by Marty Aquino
Sustainable banking is an opportunity to strongly appeal to the largest, most populous generations. In 2019, according to the Pew Research Center, millennials outnumbered boomers. Further, according to the Brookings Institution, more than half of Americans are millennials or younger. Two of the unifying values that millennials and Gen Zers share are technology and social consciousness.
Sustainable banking encompasses those values and more. It combines environmental, social and governance (ESG) criteria and inserts them directly into traditional banking. Instead of designing bank and credit union initiatives or objectives around only risk and return, sustainable banking incorporates a third dimension: social impact.
Why does this matter? As a venture capitalist, I’ve noticed that many times the success of technology investments is driven by timing large-scale trends. As an inverse example, Robert Davidson invented the first prototype electric locomotive in 1837. After some upgrades in 1841, his electric locomotive could go 4 mph and pull an impressive 6 tons. The performance was so groundbreaking that change-averse railway workers destroyed his invention after it was demonstrated — because they were afraid it would steal their jobs. Despite the electric locomotive having the potential to do so much more than traditional technology, the trend did not catch fire, because the timing was too early. Fast-forward to today, when a similar electric locomotive would easily gather venture-capital and angel investments simply because electric-vehicle investments are en vogue and growing. Global venture-capital investments in electric-vehicle start-ups topped $17.8 billion in 2021, according to Pitchbook. Robust technology coupled with clear user sentiment creates a powerful and profitable wave trend.
How does this relate to sustainable banking? It’s all about your users’ trajectory or trend. The same compelling attraction that millennials and Gen Zers have to electric vehicles largely applies to your forward-thinking bank or credit union.
Why Is Sustainable Banking Important?
According to the United Nations Environment Programme, “A sustainable financial system is … one that creates, values and transacts financial assets in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy.”
PwC’s Anish Chandra states, “The finance sector’s role in any economy puts it in the driver’s seat to lead the transition to a low-carbon and more sustainable world. Also, in the wake of the latest IPCC (Intergovernmental Panel on Climate Change) report that is aptly termed as ‘a code red for humanity,’ it has become even more imperative to ensure the optimum allocation of capital (requirement estimated to be ~$6-$7 trillion per year) towards this transition.”
Said another way, most Americans — especially millennials and Gen Zers — inherently know this. Thus, it’s no surprise that they are gravitating toward banks and credit unions that care for more than just their bottom line:
- 41% of HNIs High Net-Worth Individual (HNIs) Millennials keep sustainability as an important investment criterion versus 27% of HNI respondents overall.
- A survey of 1,000 U.S. adults ages 33 to 40 by The Harris Poll for CNBC’s Make It shows 76% of older Millennials think climate change poses a serious threat to society.
- Millennials supercharged sustainable investing growth with contributions of $51.1 billion to sustainable funds in 2020. An inflow increase of 10x compared with similar investments five years ago. Now, every generation wants in.
- ESG factors are important for about one-third of Millennials in contrast with 19% of GenZers, 16% of GenXers and 2% of Baby Boomers.
- Overall, the U.S. is interested in sustainability. Morningstar data cites 72% of Americans “expressed at least a moderate interest in sustainable investing.”
As you incorporate sustainable banking principles into your bank or credit union decisions, processes, products and services, you can be influential in supporting ESG-style practices. Consider leading the charge with ethically focused products and services to win over the majority of Americans who have already been voting with their dollars.
Advantages of Sustainable Banking
Let’s talk advantages. Similar to the bank and credit union industry, venture capital has a fact-driven bias. Sustainable banking does have clear advantages, according to Bain and Company:
- A Bain and company analysis of European banks shows potential higher compliance and reporting costs can be offset by a lower cost risk -32% lower over a five year period.
- Return on Assets (ROA) isn’t necessarily diminished by sustainable finance. Growing evidence shows that the sustainability investment theme earns stronger customer loyalty.
- According to Deloitte, ESG-focused portfolios (meaning that ESG issues are likely to affect the financial condition or operating performance of a company) outperformed standard portfolios by 2.65% in average risk-adjusted returns, making their results consistent on ESG-tilted investment decisions.
- Deloitte says, “Our evidence supports the current thinking that adopting a strategic focus on ESG issues can lead to financial outperformance. We have found that commercial banks that score high on material ESG issues have better future performance than commercial banks that score low on the same issues.”
The growing research clearly shows a preference for sustainable banking. It just so happens it’s also more profitable.
How To Be More Sustainable
There are five key areas where you can lead the charge to becoming more sustainable:
Define your strategy
Conduct an analysis of your legacy values and potential ESG-type upgrades best suited to your bank or credit union. For example, consider your institution’s culture and install initiatives that identify, incentivize and promote sustainability company-wide. Sustainable banking should be installed into the right governance and trained through the entire team to gain meaningful momentum. Work with a strategic partner to incorporate your upgraded values directly into your digital banking technology.
Manage your risk and regulatory compliance
ESG frameworks can be volatile if not managed correctly. Develop processes to collect, validate and analyze ESG data to convert your data to meaningful organizational actions.
Offer sustainable products and services
Leading-edge banks and credit unions are already offering innovative green funding-type products like bonds, sustainable mortgages and sustainability-linked loans. In the venture-capital world, this effectively mitigates some risk of entering a new space, because the trail is currently being successfully blazed.
Upgrade your operating model
ESG frameworks are still in the nascent phases and therefore can carry additional volatility. You can offset this by fortifying your operating model for sustainability with operational discipline, process orchestration and governance. Make ESG data an integral part of your user life-cycle management, starting with your initial Know Your Customer (KYC) and Anti-Money Laundering compliance and all the way through.
Green your IT
Consider moving your applications, processes, data and infrastructure to the cloud. This positive stacking effect increases your appeal by reducing carbon emissions and simultaneously lowering operational costs. According to Accenture, cloud migration can reduce global carbon emissions by 59 million tons of carbon dioxide per year — the approximate equivalent of taking 22 million cars off the road.
Implement Sustainable Banking
The wave trend of sustainable banking is here, and it’s gaining serious momentum. As with many new endeavors, more questions than answers are generated. Work with a trusted partner to help your organization benefit from upgraded innovation levels and, at the same time, a more sustainable balance sheet and planet.
Marty Aquino has been a passionate writer on venture capital, technology, forecasting, risk mitigation, wealth and entrepreneurial topics since 2009. He is the founder of Carbonwolf Energy, a venture-capital firm specializing in world-changing and status-quo-defying technologies and people.
Pew Research Center – Millennials overtake Baby Boomers as America’s largest generation
The Brookings Institution – Now, more than half of Americans are millennials or younger
Car and Driver – Worth the Watt: A Brief History of the Electric Car, 1830 to Present
Deloitte: Do sustainable banks outperform?
World Green Building Council – What are green mortgages & how will they revolutionise home energy efficiency?Accenture – The Green behind the cloud