In financial services, sustainability is bound to replace digitalisation as the growth engine
Embedding sustainability is a journey. Those who start it early can achieve more in terms of willingness to pay and of impact visibility.
It is the right time for your sustainable transformation
The digital transformation has been the engine of the recent growth in the financial services sector. But we have come to a point, in which being digital is not a differentiator anymore in the eyes of many customers. It has become a hygiene factor and a commodity. Therefore, financial services providers need another reason for the customers to join and to stay with them. A strong candidate to be that reason is sustainability
As in many other industries, such as food, clothing and automotive, also in financial services putting sustainability at the heart of the value proposition is already taking place in many markets. While talking of a growing tide of challengers has become commonplace, some of them do stand out. To name just a few examples: Triodos Bank present in six European countries only lends to businesses and social enterprises judged to be of social or ecological benefit; and two French banking alternatives La Nef and Helios, operating in a similar manner.
Additionally, sustainability has already reached in-depth also more established financial service providers who went all the way to create new sustainable retail products, e.g. allowing to calculate the climate impact of consumption of individual customers: Flowe account by Banca Mediolanum, 1% For The Planet account from Bank of the West, Nordea Wallet from Nordea and Baltic Sea Card from Bank of Åland.
Sustainable transformation is a journey
We can think of sustainability at several levels (see our chart below). The most superficial, traditional corporate social responsibility (CSR) activities, as essentially PR level undertakings, can easily fall into the greenwashing category, if not treated only as a starting point. Transforming the operations, e.g. saving paper or electricity is a concrete first step forward — and a step, which is necessary to build your credibility. But reducing only your own environmental impact has limited effect. As a financial services provider, you have the power to go much farther. The next level is transformation of the B2B product space by creating sustainable wholesale investment products and by prioritising financing sustainable projects and ventures. The sustainability of which is assessed with respect to environmental, social and corporate governance (ESG) metrics. Finally, to be a real force for good, sustainability has to be part of your B2C products. A potentially easier part is private and premium customers, who are less price-sensitive and for whom investment products take a larger part of the value proposition. The ultimate level is reaching the mass market. With the overall retail goal being to encourage sustainable consumption among your base to amplify a larger-scale change.
Where do you think your company stands? Embedding sustainability is a journey and those who start it early can achieve more. There are at least 3 reasons why you should do it now, but first, let us define more precisely what sustainability is.
Sustainability is more concrete than you might think
Sustainability may seem to be a wide concept. As described by the United Nations Brundtland Commission (1987) it is “meeting the needs of the present without compromising the ability of future generations to meet their own needs”. Additionally, in 2015 the United Nations General Assembly has translated that concept into an exhaustive set 17 Sustainable Development Goals (SDGs) and two years later identified specific targets for each goal. By consequence, sustainability can be sensibly operationalised.
The SDGs cover such areas, as: No poverty; Zero hunger; Good health and well-being; Quality education; Gender equality; Clean water and sanitation; Affordable and clean energy; Decent work and economic growth; Industry innovation and infrastructure; Reduced inequalities; Sustainable cities and communities; Responsible consumption and production; Climate action; Life below water; Life on land; Peace, justice and strong institutions; as well as Partnerships for the goals.
These goals have been further converted by the banking community into The Principles for Responsible Banking, a comprehensive framework addressing the strategic, portfolio and transaction levels across all of the bank’s business areas. The signatories of the principles, more than 190 banks so far, have committed to analysing their current impact on people and planet, set targets where they have the most significant impact and publicly report on progress in implementation.
It might make sense for you to join the trend and become its local owner.
There are at least 3 reasons why you should do it:
Your shareholders are very likely to be already reporting on meeting their sustainability goals
Even though there is no common ESG tracking and reporting standard as yet, sustainable investing has entered the mainstream all over the globe. Since 2012, total assets in sustainable investing in the five major markets (EU, USA, Japan, Canada Australia and New Zealand) have more than doubled reaching $30.7 trillion in 2018. The Morgan Stanley Institute for Sustainable Investing survey has shown that 85% of the general population of individual investors and 95% of Millennials express interest in sustainable investing. Similarly, 86% of individual investors believe companies embracing ESG practices are likely to be more profitable and may be better long-term investments. Hard data confirms that: analysis of more than 2000 empirical studies covering ESG investing since the 1970s has shown that roughly 90% of ESG investing matched or overperformed traditional approaches.
It does not come as a surprise then, that according to Jasjit Singh, the Paul Dubrulé Chaired Professor of Sustainable Development at INSEAD in Singapore: “About one-third of assets under management are estimated to be using sustainability/ESG lens, globally”. A study from 2020 has shown that 74% of global investors plan to increase their allocation to ESG funds over the next year. The world’s largest asset manager, BlackRock, announced in 2020 that it was putting sustainability at the centre of how it invested. Similarly, Abris Capital Partners, a leading independent private equity fund investing in Central Europe (Poland, Romania, Czech Republic and Serbia), has placed ESG at the core of its investment strategy: “Abris invests in companies that are trustworthy when it comes to environmental, ethical, governance and social criteria. This objective reflects our culture while it serves the wishes of our investors and employees”.
And there could be many more such quotes. By consequence, implementing sustainability has become an additional long term way to meet the needs of your shareholders, including most of the governments.
Your customers would like to implement sustainability into their daily activity
Your institutional customers, just like your shareholders are likely to already have commitments to combining their growth with sustainability. As for retail customers, an EU wide poll has shown that a majority of Europeans want the EU to become carbon neutral by 2030. Therefore, many of your current and potential customers are likely to be looking for ways to help their consumption and their investments not to harm our planet and society. More than a third of Europeans wanted businesses to be the primary force for change.
Taking as an illustration of this trend one of the CEE countries, Austria, and looking at a category of staple consumer products: the demand for drinks in reusable containers has been rising and has been replacing the demand for lighter PET bottles and cartons. With the increasing demand, SPAR, a retail industry leader in Austria, Slovenia and Hungary, present in 48 countries, has expanded its range of drinks in reusable bottles in Austria. Greenpeace Austria Managing Director Alexander Egit commented: “According to current surveys, Austrians want a wider range of returnable bottles. (…) The renewed expansion is very welcome and the right way to go.“ In parallel, to make it easier for customers to consume responsibly and to cut down on the use of plastic, SPAR Hungary introduced eco-friendly reusable fruit, vegetable and bakery bags, and multi-use silicone lids.
The pandemic has even strengthened the pro-sustainability sentiment among consumers. A new global survey for the World Economic Forum unveils that on a global basis 86% of people want the world to change significantly and become more sustainable and equitable rather than to return to how it was before COVID-19. Your employees are likely to be among these 86%.
Your employees would like their work to have a positive and impactful meaning
Would you, personally like to be proud of your legacy to society and to our planet? If you think about it, probably most of your co-workers would share your view, especially if it did not harm their career. Recruitment experts say that candidates now expect employers to go far further than issuing mission statements, introducing office paper recycling initiatives or making contributions to local charities. What is more, the study by Kyle Welch and Aaron S. Yoon has shown that firms with high ratings on both ESG and employee satisfaction significantly outperform those with low ratings on both and with high employee satisfaction alone.
One of the companies with a long-standing reputation as a leader in corporate diversity and sustainability is Levi Strauss & Co. To name a few initiatives, the company has implemented water-saving technologies; committed, by 2025, to reduce their own carbon emissions by 90% and to shift to 100% renewable electricity; sources cotton from sustainable farms, or from recycling; participates in initiatives preventing the use of hazardous chemicals. It has also launched initiatives to improve the lives of factory workers around the world; and implements programs to empower women, people of colour and other minority employees. Such an approach is of importance for employees who feel empowered by working at Levi Strauss & Co: “LS&Co inspires me to be a better version of myself. In today’s world, with issues ranging from rapid climate change to crippling poverty, LS&Co.’s efforts not to be a bystander, but to take charge and work for the change, galvanizes the activist within me.”
Pushed by corporations and students, business schools start to prioritise sustainability, purpose and responsibility in their programmes. As a result, their graduates can easily distinguish PR from genuine change. So to attract and retain the next generation of talents, especially the Millennials and Gen Z, companies need to put greater emphasis on environmental and social concerns in their employee value propositions.
Implementing sustainability in financial services can be a structured process
Translating sustainability into your organization’s reality is the most effective when starting with embedding it into the strategic priorities. A good example of that is Unilever, which has integrated many of the SDGs into its strategy by creating the Unilever Sustainable Living Plan. They set out three strategic priorities: to help more than a billion people to improve their health and well-being, halve their environmental impact, and enhance the livelihoods of millions of people. According to Jeff Seabright chief sustainability officer at Unilever, “implementing the goals means applying an SDG lens to every aspect of strategy: appointing the right leaders; innovating sustainable solutions that improve people’s lives; inspiring more sustainable choices; and working in partnerships with others to drive systemic, lasting change around the world.” Unilever uses SDGs as a guide to consistently set themselves new and ambitious targets. They also track what does and doesn’t work, and keep on making changes to get things right.
Such an approach is not limited to consumer goods companies — there are good examples of integrating sustainability into the core strategy also in financial services. Italian bank Intesa Sanpaolo in its 2018–2021 Business Plan aims to leave a positive mark on society and to become a point of reference in social, cultural and environmental sustainability. Elena Flor, Head of the Corporate Social Responsibility Department, explains: “For Intesa Sanpaolo being sustainable means going above and beyond the mere expression of our principles and translating our values into a daily and credible commitment, resulting from a precise strategy, of cohesive company policies, of actions and of behaviour that is attentive to the needs to those that are connected to us”. To that extent, Intesa Sanpaolo supports green projects of retail customers through provision of loans and mortgages for environmental purposes e.g. renovation of buildings from an energy efficiency perspective, purchases of highly efficient properties, purchases of environmentally-friendly vehicles, and installation of solar and photovoltaic panels. In 2019 Intesa provided new loans worth more than EUR 3.8 bn for activities with a high social impact, contributing to creating entrepreneurial and employment opportunities as well as helping people in difficulty. To support the circular economy transition, within the 2018–2021 Business Plan, Intesa Sanpaolo launched a EUR 5 bn Credit Plafond. It provides credit at favourable terms for most innovative companies/projects based on criteria defined together with the Ellen MacArthur Foundation.
Our 3-step framework enables to deeply implement sustainability in financial services:
1. Map your stakeholders and understand your current impact
To embed sustainability into your strategy you first need to understand who are your relevant stakeholders and create a complete picture of your relations with them. Relevant stakeholders are those individuals, groups of individuals or organisations, who affect and/or could be affected by your organisation’s activities, products or services. Except for typical stakeholders such as customers, employees, suppliers and shareholders you also need to include society and the natural environment. Next, you need to analyse your current impact on the relevant stakeholders. The analysis of impact may be qualitative, quantitative or monetised in nature. It can also focus on an immediate or on a longer-term time period, depending on the sustainability context. The analysis of impact should consider science, ethics, laws, regulations and context-based metrics.
2. Formulate your strategic goals
Having mapped and understood the status quo, you can develop goals and initiatives which will increase your positive impact and decrease the potential harm you cause. The poor performance areas should become change targets. You can use ESG benchmarking and certification standards or international or local policies as a reference in forming goals. However, make sure these goals are documented and integrated into the relevant organisational processes such as risk management, compliance, strategy development and performance management. Experience shows that among areas, in which there is typically a high potential for change are:
- improvement of resources management to reduce own environmental impact e.g. in branches and data centres — even if it might have a limited overall impact it is still crucial for your credibility
- cultivating sustainability in the corporate culture
- integrating environmental and social risks in your risk management systems
- adhering to regulation with a stronger emphasis on sustainability
- guiding investment/divestment decisions in line with sustainability.
But one of the most important areas to cover is your product roadmap, through which you can amplify processes happening at a much larger scale than merely your own operations.
3. Cascade the goals to the value proposition of your products and services
To profoundly integrate sustainability into the DNA of your company you need to create truly sustainable products and services that your customers will use and which will pave the way for your customers’ positive behavioural change.
- First, you need to make sure that you have a genuine understanding of your customers, of their motivations and behaviours. If you have assumptions, they should be validated by research.
- With a good understanding of your target customers, you can diverge into generating ideas for value propositions of products and services. At this stage, you should also consider exploring what is happening in other industries to inspire your ideation process. Next, converge to the ideas with the highest potential, based on criteria such as properly doing the job expected by the customers, addressing the pains and providing convincing benefits, while properly delivering on the business metrics. As said earlier, you can expect sustainable products and services to drive willingness to pay with greater efficacy than your current generic products.
- To evaluate which solutions might work, you need to turn the selected ideas into prototypes and test them in a realistic context with real customers and other stakeholders you want to impact. Our experience shows that for the best results, the process should include at least two iterations of testing intertwined with improvement and incorporation of customer feedback.
- With validated and improved prototypes you can start implementing the new products or services first in small scale pilots and then larger rollouts. For greater impact, the rollout of sustainability facilitating products should go hand in hand with adjustment of distribution channels for them to meet sustainability standards, as well — potentially one of your other strategic goals.
To be credible, sustainability has to be embedded in the core of the strategy and operations. But most importantly it has to be part of the products, as this is how financial services providers can really amplify a larger scale change, stand out and grow the profits.
Embedding sustainability is a journey and those who start it early can achieve more for both the bottom line and the planet.
All the stakeholders are looking forward to your next move towards sustainability. Build back better.