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Can banks lead the sustainability charter for a better tomorrow?

Never before in history has progress achieved the pace that it’s clocking today. We’ve made great strides in leveraging technology to create a world of material comforts. Yet, this progress has come at a cost. Our world is grappling with climate action failure, debt crisis, the asset bubble burst, geopolitical conflicts, terrorism, modern slavery, and the looming threat of nuclear destruction. So, what’s this got to do with banking? Almost everything.

Dakota Access Pipeline, which crosses disputed territory and violates the rights of indigenous people, received the support of $2.5 billion through 17 banks.

Sixty of the world’s largest commercial and investment banks have collectively put $3.8 trillion into fossil fuels from 2016 to 2020.

What if they didn’t do that?

As lenders in the socio-economic system, banks are uniquely positioned to be drivers of positive change. What if they said no to funding nuclear weapons or fossil fuels? What if they said no to lending money to organizations practising modern slavery? There is so much change banks can bring in if they shift their focus to sustainable profiting. Take, for example, Aspiration, a USA-based fintech company, which withholds support from the coal or oil industry, and has carbon offset programs for each purchase.

We are at a green inflection point in banking, and the stakeholders such as the consumers, shareholders, employees, and regulators stand united in their ask for an ESG commitment. Today, a staggering 92% of consumers across the world think that banks should adopt more sustainable practices and help preserve the environment, according to a poll by Dentsu Aegis Network in 2020. Moreover, sustainable practices bring transparency, efficiency, resilience, and purpose to organizations. According to World Economic Forum’s Bridging Digital and Environmental Goals playbook, there is a 2.5 times greater likelihood of success for those organizations that link digital with sustainable transformation than those that don’t.

An ethical approach is key

A significant quarter of the banking sector has already responded to this call for ethical banking and sustainable investment. The Glasgow Financial Alliance for Net Zero (GFANZ) reported that the financial sector has made commitments to the tune of over $130 trillion to achieve the net-zero mission by 2050.

The interest in green initiatives is apparent in the surge that responsible lending has seen, and it is expected that the annual issuance of green bonds will be $1 trillion in 2023. McKinsey details a three-pronged approach for sustainable investing:

  • Negative screening, which implies excluding sectors or practices from company portfolios based on ESG criteria
  • Positive screening
  • Proactive engagement for value creation with existing clients.

However, sustainability is not just about protecting the environment but also taking care of the people during the transformation. Are we dealing with individuals and organizations fairly? And indirectly? Are we promoting companies that also encourage those principles?Banking organizations must have answers to such questions.

Fair treatment threads through all aspects of banking, from unbiased hiring to rewards and promotions, and non-discriminatory lending practices. Human rights priorities for the financial sector include gender wage gap, discrimination in hiring and promotions, employee and customer privacy, due diligence of the customer, industry and large projects, and trading in commodities like staple foods.

Unlocking the digital future

Digital transformation can play a significant role here, and the resultant improvement in efficiency and profitability can go a long way in how banks are evaluated by investors and stakeholders in the future.

Affirmative action requires problem identification, and early movers have already started building these in their digital stories. Take, for example, the Green Credit Management System of Huzhou bank which has integrated technology into green lending using smart green labelling, calculation of socio-environmental benefits, and early environmental risk warning. Financial transaction chains, carbon footprint monitoring, social impact assessment, modelling, intelligent automation, and transparency through modern technologies like artificial intelligence, machine learning, blockchain, etc., can lay the foundation for greener operations, financial inclusion, and social gains.

A Deloitte-WSJ publication highlights how data-driven insights from DEI (Diversity, Equity, and Inclusion) technology tools can provide the desired objectivity and credibility to an organization. For example, natural language processing can be used to remove bias from digital communications in hiring, and machine learning can support objective evaluations of performances. The role of technology is exemplified by collaboration between Citibank, the first bank to publish the global pay gap, and The Female Quotient, leading to the development of an ‘Advancing Equality Calculator’ for accountability around the wage gap.

Treading the sustainable path

Sustainability is no longer a tick in the box but rather a business necessity. The interconnectedness of systems and companies means that everyone has a role to play. Banks may have larger ownership given the sheer amount of money transacted daily. Their insistence on lawful and fair practices by partners, mandating disclosures on human rights, emissions, and energy consumption, can potentially tip the balance in favour of the planet.

variety of regulations around sustainability reporting that have resulted in the development of tools for gap assessment. However, enterprises need to have ownership and accountability that go beyond the legislative compliances and develop policies and practices that will not only bring socio-economic reform but also make them champions of the cause of sustainability.  

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