The world is dependent on global finance working towards a fairer financial system for people, the environment and culture with a focus on sustainability, climate change and social justice. This July at The Fintech Times we’ve been putting the spotlight on ethical finance/ethical banking, including environmentally and socially-conscious practices.
As we come to the end of July’s focus on ethical banking and sustainable finance, it seems only fitting to find out the industry’s key concerns for the sector moving forward.
Although ethical banking presents a huge commercial opportunity for banks, there are a few barriers that the finance industry as a whole needs to overcome for ethical banking to be effective.
Education and transparency
Anna Krotova, who leads the execution of Mambu’s sustainability and ESG strategy, says: “While there is a higher demand globally for green banking products and an ethical banking ethos in general, there is still a lack of consumer understanding in regard to all the things green banking includes. If banks want to facilitate the transition to ethical banking and capitalise on opportunities it can potentially deliver, they need to be willing to invest in consumer education.
“Additionally, greenwashing remains a key concern, with high levels of distrust among consumers. Banks and financial institutions need to re-evaluate how they are communicating their sustainability practices with their customers, and ensure they are being clear and honest about their progress.
“The EU Sustainable Finance Disclosure and the EU Taxonomy are key pieces of legislation that in principle, should ensure that consumers and other stakeholders have better transparency of banks’ ethical practices. We now need to closely observe and hold the financial industry accountable for any shortcomings and adapt to stricter legislative measures, if needed.”
Bertrand Gacon, the CEO and co-founder of Impaakt, a fintech business that uses a collaborative approach to measure the impact businesses have on the world, makes it simple.
He gives three key concerns.
- Lack of standardised, reliable impact data
- Correlation between financial performance and impact performance is not yet established
- Regulation is moving fast but not always in the most appropriate direction
Regulatory awareness and culture change
There are several challenges that need to be overcome in order for banks to adapt to this industry shift, says Jay Nair, SVP, industry head, financial services and public sector at Infosys.
“Firstly, new regulations are continually emerging, impacting both traditional and ethical banks. Staying in sync with the regulators is certainly one big challenge for banks operating in this space. Data will no doubt play an important role in helping banks stay compliant, but many firms face challenges with data.
“For example, new data types will need to be defined, captured, processed and reported against.
In addition, banks will need to invest in training and upskilling staff. There is a need to move away from looking at ethical banking as a box ticked and ensure staff are trained, and can actually demonstrate this commitment through their daily conduct.
“This calls for a significant focus on culture transformation. To this end, greenwashing has emerged as another key challenge for banks and their clients to overcome, which often arises firms wanting to take opportunistic advantage of ethical banking as a trend.
“Finally, banks must address the challenge of achieving industry coordination. A lot of issues span entire supply chains and cut across banking ecosystem such as ratings agencies, investment funds and so on. Developing common standards, operating models and shared infrastructure is imperative.”
Despite the increasing demand for ethical banking and sustainable products, the industry is facing many challenges, such as reporting disparity, says Krzysztof Grzeszczuk, senior innovation consultant at Netguru.
“Leaving aside the costs of transformation, there are currently no common standards for ESG reporting, which sometimes makes it difficult to validate the impact a company has on its stakeholders,” he says.
“This should, however, not be an excuse for companies not to focus on their purpose and sustainability. In the end, investors, banks, and customers will redirect their money to those who know how to run their business responsibly.”
Finally, the industry must make responsible lending decisions.
“Ensuring that customers are aware of their level of affordability is even more important during this current cost-of-living crisis,” advises James Wilkinson, co-founder of car financing marketplace Zuto. “The industry also needs to go beyond finance and address the impact we make on people and the planet.