How Banking and Financial Services Leaders Are Embracing Sustainability

  • February 07, 2023
green piggy bank

When I ask myself what the next sea change will be in the financial services sector, I am confident that it will revolve around the issue of sustainability.

Just as the emergence of cloud computing, open APIs, and artificial intelligence transformed the sector almost beyond recognition, the push toward sustainability will catalyze an equally all-encompassing change. The question is no longer if this will happen but when and how.

How must leaders in the financial sector respond to sustainability demands?

Financial institutions (FIs) worldwide must start creating and implementing sustainability strategies. These same institutions must remember that successful strategies do not have to impact their bottom line negatively. The best strategies are those that implement sustainable initiatives without dampening profits. For example, recent studies show a positive relationship between ESG and financial performance:

  • Sustainable corporations show better financial performance due to improved risk management, productivity, and innovation
  • Companies that commit to ESG see improved financial performance over an extended period
  • Investing in ESG offers downside protection, especially during an economic or social crisis

While the vast majority of global FIs have already started exploring sustainability initiatives, there are certainly those who have yet to realize what is coming. Those institutions will need the most guidance as the drive to a greener world becomes unavoidable. We recommend prioritizing sustainability higher on your list in the new year.

Examples of sustainable solutions in the financial sector

There are already shining examples of fintechs and banks that have incorporated sustainability into their organization's core. In the case of fintechs, emerging financial start-ups have built themselves on a model that aligns sustainable objectives with the needs of banks and FIs.

In banking, there are examples of larger banks that started their sustainability journeys ahead of their direct competitors. In 2019, the Global Alliance for Banking on Values (GBAV) released a report revealing that commercial banks prioritizing sustainability outperformed those that did not. This trend has continued, with many of the world’s largest banks creating ESG and sustainability roadmaps for 2023 and beyond.

At NTT DATA Services, we are mapping out sustainability levers (green loans, financial inclusion, and green IT being a few key examples) to predict these levers' impact on a company’s bottom line.

  • Green loans: A green loan is a form of financing that allows organizations to finance projects with an environmental impact. Examples include businesses installing solar panels to reduce their carbon emissions or banks providing financial incentives to improve the sustainability of an entire supply chain. In all cases, the benefits of these loans go beyond profit, allowing organizations without the financial means to undergo a sustainable transformation the opportunity to do so.
  • Financial inclusion: Sustainability is not only concerned with the environment; the shift toward a more inclusive industry is also vital. In its essence, financial inclusion aims to ensure that much of the world can access essential banking and financial services at an affordable cost. Over the past few years, fintechs have had a significant role in driving forward financial inclusion, in projects such as using cashless digital transactions. Equally, major banks and FIs are creating global projects, aiming to reduce the number of “unbanked” people worldwide significantly.
  • Green IT: In banking technology, green IT is an emerging trend. BFS is an industry that requires a substantial number of energy-intensive technologies, including data centers, computers and other office equipment, and security systems. Therefore, innovative technology solutions that reduce the industry’s emissions are in high demand.

We take a practical approach to our clients’ sustainability strategy, mapping out the steps to success on a case-by-case basis.

Three steps to successful sustainability action for financial institutions

Institutions across the financial sector want to stay ahead regarding sustainable solutions. However, leading by example can be challenging to model your strategy on past successes. That is why it is vital to create a step-by-step plan of action that includes benchmarks to measure your success as you go.

1. Start with a baseline

When we first enter a FI to guide them through this process, we ask two important questions. These questions are designed to establish their needs and ascertain their priorities.

The first of these questions is: What do you want to monitor?

The goals of each institution can vary significantly. Some organizations will focus on financial inclusion, while others prioritize green loans. Determining precisely what they want to monitor as part of their long-term sustainability goals is vital in the planning process.

The next question is: Where are you in your sustainability journey?

While some companies may not have even begun to consider sustainability, many have already taken significant steps toward achieving their sustainable goals. For companies already ahead in their journey, the approach will differ from those that have yet to begin.

To recap, determine what you want to monitor and locate where you are in your sustainability journey. Then, you can start creating a bespoke plan.

2. Create a bespoke plan based on your specific needs

Once the baseline is established, the next step is clearly outlining the different sustainability levers. As I previously mentioned, these might include financial inclusion, carbon-neutral initiatives, green loans, green IT, or even supporting research into sustainable energy sources. There are many ways to make an organization more sustainable, so it is important to clear all options.

The plans must factor in a company’s financial performance. The long-term financial plan should not be seen as mutually exclusive from the sustainability plan. No company will become sustainable unless it can remain profitable. Our challenge is to create strategies where profitability and sustainability go together.

Marrying profits and sustainable goals is a highly challenging process that requires deep knowledge of each organization. Therefore, operating on a case-by-case basis is critical to achieving success with such a complex and multi-faceted strategy.

3. Define the end goal

By gathering all their sustainability goals into an overarching strategy, companies can start to track their progress. Setting checkpoints for the next five to ten years is a valuable measure of success.

These checkpoints should be defined by key performance indicators (KPIs). For example, if a company sets a green supply chain initiative, a KPI could reach complete visibility within three years. Change will not happen overnight, but reaching checkpoints step-by-step is a method that allows FIs to visualize and then realize their journey.

Emerging regulations continue to drive sustainability action in the financial services sector

A significant change will only come with the influence of financial regulators. Banking and Financial Services (BFS) is a highly regulated industry. When historical changes occur within the industry, they are almost always driven by regulation.

In the U.S., there has been noise around the United States Securities and Exchange Commission potentially requiring ESG disclosures from financial institutions. Similarly, the Bank of England publishes its climate disclosure, and the possibility of a requirement for banks and FIs to do the same certainly being in the cards.

With these examples in mind, regulators across the globe are starting to take sustainability more seriously. However, there must be a concerted effort to get regulators to buy into the fact that sustainability is important. Once regulations are in place, FIs will be obligated to follow suit, and the industry will begin to move toward a greener future.

The responsibility lies with the people behind the industry to make change happen. To be sustainable is to continue to grow, adapt, and evolve. We must work together to create a sustainable future, not just for the BFS industry, but to create a brighter future and planet for all.

Learn more about NTT DATA’s commitment to corporate social responsibility and sustainability action.

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Niraj Singhal

Niraj Singhal is Senior Vice President and Head of International Banking Practice, NTT DATA. In his IT career spanning over two decades, Niraj has advised leading financial institutions on digital strategy and is a regular speaker at various Industry forums, including, SIBOS, EBA Day, and CEB Technology Conference. He also works with leading Industry Analysts to advise on strategic imperatives for banks as they grapple with pressures of cost, compliance and customer retention. Niraj has extensive global experience in consulting across financial institutions, predominantly in the areas of digital banking, payments modernization, risk and compliance, process re-invention and banking industrialization. He previously held leadership positions within the TATA group, wherein he worked as a strategy consultant, with experience across diverse group companies.

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