns.

Research also highlights how consumption and the carbon footprint can vary over time, affected by various life events. For example having another child, buying a new home, going on retiring trips, moving to a smaller home, will have a big impact.  Sharing better knowledge with customers on how life events can affect their environmental footprint can also be a way to further engage and influence the customers to act more sustainably. This is in line with Econans’ studies on life events and the desire of people to better understand how life events affect their personal finances. To link that further to the environmental impact could be an interesting solution.

Conclusion

The bank is present in people’s everyday life. The bank is also there for our big life events and financial decisions, like buying or renovating a new home.

Banks have a great opportunity to influence how their customers behave by utilizing new technology and partnering with specialists, if they lack the competence inhouse.

By educating the customers and giving them more knowledge about their investments, housing, and private consumption, and how they impact the environment in these areas, banks have great potential to raise the awareness of their customers. Banks can give customers tips on how to make better decisions these areas to contribute to a low carbon footprint economy.

By linking the environmental impact of these financial actions to personal benefits and clearly explaining how the end-customers will personally benefit if they act to become more sustainably, we should see that end-customers are more willing to change their behaviour.

Banks also have a great chance to increase the trust among their customers, especially the younger generations, by shifting the focus towards more sustainable products and services,

Retail banks can thus play a central role in fighting the climate crisis.

Sources

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en

https://www.schroders.com/en/us/insights/equities/how-do-retail-investors-feel-about-returns-from-sustainable-investing/

https://www.government.se/

https://oecd-development-matters.org/2019/04/12/a-perspective-from-the-financial-sector-on-sustainable-business/

https://www.forrester.com/blogs/the-european-unions-sustainable-regulation-jigsaw-is-almost-complete/

https://easac.eu/media-room/press-releases/details/with-25-of-europes-greenhouse-emissions-coming-from-buildings-scientists-suggest-fundamental-policy-changes/

https://www.sciencedirect.com/science/article/pii/S2214629618310314

https://www.tietoevry.com/en/newsroom/all-news-and-releases/other-news/2021/10/nordic-sustainability-survey?utm_source=linkedin&utm_medium=sponsored-update&utm_campaign=NR-2021-09-Follow_us_media_journalists_influencers-Brand&utm_content=Post_1&li_fat_id=802ef3a1-2576-402c-8ea0-f9f859d65462

https://hope-project.net/?page_id=2&

https://www.edelman.com/sites/g/files/aatuss191/files/2021-04/2021%20Edelman%20Trust%20Barometer%20Trust%20in%20Financial%20Services%20Global%20Report_website%20version.pdf