From Profit to Purpose: Why Finserv Must Stop Dodging ESG

Establishing sustainability goals has become increasingly challenging, as shown by the recent global efforts at COP29 to set The New Collective Quantified Goal (NCQG) – a new climate finance target that will help developing countries mitigate and adapt to climate change. 

But, while first-world nations focus on developing countries, in their own backyards the finance industry is trying to shirk its ESG responsibilities, says Steve Round, Co-founder and President of SaaScada and Chair of the Governing Board Forum for the Global Alliance for Banking on Values. 

Here, he outlines what the finance industry must do to become a champion of ESG. 

Give us an overview of the ESG landscape in finance today

Recently, banking leaders have claimed that governments are too reliant on the private sector to meet net-zero goals. 

However, the finance industry cannot afford to wait for government directives. Financial institutions across the globe must start showing some bravery in their approach to sustainability.

The industry needs to move first, putting ESG at the heart of its culture. Ultimately, this means taking a miniscule hit to their enormous profits to create greener operating models and give a financial incentive for customers to adopt sustainable practices. 

After all, without radical change across the industry, nations will fail to reach key climate and energy goals – turning every green claim into nothing more than hot air.

What excuses are holding financial firms back? 

A recent Institute of International Finance (IIF) paper saw its sustainability and regulatory leaders push back on the current “finance-centric” approach to decarbonisation, arguing that:

• Transitioning to net zero is complex and difficult, especially when the industry is facing a “polycrisis” of interlinked economic stressors.
• Capital will only move in support of net zero goals at scale when the economics make sense.
• Regulating the finance sector “won’t shift the economic fundamentals needed for real economy transition”.

In some ways they are right. Moving to net zero is hard, it must make financial sense, and regulation alone won’t magically get us there. But reports like this give the whole industry a bad reputation. If all IIF’s leaders can come up with is excuses and criticism of regulators, they should resign.

Just because something is difficult, it doesn’t mean we should be trying to pass responsibilities over instead of trying to solve the problem.

How can financial firms be empowered to change their ESG stance?

The fact is, decarbonisation is a finance-centric issue because we have the power to change things. If banks weaved sustainability into their core business model and loan origination process, they could encourage consumers and businesses to make socially conscious and informed financial decisions. 

For example, choosing whether to apply for a loan to build new office space or buy existing properties based on the impact on the local ecosystem.

Seven billion people across the globe have access to financial services. If just ten percent of banks took some initiative, offering customers more sustainable products, with a small financial incentive for choosing them – e.g., a slightly lower interest rate on a loan – the impact would be huge. 

Just imagine what it would look like if banks convinced 700 million people to make more sustainable choices. Not to mention the fact these banks would be seen as green pioneers and see an influx of financially and socially conscious customers switching over to them.

Change must start with the banking industry, but we’re seeing that if you make a problem too big, people ignore it. To successfully put green products at the centre of banking, the industry needs to agitate, innovate, incubate and mainstream.

This means shaking up how problems are approached, launching innovative green banking offerings, and demonstrating these offerings can meet consumer demand and make a solid business case. Then, it’s up to the industry to adopt these sustainable models more broadly.

For example, Ecology Building Society (a member of the Global Alliance for Banking on Values) was created to put sustainable offerings at the heart of its business. 

Savings accounts offer interest gained from investments in sustainable projects like eco-friendly homes, affordable housing or community projects. 

At the same time, the bank offers mortgages for properties and projects that will have a positive environmental or social impact, and even measures and discloses the greenhouse gas impacts of its lending.

As a result, Ecology lent £65m in 2023 across 310 sustainable properties and projects. This relatively small player has made a real difference, helping to build green properties, housing co-operatives, community land trusts, woodlands and community gain projects like wind farms or sustainable transport infrastructure.

ESG-centric operating models can drive change and remain profitable. So, now it’s up to financial institutions to recognise that “the economics make sense” and follow suit. 

By mainstreaming sustainable banking and driving environmental improvements on a much grander scale, big banks could become the biggest environmental and social change makers the world has ever seen.

How can banks put ESG at the heart of their offerings?

It starts with data. Data will support the creation of detailed impact assessments for every product, but many banks will lack the visibility needed to make accurate decisions.

To get the insight into environmental impact they need, many banks will need to transform their core banking infrastructure. 

This will give banks access to real-time data, so they can better understand and track how investment and purchasing decisions affect the planet, allowing them to measure everything at a granular level. From the carbon footprint of daily purchases to the ESG impact of pension investments.

Instant impact assessments will help everyone in the financial ecosystem – from consumers to business owners and the wider supply chain – to make radical and rational choices that build a greener planet. Now, it’s up to banks to make this a reality.

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