Key trends impacting ESG performance in the retail banking sector

The global pandemic arguably did more for ESG awareness than it did for digital adoption. A dual health and economic crisis, in which the fate of individuals was dependent on how other people behaved, created a heightened sense of togetherness. This was visible not only in terms of virus transmission but economically, as banks realised that only by helping customers survive the crisis could they help themselves repair balance sheets. Now, amid the Russia-Ukraine crisis, ESG has been brought into even sharper focus with banks under pressure to offer various types of support.

Spending analytics

Banks and technology vendors are re-purposing digital money management (DMM) capabilities to optimise financial wellness goals and ESG impact.

Companies are increasingly offering climate change impact insights and tools that track and measure the CO₂ emissions associated with their purchases. Doconomy in Sweden, a partner of Mastercard, helps users track and measure the CO₂ emissions associated with their purchases, enabling them to limit the climate impact of their spending through climate savings, climate compensation, sustainable investments, and climate refunds from partner brands. Just as we had traceability in supply chains for fair trade, we are now moving toward traceability in money.

Open banking ecosystems and sustainable digital finance

Banks are strategically deploying fintech eco-systems to drive sustainability in their products and operations. This is often referred to as sustainable digital finance (SDF). It includes mobile payments platforms, crowdfunding, big data, AI, blockchain, digital tokens, and IoT, to help providers directly and indirectly support the targets set in the UN’s SDGs.

Retail divisions (as seen at Barclays) have opened additional application programming interfaces (APIs) to collaborate with external partners that commit to designing new green products. 

Sustainable robo-advice

ESG-focused robo-platforms use ML algorithms to guide investors towards suitable investments, typically exchange-traded funds (ETFs) that bundle securities into themed and lower-risk instruments in which risk is hedged across a portfolio. Sustainable ETFs have grown in popularity due to specialist robo-advisors, such as EarthSimple10, that deal exclusively in sustainable ETFs.

By making it easier for individuals to invest in accordance with their values and preferences, the total amount of capital available for SDGs may increase significantly.

Growing evidence that ESG makes money

There is growing evidence that environmental impact, diversity, and privacy are key drivers of financial performance at the wealth, corporate, and retail levels. As one indicator, the average ethical fund eclipsed the average non-ethical fund between 2017 and 2020 in terms of growth (30.4% vs. 29.1%) and between 2015 and 2020 (76.1% vs. 64.1%).

Further, the interdependency between a bank's profitability and the environmental record of its clients has become increasingly clear. For example, US energy giant PG&E filed for bankruptcy in 2019 as it couldn’t meet the liabilities it faced following the Californian wildfires. 

Reputational building

Banking has a particularly high need for reputational rehabilitation after the Great Recession. ESG initiatives are a potential way to atone, by doing demonstrable good for local communities, employees, customers, and the environment. This contrasts with skin-deep marketing campaigns and greenwashing.

Generation hashtag

A large driver of sustainability is a generation that will soon represent 75% of all accounts and purchases and receive an estimated $30 trillion wealth transfer from baby boomers over the next 30 years. 

Younger customers place increased weight on a company’s moral, social, and political views, and choose to affiliate with those that share their values. This creates an opportunity for financial institutions to win more customers than they lose by taking a stand on popular issues.

Several purpose-driven banking organisations, like building societies or credit unions, often enjoy above-average financial returns and net promoter scores (NPS). But white space exists for traditional financial service institutions in this regard.