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June 15, 2021

The remaining hurdles on the road to sustainable finance

By Patrick Brusnahan

Financial firms can’t ignore sustainability. That is the key highlight of a new report out from Forrester, but financial institutions (FIs) have done a tremendous job ignoring it until now. What has changed? And is a focus on sustainable a differentiator for clients in wealth management? Patrick Brusnahan writes

The idea of sustainability isn’t new, though the definition and actions to achieve it continue to evolve,” according to the How to Make the Shift to Sustainable Finance report from Forrester.

Consumers and clients are increasingly looking for brands and companies with values that align with their own. This applies to private banking as well.

According to Forrester, 55% of US online youths are concerned about the impact of climate change on society. 53% of Italian online adults state a company’s position on environmental protections and on climate change are important aspects of corporate social responsibility.

In addition, 59% of UK online adults consider it important that companies operate on a socially responsible level. Remarkably, 51% of US online adults regularly purchase from brands or companies that align with their personal values.

The road to sustainability

Are consumers pushing the shift towards sustainable finance or have banks realised that they need to go down this path to keep clients?

Speaking to PBI, Oliwia Berdak, VP & research director for financial services at Forrester, and a co-author of the report, says: “It’s the regulators unfortunately. In financial services, as we know, a lot of customers stopped switching providers often in current accounts. It’s a little bit different in the area of investment where there indeed has been a very big inflow into sustainable funds. There is this kind of pressure and demand from customers for more sustainable products and it is very visible.

“In banking, on the other hand, it’s much more coming from the regulators who are very keen to channel funding and capital into sustainability.”

Regulators are indeed bringing in a flurry of regulation to make the sector more transparent, ethical, and sustainable.

The US is modernising its anti-money-laundering (AML) laws with the December 2020 passage of the Anti-Money Laundering Act of 2020.

Furthermore, the Financial Transparency Coalition aims to prevent illicit financial flows, while the Association of Certified Anti-Money Laundering Specialists aids businesses fighting financial crime by certifying them on their AML policies.

Since 2018, EU law has also demanded all large companies to disclose information on their policies and activities in areas such as environmental protection, anticorruption and bribery, and social responsibility and treatment of employees.

In addition, November 2020 saw the Partnership for Carbon Accounting Financials (PCAF) publish the Global Greenhouse Gas (GHG) Accounting and Reporting Standard to help financial institutions assess and disclose greenhouse gas emissions of loans and investments.

Clients are not changing provider at any pace and many in private banking have a large number of providers. Will sustainable finance be a differentiator for clients now?

“I think it can be a differentiator,” Berdak explains. “But probably for a very specific customer segment.

“It’s quite clear that I don’t think 100% of customers will suddenly choose their bank provider on the basis of their green credentials, but there are some players who are trying to differentiate not just on the environment but with social aspects. They are really trying to do something good for society.”

Berdak concludes: “There are a few major obstacles. One of these is the fact that the business models at the moment are not always conducive to change. What I mean is if you’re a big bank and you have a lot of corporate clients, some of these will be big polluters and some of them will not be conducive to an environmental or climate change agenda.

“Therefore, you have to make a decision on how you work with those clients, and how you help them potentially move in the direction of sustainability.”

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