Turning ESG for banks into a competitive advantage

Banks face increasing environmental, social and governance (ESG) demands. Not just from regulators, but investors, customers and employees too. But as sustainability moves up the priority list for all stakeholders, it opens up the next frontier of competitive advantage and a pillar for future growth for those banks that get it right. 

As financial intermediaries, banks are at the heart of ESG transformation. They stand to play a big part in channeling capital into low-carbon activities and financing transition activities. 

This is more than a feel-good exercise. Companies that implement policies and practices to address sustainability create more value, according to McKinsey. They generate higher equity returns and see a reduction in downside risk, with lower loan and credit default swap spreads and higher credit ratings. Commercial banks that adopt a strategic focus on ESG outperform their rivals too, according to a recent report from Deloitte

Many investors see ESG performance as a proxy for good management, and customers and employees increasingly look for concrete evidence of green credentials. So banks that get their ESG proposition right can differentiate themselves and gain a competitive advantage. It also represents a big opportunity for developing new business and revenue streams.  

ESG as an opportunity for green growth 

By embedding ESG across their business, banks can better understand and manage their own climate challenges and sustainability transformation, and those of their clients. They can identify and manage climate risk, attract new customers, and develop and sell new products. 

The numbers speak for themselves. Achieving net zero is estimated to require $9.2 trillion in capital expenditure (capex) per year until 2050 globally. That amounts to a total capex requirement of $275 trillion. And demand for green financing products like sustainability-linked loans is also expected to keep rising. Indeed, for the first time since the Paris Agreement in 2015, banks are now earning more fees arranging green-related bond sales and loans than they did helping fossil-fuel companies raise money in the debt markets. 

These products have a knock-on effect, for the bank and its customers. By providing green financing, banks accelerate the sustainable transformation of the customers who buy them. And by aligning with a product strategy focused on reducing carbon emissions, banks indicate the strength of their governance. It shows that they understand the strategic risk that climate change represents, and demonstrates their commitment to mitigate that risk. 

So by creating a robust green product offering, banks both tap into new, sustainable revenue streams and help hit their own – and their clients’ – ESG goals. 

Powering banking’s ESG transformation with unified data 

This requires the concerted effort of every bank business function. Strategy and business development units, for example, need to set an overall ESG strategy. This means laying out their path to net-zero emissions by 2050, steering the portfolio, and adjusting sales and pricing mechanisms to achieve net-zero goals, among others. 

And while ESG demands differ across various bank units, all of them share a common basis: data. To keep up with ever more stringent legislation, banks need to gather, clean and analyze entirely new types of data. 

With this, they can report their own environmental performance; evaluate their clients’ financed emissions and supply chains; run climate risk models and stress tests; and build new ESG applications. 

The problem, however, is that most banks don’t yet have this data. It’s a new challenge, and few have the know-how and tools in place to measure sustainability metrics. And those that do have their data in a lot of different silos across the organization. This makes it difficult to extract it when they need it. 

Banks need a unified data repository, a single source of truth, that is readily accessible across the business. From a reputational and compliance standpoint, this allows for efficient reproduction and trail of ESG metrics. And from a business perspective, it allows teams and solutions to operate in concert across the bank. The risk department can perform and disclose the results of climate risk stress tests, then incorporate the results into the bank’s risk steering mechanisms. Other departments can then integrate this risk data into their own ESG metrics. That data might then underpin, for instance, decision-making about whether or not to continue to lend to high-emitting clients, and more efficient reporting on ESG efforts. 

By making data flow throughout the business to the teams that need it, banks can integrate sustainability in all business lines. This data advantage enables improved steering capabilities, a more focused strategy and the ability to run simulations to identify and react to “dirty” trends in the portfolio. And it  means more effective communication to both internal and external stakeholders. What’s more, putting a coherent data framework in place also makes a bank’s entire data function more robust. They can turn this infrastructure to any data-intensive project. 

Turning the ESG tech stack into a competitive advantage 

But to get the most out of their data, banks need a tech stack that allows for this connectivity and scalability. ESG requirements for banks are constantly changing, and the expectations from customers, employees and investors are evolving. So banks need an ESG solution that’s flexible enough to accommodate future use cases. 

That’s why we built our Sustainable Finance Platform on a central data hub. It acts as a single source of ESG truth that connects and harmonizes external data with a bank’s internal ESG data. With that as a foundation, banks can build up a custom platform of ESG applications that fit their priorities, from emission management and steering to climate risk stress testing and ESG advisory, among many other use cases. Those banks with a tech stack that can flex to meet these varied demands will have a significant competitive advantage. 

Getting sustainability transformation right, then, offers two-fold benefits. Banks can play a major role in responding to climate-related risks – for themselves and their portfolio – and it makes good business sense. Integrating sustainability across the organization enables banks to better identify and mitigate risks as well as opening up new product opportunities and revenue streams. It creates a technical framework that is useful for any data-intensive problem: a flexible, future-proofed tech stack that can be applied beyond sustainability initiatives. ESG is an investment in the future – not only of the planet, but of growth, too.