Why are Financial Institutions Prioritizing Sustainable Banking?

Why are Financial Institutions Prioritizing Sustainable Banking?

Time Stamp: September 6, 2023 6:50 PM
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Financial institutions, including banks and payment companies, have a leading role to play in shaping our sustainable future.

Sustainability has become a critical driver of decision-making for individuals, businesses, and governments. In this article, we’ll explore the importance of sustainability for banks and financial institutions, how they are embracing eco-friendly practices, and the impact of these efforts on their brand reputation, access to capital, and overall competitive advantage.

The Impact of ESG on the finance industry

ESG (Environmental, Social, and Governance) performance is at the forefront of sustainability efforts in the financial sector. Financial organizations use sustainability reports, annual reports, and other disclosure methods to convey their commitment to ESG principles. According to McKinsey, studies show that strong ESG performance is positively correlated with higher equity returns and reduction in downside risk. However there are several other key reasons for prioritizing sustainable banking practices:

Improve Brand Reputation: Companies that prioritize ESG factors are viewed as more responsible and ethical, enhancing their brand reputation.

Access to Capital: Investors actively seek out ESG-friendly organizations, giving firms that incorporate ESG considerations better access to capital.

Customer Loyalty: Customers prefer doing business with companies that align with their values, fostering loyalty.

Lower Risk Profile: Ignoring ESG factors can create financial risks for investors and insurers. Banks that prioritize ESG are better equipped to manage these risks.

Competitive Advantage: Operational alignment with ESG factors sets financial institutions apart from competitors, making them leaders in sustainable finance.

How banks are promoting sustainability

Banks play a leading role in promoting sustainability, and their impact goes beyond simply implementing internal practices. Banks and financial institutions can contribute to sustainability in two primary ways:

Externally: They can offer finance options, loans, and investment schemes for green projects, supporting individuals and companies on the path to sustainable development.

Internally: Banks can incorporate sustainable practices in their operations, human resources, and asset management. This commitment to sustainability, both inside and outside the organization, gives them a competitive edge.

Collaboration is key for sustainable banking

Stakeholders and investors are increasingly scrutinizing the impact of investment decisions on climate and society. Investors understand that younger generations, in particular, are inclined towards sustainable investments. According to a Kearney survey, 18- to 24-year-olds are nearly twice as likely to switch banks based on environmental, social, and governance (ESG) credentials.

To meet growing expectations, banks must prove they are taking direct action to address concerns and avoid greenwashing practices. (Greenwashing, happens when banks falsely claim to be environmentally friendly)

In the UK, Barclays recently faced a shareholder drive to divest from coal, gas, and oil industries. Similarly, US banks like Chase, Bank of America, Wells Fargo, and Citi have received investor commentary on sustainability issues at annual meetings.

Effective ESG data governance requires a coordinated, centralized approach involving close alignment between business and IT functions. The data strategy should be integrated into the broader ESG and business strategy, with support from leadership at the highest levels.

Climate Payments: A Growing Trend

Financial firms are increasingly recognizing their responsibility in empowering consumers to reduce their carbon footprint. More payments firms are joining this movement, offering innovative solutions to enable eco-conscious choices. A recent report by Deloitte, shared insights that predicted carbon offset purchases reaching a $100 billion dollar market, in developed economies by 2030.

They go on to predict that the digitization of carbon-market infrastructure, including the use of blockchain technology, is facilitating the divvying up and sale of carbon credits via mobile apps and embedded-finance functionalities. Why? Because this technology can streamline the process, encouraging more consumers to support small-scale and niche sustainability activities, from wherever they are in the world.

At ClimateTrade this is something we have been passionate about since we launched back in 2017. Our suite of products and solutions empowers businesses and their customers to take direct climate action.

ClimatePay, is an integration for payment processors, enabling businesses to make a positive impact on the environment. Integrating ClimatePay into your payment processor tool is another way you can embed climate action into your business ecosystem. Further demonstrating your commitment to sustainability while giving customers an opportunity to contribute to environmental causes.

The Future of Sustainable Banking

Sustainability is no longer an option but a necessity for banks and financial institutions. They have a unique opportunity to drive positive change by integrating ESG principles into their operations, aligning with the values of stakeholders and consumers, and helping build a more sustainable world.

Additionally, Financial institutions that prioritize sustainable banking initiatives can unlock avenues for revenue growth that were previously untapped. By embracing environmentally and socially responsible practices, banks can attract a broader customer base that values sustainability, thereby increasing deposits and investments.

ClimateTrade stands as a key partner for banks and financial institutions, providing vital support in their journey towards addressing climate concerns and achieving sustainability goals. By collaborating with ClimateTrade, banks can access a comprehensive suite of tools and solutions designed to help them navigate the complex sustainability landscape.

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