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:
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.
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:
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:
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.