The thin green line: How can banks rewrite the rules on sustainable investments?

Banks, insurers and investors all have a unique opportunity to serve customers while making real progress on sustainability through the products that they offer. But how can this sector build on the guarantee that its products are sustainable?

On the global stage, 122 banks have joined the United Nations’ Net-Zero Banking Alliance (NZBA), representing 40 per cent of the world’s banking assets. In doing so, these financial institutions have committed to aligning their lending and investment portfolios with net zero emissions by 2050.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

In the UK, the government has pledged that by 2050, the amount of CO2 emitted by all cars, homes and businesses in the country will be net zero. That means for every tonne produced, a tonne must be extracted from the atmosphere.

One sector which could make or break this target is banking.

Unlike energy-intensive industries such as aviation, hi-tech, manufacturing and distribution, which dominate the environmental news cycle, the main cause of emissions in financial services is not day-to-day physical activities.

It is ‘financed emissions’—capital like loans, investments, and underwritings spread across a vast landscape of lucrative pots – which makes the UK’s banking and finance industry a high-carbon sector.

Net zero is the new bottom line

Every country has its own environmental, social and corporate governance (ESG) agenda. According to a recent CUBE report, major advances have been made in sustainability and greenwashing regulations in the last five years—showing that there is a willingness to change.

To comply with the UK’s decarbonisation plans, banks, insurers and investors must move to align their financed emissions, as well as their own direct emissions. The UK financial services sector is among the leading sectors in setting and implementing net zero commitments. But a failure to deliver on these, in tandem with other sectors of the economy and policymakers, could risk hindering the UK’s progress to meet a 78 per cent emission reduction target by 2030.

Lending shouldn’t cost the earth

If banks mean business on sustainability, they need to track and vet every penny of investment to evaluate just how green that product is.

This requires adopting a policy of applying strict metrics to every lending or underwriting decision. Questions on energy efficiency could be asked during mortgage applications. And insurance firms can make customers aware of their carbon footprint based on the number of vehicles they have access to.

Data like this will help financial institutions to be far more transparent about the sustainability of their products and services.

Getting to this state requires firms to have complete visibility over all the data in their ecosystem.

To see some of the steps that financial services companies should take in making their sustainability strategies a reality, ServiceNow has published a guide which can be downloaded here.

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