The most pressing ESG concerns for the retail banking industry

There has been an explosion of interest in environmental issues, much of that driven by global governance institutions, national governments, investors, and CEOs. But that must be carefully quantified when building the business case for new consumer-facing propositions, particularly in the context of deteriorating economic conditions.

Additionally, the pandemic brought into sharp focus the social impact and role of financial service providers. Banks were not just answerable to shareholders but to the government, citizens, communities, the press, and regulators. And not just because it was the right thing to do and government-mandated, but because foreclosing on all those customers in arrears would have further devastated loan loss provisions. Since then, regulators have focused even more specifically on “fair treatment” and consumers, in turn, are more alert to how companies approach social risks, which will come into even sharper focus amid inflationary and recessionary pressures.

Concerning governance, following a string of scandals and the 2008 financial crisis, the public has a very negative view of banks and their corporate culture and structure. Much work has been done, in both policy and PR, to address this. The industry will be focused on preserving those hard-won gains and seeking to cement banking as an industry with leading governance standards. 

The focus on ESG follows soon after the decade-long focus on customer-centricity, and there are tensions between the two. As covered in our UK Retail Banking: Competitor Benchmarking 2022 report, ESG is not obviously customer-driven, as it is not just low as a driver of provider choice, but bottom, in all age groups, and all wealth brackets.

Our executive survey data suggests few banking and payments executives believe ESG will have a high impact on their business. This was true from 2021 data, when compared to other industries banking executives expected the lowest possible impact across 12 months. In 2022, when we asked those same executives to specify the most impactful themes among five options, ESG was lowest, at 11%, half as important as broader digital transformation imperatives and trade disputes, for example, particularly as economic austerities bite. ESG will slip even further down the agenda in 2023.

For “sustainability” to be sustainable in the long term, it needs to be sustainable for everyone. This includes the customer, meaning it cannot be more expensive or less convenient than alternatives; the commercial provider, so it cannot be loss making or market share losing; and the wider environment—the E. There is insufficient evidence consumers will flock to the “best” green financial products. Triodos Bank—routinely applauded as a paragon and “success “of the movement—is arguably also a reminder of the limitations of such an approach. Despite well over 20 years in existence, it still has fewer than 100,000 customers (and in the first year of 2022, assets under management decreased by 10%, down EUR5.7 billion).

Younger cohorts’ investment preferences differ from their older peers regarding environmental impact. In the UK, 75% of consumers in their 20s regard sustainable investing as ‘very important’ or ‘somewhat important.’ This stands in stark contrast to those aged 60 and above, among which the proportion drops to 37%.

In moments of heightened emotional stress, commercial providers that organise themselves to deal with the root causes of that stress are more likely to increase customer advocacy and trust, which is linked to the increased likelihood of cross-sales, referrals, and overall customer lifetime value. This is the enlightened self-interest that will see many providers double down on ‘social’ considerations.

Regulators worldwide are fixated on driving fair, transparent lending decisions. In the US, the Biden administration has proposed a new federally-backed credit bureau, mandated to ensure credit scoring is not discriminatory and includes alternative data. Housed within the Consumer Financial Protection Bureau, all federal lenders would be required to incorporate the federal credit agency’s scoring, including for programs such as federal home lending, PLUS loans, and other loans that are guaranteed by the US government.

SMEs are the bedrock on which many economies are built, creating half the world’s jobs and generating up to 40% of GDP. The pandemic hurt this group disproportionately, making it even harder for SMEs to access the finance they need to drive sustainable global recovery. 

Banks (at the retail, corporate, and investment levels) have long histories of bad press for unjustified remuneration. This can include high-ranking executives earning too much compared with other staff in the bank or big pay-outs regardless of overall corporate performance. In the aftermath of the credit crisis, outrage stemmed from the banking industry’s ability to privatise gains and yet socialise losses, with bankers receiving bonuses despite government bailouts due to irresponsible behaviour presided over by executives, many of whom received golden parachutes.

In a retail context, some banks have introduced limits on variable pay, supporting so-called balanced scorecards to guard against product push, forcing sales staff to engage more meaningfully with the specifics of each customer’s financial situation, and devising new performance metrics based on helping customers (whether that results in new product sales or not). BNP Paribas has introduced incentive schemes that govern 20% of staff’s variable compensation. The bank has CSR filters in its credit decisions and has installed incentive schemes that govern 20% of the variable compensation of 7,000 employees, relying on nine CSR performance indicators.

Hidden charges, punitive fees, and mis-selling are all big reasons for the ill will toward banks. Profiting most when customers often benefit least – through overdraft fees, for example – creates enormous structural disincentives to customer-centricity. The biggest banks in the US have not removed fees because their peers have not removed fees, which means it is not yet a competitive issue. Even at the height of the pandemic, JP Morgan generated nearly $1.5bn from overdraft fees in 2020. Yes, new digital banks have capitalised on that, with zero-fee models to gain a foothold in the market, but the truth is most of those players have been unable to fund the service they provide and are now exploring various types of fees themselves (Tandem has introduced fees for credit cards, Monzo new fees for accounts).