Updated: Feb 16
Two of the most prevalent current trends in businesses and finance are shifting towards a more ESG friendly business model and integrating big data, artificial intelligence, and the most forefront technologies to gain competitive edges in such a challenging time. The banking sector has always been an innovator and leader in incorporating new technologies, at the same time, being a highly regulated sector, so there is huge pressure from the government and the public that demand banks to take up more responsibilities to build a sustainable future. These two trends have great potential to complement each other in banks’ current stage of transformation, enormous opportunities lie in using big data to help the bank achieve its ESG objectives. In this article I will focus on unpacking the ways that banks could promote sustainability by driving sustainable actions by its customers.
According to KPMG, investment into fintech across the globe has reached $111.8 Billion in 2018, and as COVID-19 crisis further forces banks to improve on better digital banking platforms, financial inclusion has risen dramatically in the past few years. The relationship between banks and customers is in its nature very intimate and requires trust. From the customer’s side, banks take up the role of performing, managing and influencing their financial decisions, putting their money in a bank really means having faith in the bank to take good care of it. Thus, a bank’s activities could have huge impacts on any of their customer’s activities related to money: consumption, investment, savings and much more, banking is embedded into many of our decisions. This gives banks opportunities to drive customers to adopt a more sustainable mindset and lifestyle, and through data driven personalized services and financial products, they could further encourage customers to contribute their part in investments into a sustainable future.
Diverse data streams including both traditional financial records data and alternative data such as social media footprints, telematics and sensor data, geolocation data have enabled better customization of financial products and services, banks now have better ability to use machine learning techniques to extract meaningful insights from customer’s data. An individual’s risk aversion is no longer assessed by a simple questionnaire, his or her acceptable pricing range, upcoming life events and turning points, consumption pattern and preferences could be accurately estimated by algorithms, which then allow banks to tailor products to each individual’s specific situations.
How could this help drive sustainability?
First of all, in giving financial advice and product recommendations to customers, banks could better identify the ‘tribe’ of customers who have greater interest in supporting sustainable and green activities, then construct tailored products such as green investment portfolios that are heavily weighted in ESG indices. For instance, incorporating green bonds, fossil free sustainable bonds in pension programs, or allowing investors with more risk acceptance to invest in ESG derivatives such as ESG futures and options.
Apart from the investment side, banks could also tap in from customer’s consumption footprints. Automated process of analyzing customer’s payment transaction data can be done in real time, and based on purchase information, a carbon impact scoring can be calculated using artificial intelligence algorithms for each customer. For example, large spending on gasoline can deduct the scoring while a recent purchase of an electric powered car boosts the scoring. Customers could look at their scoring breakdowns and try to mitigate their impact and carbon footprints by focusing on reducing the kind of transactions that have downgraded their carbon scoring, and this could gradually guide them towards a more sustainable consumption habit. Furthermore, by leveraging the power of networking, banks could provide benchmarks and averages of carbon impact scoring for customers to compare with the rest of the world, potentially even create leaderboards and incorporate gamification into it to create greater incentives for green consumptions.
Furthermore, banks could also introduce and open customers to opportunities to finance UN certified carbon offset projects targeted to specific customer interests. There are a wide variety of projects available for public financing such as renewable energy generation projects by Varam Power Project in India, Gangwon Wind Park Project, however they usually don’t receive enough attention from the wide public. Banks could get actively involved in financing of such projects using saving funds. The impact, the quality and the successfulness of these projects could then be evaluated using AI metrics to give customers a concrete measure of how much impact their funds are making. Apart from bank initiated financing, as most of the projects’ minimum financing starts from only $3 USD, banks could introduce project with different focus, different region to specific group of customers and raise customer’s awareness of such opportunities to contribute to the world’s sustainable development, as well as helping to make the payment transaction to support these programs convenient and seamless. One of the successful examples of sustainable banks is Toriodos bank, it opens customers to various sustainable crowdfunding investments, as well as allowing customers to open ethical savings accounts. Customer’s savings are used by the bank to finance ethical and sustainable projects, and the bank has made these investments transparent for its customers, which strengthened a trusted relationship with customers, and drove more funds to be devoted to sustainable financing.
Banks: the intermediaries and the key drivers for transition to a green future
According to Schroder’s Global Investor Study publishing in 2018, over 85% of people aged 18 to 36 consider sustainable investing as being important to them, at the same time, 57% of people around the globe suggested that lack of information and understanding of sustainable investment is preventing them from investing more into it, followed by 26% of people agreeing that it is the lack of advice available on sustainable investment that is holding them back. Individuals do want to actively engage in sustainable finances but it is just difficult for them to find ways to find trusted, well managed and convenient ways to pursue these sustainable objectives, and this is where the banking sector could provide their support. Multiple reports have also shown evidence that commercial banks incorporating ESG related services outperforms their competitors. (Deloittee, 2019) Effective use of high quality customer data and artificial intelligence creates clearer classification of customers, better customized products and services, and more comprehensive analysis of each customer’s carbon footprints. The power of banks to influence customer’s sustainable contributions from investment, consumption and saving for sustainable financing can be enhanced by such customization, and gradually, this could help transform our society such that every individual could be responsible and make contributions, paving the road for a more sustainable future.
Deloitte. Deloitte, 2019, Do Sustainable Banks Outperforms? Driving Value Creation through ESG Practices, www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/Banking/lu-do-sustainable-banks-outperform-driving-value-creation-through-ESG-practices-report-digital.pdf.
“ESG Investing: What Is Sustainable Investing? — HSBC UK.” ESG Investing | What Is Sustainable Investing? — HSBC UK, www.hsbc.co.uk/wealth/articles/sustainable-investing/.
“Ethical Banking for Individuals: Triodos Bank.” Individual, www.triodos.co.uk/individual.
Pwc, 2020, Financial Services Technology 2020 and beyond: Embracing Distruption, www.pwc.com/gx/en/financial-services/assets/pdf/technology2020-and-beyond.pdf.
Schroders, 2018, Schroders, www.schroders.com/en/sysglobalassets/digital/insights/2018/pdf/global-investor-study/sustainability/global_investor_study_2018_sustainable_investment_report_final.pdf.