Financial Services

The rise of ESG: Why sustainable banking is the future of finance

Today, Environmental, Social and Governance (ESG) considerations impact every aspect of our lives, businesses included. The ESG impact is seen in every business sector, driven by regulations and demands of customers and investors alike. In finance and banking, buzzwords such as green finance and sustainable banking drive conversations around policies and investment decisions. Banks are working towards sustainability goals by tweaking their products and services to support responsible ESG projects. Here are some intriguing findings from a McKinsey report titled Banking on a sustainable path.

• Sustainable bonds accounted for 11% of the total bond market volume.
• Around 13% of the global syndicated loans market volume was sustainability-related.
• The revenue potential for banks from debt-focused investment supporting the transition to a sustainable future could average $100 billion annually by 2030.

These statistics highlight why sustainable finance is now a key focus area for banks. Green bonds, loans or equity issuance, sustainability bonds, transition funds or bonds, clean energy finance, etc., are some sustainable finance offerings from banks. In retail banking, you have EV loans or green mortgages, reverse leasing of rooftop solar panels, etc. But like every other business, success in banking hinges on profitability. So, does adopting ESG in banking help achieve profitability?

Can ESG principles help with profitability?

Over the years, many studies have found that companies that adopted sustainable practices have had better economic performance than those that did not. More recently, an ESG data analysis of European banks by Roland Berger found that ESG performance or ratings of banks increased drastically from 2002-2020. The study also found a correlation between the size of the bank and its performance – bigger banks had better ESG ratings. Interestingly, an analysis of Return on Equity (ROE) for the same period revealed that E and G policies helped banks achieve higher profits, even though the S policies did have a slightly negative impact.

Let’s try and decode this rise of ESG from another perspective linked to profitability. A joint study by McKinsey and NielsenIQ titled Consumers Care about Sustainability - and Back it up with their Wallets, found that products with ESG claims had achieved disproportionate growth across brands of all sizes. Corroborating this is a Deloitte study highlighting a significant shift in customer preferences towards sustainability. Most customers indicated that the ESG commitment of businesses was a major factor influencing customers’ trust quotient.

This shift is seen even in the banking industry. Almost half of the respondents of a study by cloud banking platform Mambu said, "Access to green financial services has become more important in the last five years.” Further, 49% said they would switch to a service provider more committed to sustainability.

It’s evident that by adopting ESG principles, banks can gain customer trust and improve profitability. These are two crucial aspects without which the banking industry cannot sustain. What else do they gain?

The ESG-driven benefits

With customer preferences shifting to sustainability, banks that chart a path of sustainable growth will see improved branding and gain a competitive edge. A significant cascading benefit is that such banks will have access to more capital as they will attract and retain more customers. They will even be able to attract and retain good talent.

Sustainability is crucial, with the UN and global governments committing to achieving set targets for which even regulatory changes will fall in place. Hence, banks that subscribe to sustainability practices with customised offerings will also have a lesser risk profile with better compliance. Let’s not forget the most critical impact – preserving the planet and environment for future generations, as banks will enable and support more green projects.

The outlook

As humans have more than realised the importance of incorporating sustainability practices into our lives, it will impact every sphere of our lives. There will be a demand for green financing and sustainable banking services to support sustainability initiatives. New technologies and business models will evolve to promote the growth of green energy, especially in the renewable energy sector. It will be a win-win scenario, where every stakeholder, whether the businesses, customers, investors, or governments, will be equally invested and happy. Because the underlying cause, that of the planet, matters to all. The future of both – our planet and the world of finance – are closely intertwined.

How can Infosys BPM help?

Infosys’s BPM banking business offerings support a spectrum of banking services, such as retail banking, mortgages and consumer finance, commercial and business banking, and cards and payments. We help our customers revolutionise their banking services. A shift, by our customers, to processes backed by robust technological knowhow helps resolve multiple problems and unlocks more opportunities. We help them deliver value by transforming their business models.