How to achieve a sustainable bank through digital solutions

By Ruby Walia, Senior Advisor for Digital Banking, Mobiquity

The banking sector has a major role to play in the fight for environmental sustainability. But for some banks, it’s a bigger role than they’re prepared to take on.

In 2016, the Paris Climate Agreement included low-emission financial flows as an essential component of effective climate change mitigation. This positions financial institutions (FIs), including those in the private sector, as key players in driving green initiatives.

Unfortunately, progress on this front has been slow. Despite overwhelming support from industry leaders to tackle climate change, few institutions’ sustainability programs are mature enough to make meaningful progress toward ambitious emissions targets. And the lens of these struggles misrepresents the industry as a whole. Two-thirds of consumers think their financial institution does “green laundering” or is more focused on promoting itself as climate-conscious than reducing its carbon footprint.

When it comes to reducing carbon emissions and gaining public approval, the best intentions can only get FIs so far. To put climate initiatives into action, FIs need to leverage fintech solutions such as artificial intelligence (AI) and advanced data analytics. These technologies hold the key to scaling sustainable banking initiatives at a pace that maintains progress toward environmental goals, while protecting institutions’ profitability.

It’s not easy being green

Across the industry, FIs see sustainability as a top strategic priority. They are mobilizing trillions of dollars to green financing, hiring environmental specialists for key decision-making positions and working with international communities to fight climate change. Many of the biggest players are even committed to building carbon neutral investment and lending portfolios by 2050. By all accounts, FIs appear to be doing their part. In practice, however, they struggle to deliver on their commitments.

The 60 largest private banks in the world invested $742 billion in the fossil fuel industry in 2021 – a negligible drop from the previous year and an increase since the ratification of the Paris Agreements. When it comes to carbon neutral projects, not much is happening beyond talks. According to recent assessments, the world’s largest banks must “greatly accelerate” their efforts if they are going to help keep global temperatures under control.

Although key financial decision makers clearly intend to commit to more sustainable banking, factors unique to the financial sector are creating significant barriers to real progress.

In particular, longstanding ties to unsustainable industries and the lack of enforceable standards hamper green investment strategies and goal-setting efforts. Banks love JP Morgan are working to meet long-term emission reduction goals, but significant investments in non-renewable energy create the responsibility to meet global energy needs. And even if FIs fail to meet sustainability goals, no governing body can hold them legally accountable. FIs also do not operate under a common set of guidelines that constitute best practice for the transition to green banking policies. Governments are working to create sustainable banking standards and laws, but the politicization of the issue virtually guarantees that the process is slow and time-consuming.

Digital solutions as sustainable solutions

The way forward is for FIs to identify strategies and structural changes that will keep environmental initiatives on track without causing serious financial disruption. Commitments to creating a more sustainable world are just the beginning, but meaningful change requires data-driven insights into green banking risks and opportunities.

This is where fintech solutions including risk management and predictive modeling through AI, machine learning and robust data analytics come in. By enabling measurable progress towards sustainability goals, these technologies can make the difference between empty greenwashing and genuine environmental advocacy.

Here are three ways FIs can apply fintech to foster effective sustainable banking:

1. Identify key investments. Although the long term profitability sustainable business operations is well documented, environmentally conscious lending and investment decisions can have detrimental short-term consequences if not done correctly. It is essential that FIs strike a balance between climate progress and profitability mandates. Fintech solutions can set metrics for green initiatives to identify investments and loans with a high probability of reducing emissions and generating a return. State-of-the-art AI is able to automatically analyze data to assess and visualize opportunities with sustainable investment and lending decisions. Machine learning and data analytics, meanwhile, will continuously generate insights into green initiatives and support rapid adaptation to changing economic or social conditions. For example, geospatial data helps an FI identify climate-related environmental changes that project the long-term viability of controlled assets. This data can inform models quantifying exposure and justify divestment or reallocation decisions.
2. Pilot the management of climate-related risks. FIs also need to understand the risks of climate change to create more effective green strategies and advance sustainability goals. Financial regulators around the world are rolling out climate-specific stress tests determine banks’ exposure to physical and transition risks. These tests will be a major tool for regulators to assess resilience and monitor climate commitments, so FIs should be prepared for in-depth risk management assessments. Scenario analyzes can feed into these assessments to identify climate hazards and sources of risk at an industry-specific level. Predictive modeling via AI can then generate estimates of the impact of damaging events such as natural disasters and droughts. The results will support stronger risk management strategies and give the FI a better understanding of how to focus sustainability efforts and continue to make progress towards its goals.
3. Support accountability. Just as digital solutions foster more strategic green banking, detailed sustainability reporting through technology resources improves accountability and builds trust in green initiatives. Data analysis can feed frequent and comprehensive assessments of the progress of green initiatives, as well as long-term projections. An FI that can generate and share such reports will show solidarity with the values ​​of conscious consumers. And this will be important to improve market reach in the future.

Almost half (48%) of consumers say that having access to green banking options has become more important to them in recent years. These consumers will have more confidence in a transparent institution to make profitable investments in entities that reduce the carbon footprint of their portfolio. In turn, FIs will have a better chance of balancing sustainability and profitability when there is greater interest and financial support for green industries.

Sustainability is the future of banking

The road to green banking is neither simple nor easy – climate pledges come with the understanding that net-zero emissions will take decades of work and billions of dollars of investment. It’s a daunting task, but not impossible if financial leaders are willing to invest in technology and people to give long-term green initiatives a chance.

Fintech solutions are paving the way towards sustainable and profitable banking practices for FIs of all sizes and can help make greenwashing a thing of the past.