Over the past decade, interest in green and ESG financial services has exploded. By some estimates, a third of all investment vehicles now fall under an ESG umbrella, and green bond issuance and green loans have soared.
With the arrival of this green wave, management of financial institutions face the question of how fast to paddle in and at what angle to ride the break. The surfing analogy here is deliberate: There is tremendous upside not only to new products and new ways to connect to customer segments, but also in delivering personalized insights that address a broad range of wellness objectives, financial and beyond. But it’s not without risk. Public opinion is divided on green/ESG policy, and investments and passions run high on both sides of the wave. And much like a surf break, where the market for green products is headed is as unpredictable as it is rapid. Policy, regulation, standards and market segments are still evolving — no more so than in how they relate to key elements of carbon capture and trading.
But despite the inherent challenges of doubling down on green banking, many have concluded that the time to act is now, and many more are weighing their options.
What Is Green Banking And Should You Pursue It?
As we see it, there are two ways of going green. The first is for the financial institution itself to minimize its impact on the environment. The second is to support or foster its clients in going green.
Why do it? There are two fundamental reasons. The first is ideological. Here there is a range of perspectives, and we’ll leave those to individual institutions and their customers. The second is commercial, which is where we’ll focus.
At the retail consumer level, there are important population segments that have exhibited environmentally motivated buying behavior, including many with favorable customer lifetime value characteristics. Evidence includes the estimated 2.3 million plug-in vehicles sold since 2010 and the growth of installed solar capacity, which is now generating enough electricity to power 24 million American homes. Nearly three-quarters of consumers, moreover, say they are willing to pay more for sustainable packaging, according to research by Trivium Packaging, and a third of those respondents say they would pay 10% or more.
Clearly, the consumer segment that acts on its environmental sensitivity is large and growing. And that’s a big opportunity for providers offering or looking to offer a meaningfully differentiated value proposition for green banking. Already, some providers are offering favorable terms on home loans for projects that promote energy efficiency and sustainability, such as improving insulation and installing solar panels.
There are also powerful market incentives at work in the commercial and institutional space. A meaningful portion of large institutional investors have adopted some form of sustainability or ESG criteria for their investments. These include favoring lenders that focus on financing companies that include ESG as part of their corporate mission. This has put direct shareholder pressure on public companies and indirect pressure on middle-market companies to develop and promote an ESG response.
And it’s not just investors. Ratings agencies have also incorporated ESG risk into their risk-rating frameworks, which can affect the ability of companies to access public debt markets on attractive terms.
In short, aside from their own shareholder ESG pressures, financial institutions can adopt a posture of helping clients improve their environmental impact.
It’s important to note, however, that while many large institutional investors have adopted green/ESG environment standards, others have taken the opposite position, including some who oversee investments for state governments. As we’ve noted previously, this is a contentious issue and any position providers elect to take will likely deepen engagement with some market segments and alienate others.
So You Want To Go Green.
How Do You Do It?
Green banking initiatives aren’t entirely new. For decades financial institutions have urged consumer and corporate customers to “make the green choice” by switching from paper to electronic statements. And many of the largest banks have made multi-billion-dollar green pledges that they are fulfilling through a combination of products, financing and greening their business operations.
But many providers are still grasping for a comprehensive definition of what it means to be green. Far too often they take a disjointed approach, with pockets of the organization working in silos rather than undertaking a connected, strategic overall effort. Some tackle green banking by launching a tactic or two but lack the supporting organizational capabilities or consistent proof points to gain traction or back their claims. What we often see lacking is a consistent framework guiding overall efforts and ensuring that individual efforts are coordinated and reinforce one another. Below, then, is a relatively simple framework for consideration. (See Figure 1.)
Figure 1: Green Banking Institutional Framework
COMPANY MISSION
GO-TO-MARKET
CUSTOMER EMPOWERMENT
Balance Sheet
Divesting from fossil fuels or funding sustainability-focused organizations and projects
Community
Donating to nonprofits
Distribution
Thinning branch networks, green branches or reducing drive-throughs
Product
Environmentally friendly debit/credit cards or environmental donations built into the product
Pricing
Green LOCs/loans
Awareness
Climate and environment-focused insights into spending patterns or educational resources
Trigger for Action
Providing customers the ability to choose where their money goes or offering incentives to customers for buying sustainable brands
Source: Curinos Analysis
Mission, Go-to-Market, Customer Empowerment
Set a mission. This means developing a clear framework for what the institution will do, what it won’t do, or both. In some cases, the mission statement may also address the “why” question. For some banks, a public mission statement may make sense. Those operating in markets less receptive to a public green mission statement, on the other hand, may wish to address mission more narrowly. For example, they may prefer to focus on empowering customers to make their own choices without committing the bank as a whole to a particular mission or set of values.
The framework can include both balance sheet and community engagement. For example, a provider might articulate a mission that encompasses lending into environmentally sustainable sectors, and in some cases it might identify sectors that it will decline to finance. Mission statements may also incorporate sustainability commitments to the communities in which the institution operates. In short, the mission statement clearly articulates the company’s approach to environmental sustainability and lays out a framework for how the approach will be implemented in its go-to-market activities.
Go to market in an environmentally friendly way. A go-to-market strategy is the core of how a green bank operates. It covers distribution, products and pricing. Green distribution can cover initiatives ranging from reducing a branch’s environmental impact to removing the branch altogether. For example, the most recent Curinos U.S. Shoppers Survey finds that, for the first time, the number of new checking accounts gained through marketing, increasingly digital marketing, surpassed those opened through branch networks. And 53% of checking account shoppers reported some form of online/mobile banking capabilities as the top reason for choosing their primary bank. (See “Marketing (Digital and Direct Mail) Is Making Its Mark” in this issue.)
Green distribution can also encompass providing more remote sales and service contacts, thereby reducing (although not eliminating) the miles bankers and clients log for meetings, servicing or transacting. Finally, there are many aspects of the corporate operations that are extensions of the same principles, such as its real-estate and carbon footprint.
While green products encompass every business line and customer segment, green bank assets (green bonds, green loans), green wealth products (ESG funds) and consumer payments (electronic transactions) are among the most mature. Commercial cash management falls somewhere in the middle. Despite many advances in electronic payments products, nearly one-third of middle-market payments are still made by paper check. And in both consumer and commercial banking, green deposit products are still in their infancy. In addition, there is a huge opportunity for banks, both individually and collectively, to improve the liquidity, recordkeeping and standardization of the U.S. carbon trading market, which is currently opaque and poorly structured.
Green pricing can take the form of incentives or penalties. Incentives can include better rates on green financing. Penalties might include charging higher prices for services with adverse environmental impacts where a better alternative is available, such as counter check transactions that could have been completed on the mobile app.
Empower customers to go green on their own terms. Empowerment is the essence of serving customers. Depending on how bold their green policies are, providers can offer financing, offer advice and even help clients evaluate the impact of going green on valuation and investor attractiveness.
Financial institutions that choose to embrace green in mission, go-to-market and customer empowerment are in a unique position to both harness funding from a pool of green-minded depositors and put it to work in a range of customer segments and financial products. And the scope can go beyond their financial resources. Banks and other financial providers have vast stores of data and deep pools of human talent and expertise. With them, they’re uniquely positioned to heighten awareness among customers and to trigger them to take the action needed to sustain the environment — all while growing their bottom line.
