Sustainability in Financial Services: how banks are using tech to beat the curve

Monica Hovsepian, Head of Financial Services Industry at OpenText 

According to the 11th annual EY/IIF global bank risk management survey, climate change will be the greatest emerging threat to banks over the next five years, with over 90% of Chief Risk Officers (CROs) and the Board in agreement. In light of this, over the past 18 months, Financial Services (FS) organisations have had to significantly shift their priorities around the climate.

Climate change poses two main types of risk to FS organisations: physical and transitional. The physical risks are the symptoms we can all recognise, such as extreme weather events and long-term shifts in climate. These can impact the physical premise or operations of the bank and or its customers. The transitional risks, however, are those which impact their products and services, as a result of a move to lower carbon emissions.

Why are banks changing their ways?

The motivation behind banks’ changing priorities can be broken down into three main areas. Firstly, rising regulatory pressures. All around the world, banking regulators are formalising new rules for climate change management. For example, the Bank of England’s Prudential Regulation Authority was among the first to set out detailed expectations regarding risk management. It requires banks to identify, monitor and measure their exposure to climate change and employ the necessary tools and technology to mitigate the impacts. Similar moves are being made by Germany’s BaFin (the Federal Financial Supervisory Authority) and the European Commission. It’s likely that these kinds of regulations will only become more prevalent with time.

The second factor is evolving customer expectations. For the last few years, customers have been demanding more from the businesses they engage with, both in terms of service being provided, and their commitment to the environment.  In fact, it seems that the pandemic dramatically accelerated customers’ engagement with climate change and sustainability. With extreme global weather events increasingly making headlines, as well as various individuals and activist groups raising awareness, customers are becoming increasingly conscious of the topic.

Unsurprisingly, we’re experiencing a slight generational divide around the issue. Recent customer research from the consultancy, Cornerstone Advisors, found that several of the largest banks in the US (including Bank of America and Wells Fargo) were losing customers – primarily among millennials. These losses seem to be the beginning of a worrying trend for traditional banking establishments – unless something changes.

The third motivator is employee engagement. The last two years have dramatically shaken up the labour market, with record numbers of job vacancies helping to fuel The Great Resignation. For example, over half of 16 – 34 year-olds considered quitting their jobs or actively looked for a new one in the final three months of 2021, with movers hitting a record high.

With the workforce firmly in the driving seat, employees are looking for purpose in their work and are able to demand change within their organisations. A survey from just this year found two-thirds felt it was important for an organisation they work for to be committed to acting sustainably with nearly half wanting businesses to take steps to be more sustainable. And an organisation with a clear social, ethical purpose ranked higher than remote or hybrid working in factors that would make employees take a new job.

The combination of these new regulations, plus pressure from both customers and employees is leaving banks with little room for manoeuvre. Unless they’re willing to lose revenue and talent, FS organisations seriously need to begin prioritising the climate and putting management strategies in place – and fast.

How can banks meet these new expectations?

For FS organisations, the first step on the road to sustainability is ensuring that all internal operations and processes are environmentally friendly. Unfortunately, there isn’t a ‘one size fits all’ approach to solving this problem. Instead, it can be achieved through a variety of mediums, for example, abiding by clean technology. However, it could also be as simple as reducing the paperwork from traditionally, paperwork-heavy personal and corporate finance processes and becoming more digital. Not only is this environmentally friendly but it helps to create a more seamless customer and employee experience.

By extension, banks need to ensure that their products and services align with their sustainability goals. This is achievable through the introduction of more sustainable supply chain processes. For example, digitising your supply chain platform is one method of embracing sustainability. Banks are also able to put pressure on companies to be more sustainable when they’re working with and approving loans for large, corporate clients. Conversely, a number of mainstream banks and lenders have now begun to offer ‘green mortgages’. This is where lenders offer mortgages with better interest rates to those moving into energy efficient homes.

Organisations should also consider adopting a Customer Life Cycle Information Management (CLIM) approach to improve their sustainability performance. This allows organisations to consolidate information into one single customer view across the enterprise and improves customer data management. It can ultimately be used to market, organise, analyse and manage customer-related information and activities, which will in turn enhance the overall sustainability performance of an organisation.

Ultimately, we can’t change things overnight. However, we can take things one step at a time, and all play our part in managing the situation. Though it might be slow, we’ll gradually start to see a difference being made. Afterall, we all bank, we all have a bank account, we should all contribute and ensure we are doing our part to the future of our planet and environment.