ESG expectations on banks and insurers are higher than ever - failing to meet them poses major risks

Climate change is undoubtedly the biggest challenge of our era, and the decisions we take now will impact the lives of generations to come.

In November, world leaders will meet for COP 29 to further global cooperation on reducing rising temperatures. While initiatives across governments and industries will be critical, it's understandable that individuals around the world feel compelled to do their bit to reduce their impact on the planet.

As well as changing their habits, people are increasingly looking to use products and services that align with their values and help protect the environment – and for banking this is no exception.

In the UK alone, it is estimated that the investments held by the biggest banks and investors emit 805 million tonnes of carbon per year.

So, when choosing a bank or insurer, more than ever, consumers are taking into consideration the values and green credentials of financial providers. Attitudes are clearly shifting, and the importance placed on environment, social and government (ESG) related issues will only continue to grow.

Falling short on sustainable finance

People across the globe are taking more sustainably conscious decisions. Our latest research of US and European consumers shows that the most popular include better recycling efforts, taking shorter showers, and switching to cleaner forms of energy in their homes.

However, at present, these actions appear to be falling short in relation to how consumers approach their finances.

For example, less than one in ten consumers globally currently put their money into environmentally responsible investments and even fewer said they had used a carbon calculator to assess the environmental impact of their spending.

Increasing demand for greener products

The good news is that consumers want this to change. This is particularly the case for younger generations who are leading the charge towards a more sustainable future, with research showing that Gen Z and millennials have some of the highest levels of fear, guilt and outrage about the effects of climate change compared with Gen X and baby boomers.

This sentiment is clearly translating to their finances - while over half of consumers now want their bank to help them live more sustainably by offering greener services, this demand is particularly high among younger generations, rising to two thirds.

The risk of failing to act

With consumer demand for more environmentally friendly financial products clearly growing, why then, are so few taking more sustainable action on their finances?

One reason could be awareness and communication. Just 12% of consumers have noticed their financial services provider talking more about their environmental efforts, with banks, insurers and financial providers potentially needing to better articulate their sustainable offerings more clearly.

Alternatively, it may also mean that providers need to step up their sustainable initiatives full stop, and simply offer customers greener, more ethical products and services.

Not only does failing to act negatively impact the environment, not responding to the demand for greener financial products can also deter existing and prospective customers from using the products and services of certain companies.

More than one in ten 18–34-year-olds say they have already swapped their financial provider due to its environmental practices or it not aligning with their values - and this generational trend is only likely to continue.

Financial institutions need to better tailor their offering to meet the greater demand for ethical and environmentally friendly products or risk losing the trust and loyalty of not just their current customers, but future ones too.

Leveraging the shift

The interest in greener, more ethical financial products is clearly growing, particularly amid younger generations who are spearheading a broader drive toward a more sustainable society.

Banks, insurers and other providers, however, are falling short in keeping up with demands for these products and services. And when they do offer them, they are failing to adequately communicate their offering to customers.

While meeting these demands can be challenging, there is a clear opportunity for financial providers to leverage this shift; be it offering more greener financial products such as climate-friendly insurance and investment options, providing tools and guidance to help consumers understand their carbon footprint, or increasing transparency about their operations.

Good ESG practices are not just vital to creating a cleaner, more sustainable planet – they are also a crucial component to attracting and retaining the next generation of increasingly environmentally conscious consumers.