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The ESG journey in retail banking
High environmental, social and governance standards are increasingly critical to a bank’s reputation and its license to operate, but also give rise to new revenue streams, as our colleagues have pointed out in their article on “Why banks can no longer ignore ESG”. While ESG is already high on the agenda for investment banks and commercial lenders, it still plays a subordinate role for retail banks. Nonetheless, there is an emerging range of examples illustrating the rise of ESG as an agenda item in retail banking:
- Inclusion and empowerment: Branch rationalizations and change in service models are driving the need to digitally include the ~20-35% non-digital customers (PwC Strategy& estimate). In addition, empowerment of entrepreneurs and small and medium businesses (e.g., simple & fast start-up financing, focus on underserved rural SMEs) is an important element of the social dimension of ESG
- Mortgage products: In light of an overall trend towards sustainable financing, retail banks need to strategically position themselves and manage difficult trade-offs, for example supporting home ownership of low-income families (social) at the expense of potentially non-sustainable housing standards such as 1970s oil heating (environmental)
- Investment products: Sustainable investments are increasingly gaining momentum, with more than 40% of investments already being made in sustainable assets. Consumer investment motives, even though still dominated by considerations of security and returns, are increasingly ESG-driven, with ~40% of customers already preferring a sustainable investment over a (slightly) better performing non-sustainable investment
- New business models and ecosystems: Regulatory dynamics are driving an increase in (lending) products predominantly related to the environmental dimension of ESG, e.g., development of collaterals in auto financing due to diesel engine restrictions, or emerging “green” housing standards
- Carbon neutrality: Industry-led initiatives that push towards a net zero ambition are gaining momentum e.g., Net Zero Banking Alliance committed members already account for 40% of global banking assets
The examples outlined show that the environmental dimension in ESG has been a primary focus. Nevertheless, retail banks must consider all three ESG elements – environmental (impact on the environment), social (contribution to fairness in society) and governance (processes for decision-making, reporting and ethical behaviors) – as part of a coherent and holistic ESG strategy. To achieve and implement such a strategy, retail banks need to re-examine their business and operating models, as well as their capabilities.
A successful ESG journey requires strengthening of core capabilities
To successfully pursue a bank-wide ESG strategy, it is critical to identify the required capabilities that retail banks need to strengthen. Below, we outline six capabilities that banks need for their ESG journey, which vary in their potential for differentiation:
- Proposition and ecosystem management: Conceptualize, develop, and measure new ESG propositions as they are brought to market in an increasingly ecosystem-driven playing field, but also leverage larger bank facilities/capabilities in the process (e.g., Visa collaborating with SaaS-fintech ecolytiq on providing transparency on carbon footprint based on card spending, or NatWest’s green mortgage products)
- Brand building: Identify, build, and present a robust and differentiated ESG brand in the banking landscape, whilst ensuring a harmonious portfolio between the traditional and ESG positioning (e.g., Dutch ethical bank Triodos’ vision on making money work for positive social, environmental, and cultural change, or German direct bank DKB’s sustainable financing agenda, including green and social bonds issues)
- Risk assessment and pricing: Include ESG factors in screening for mortgages and reflect ESG criteria in mortgage pricing (e.g., Barclays providing lower mortgage rates on energy-efficient properties, or UniCredit’s commitment to disburse € 1bn of financing on social impact banking by 2023)
- Measurement and performance management: Define, measure, report, and act on appropriate key performance indicators in the three ESG dimensions (e.g., German specialist bank GLS providing regular transparency on its impact across different sectors, incl. social and environmental building projects, or ING’s ESG team reviewing targeted dashboards to steer their financing policy direction)
- Investment screening: Refine internal screening processes to identify strong sustainable investments while the sector is still developing and information is harder to assess (e.g., independent rating agencies like Scope providing ESG impact analyses, or ING’s sustainable investment services integrating positive and negative ESG screenings)
- Sustainable internal operations: Identify needs and opportunities related to sustainable internal operations, and establish consistent reporting on internal progress/improvement (e.g., Net Zero Banking Alliance – with Nordea as one example committing to reduce its carbon emissions from internal operations by 50% by the end of 2030 compared to pre-Covid levels)
Four steps needed to kick-off the ESG journey
The relevance of ESG for retail banks has passed a tipping point. Leading early movers illustrate the potential for success of an ESG-permeated business model. Fintechs and challenger banks like US-based Aspiration and European-focused bunq have gained considerable traction, with an attractive offering that allows consumers to spend and save in a sustainable way.
Consequently, we believe that putting ESG on the strategic agenda is no longer a choice, but a ticket to a future-proof business and operating model. Retail banks require a holistic and coherent approach for a successful ESG strategy that is tailored to their needs and individual ambition level. To kick off their ESG journey, retail banks should consider the following steps:
- Define ambition: Paint an ESG target picture by defining the ambition level, backed up by a clear rationale for organization-wide buy-in
- Plan the journey: Set a high-level ESG roadmap with specific targets
- Gear up: Baseline and strengthen the core capabilities required to succeed in the ESG journey
- Walk the talk: Implement ESG-related activities – from developing ESG propositions to shaping internal operations
This is the fourth article of our Retail Banking Monitor 2022 blogpost series. Also check out the other blogposts on Reinventing and Repositioning, Reinventing Sales, Reinventing Products, Repositioning for Embedded Finance, and Performance Review.
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