Could Financial Institutions be the Activists Climate Change Needs?

Eloisa Tovee 7th February 2022

When something affects the whole world, how do we begin to fix it?

Some say start small. Every paper straw, every switch to electric, every vegan dinner will inch us forward to a greener future. But the truth is, until leaders join the sustainability effort, the changes we need to curb the effects of climate change – and the pace at which we need them – won’t be realised.

The world’s first “net zero finance centre”

In today’s context, leaders are no longer just heads of state, policy makers and government. They are the executives of big tech, the CEOs of conglomerates and the David Attenboroughs from the science, health, and charity communities. They are also the organisations managing any existential threats to the global economy. Which is why it should come as no surprise that the world’s biggest banks are a large part of the climate change conversation.

In fact, at this year’s COP26 summit, over 450 financial institutions committed themselves to limiting greenhouse gas emissions – a pledge that is considered to be one of the top achievements of COP26 and sees the number of financial firms committed to net zero plans tripled. Using the momentum of the summit, Prime Minister Boris Johnson promised to:

“unleash the unique creative power of capitalism to drive the innovation that will bring down the costs of going green”,

seeing UK climate action as a possible boost for the economy and a way to kickstart the net zero journey and evolve expensive technology into affordable infrastructure.

And this is the balance banks must find. The adoption of low-carbon options requires financing and facilitation of the transition, which in turn takes investment into new technology and green ways to do business. Whilst banks are demonstrating a keenness to adopt, they are not all in a position to action without public funding. Change also raises red flags when it comes to risk and can add additional complications around third party management and data limitations. This prevents banks from acting too hastily in case existing regulatory obligations are not met. As well as external factors, banks have the added pressure from stakeholders and customers to base financing conditions around sustainable credentials and to offer actionable advice about how everyday banking can contribute to the green transition.

To help give structure to climate action, the Chancellor, Rishi Sunak set out new rules as part of the UK’s net zero roadmap, requiring public companies to report on their plans to achieve net zero emissions by 2050. This mandated reporting will give large bank and financial institutions teeth to set short and long-term data-backed targets, moving entities away from superficial climate strategies and closer to Sunak’s vision of the City of London becoming the world’s first “net zero finance centre”.

Unlikely activists

Despite the growing awareness of climate action, the world’s largest 60 banks provided £2.7 trillion to the fossil fuel industry since the signing of the Paris Agreement in 2015. Fossil fuel financing in 2020 alone outstripped that provided in 2016, and a 2021 report found UK financial institutions to be responsible for 1.8 times the UK’s annual net emissions of CO2.

For an industry so deeply rooted in fossil fuel production, the financial sector seems like an unlikely comrade for the climate change movement. And yet, there’s a lot more going on behind the headlines.

Whilst rules and agreements can give structure for change, change only happens when people want it to. As detailed by Abyd Karmali, Managing Director of Climate Finance at Bank of America, at the 2021 Sibos conference, if banks want to act on climate change today, they should be looking into four key areas: alignment, ambition, advocacy, appetite.

Rather than battling ‘problematic headwinds’, Karmali urges banks to align on global climate initiatives and create a ‘supporting tailwind’ with new policy. Initiatives such as Sibos, UN Climate Change Conference and the Climate Financial Risk Forum enable ongoing conversations between regulators and industry to drive best practice and ensure the risks associated with climate change can be managed, and where possible, taken advantage of for the benefit of consumers.

Individuals such as Alison Rose, Chief Executive of NatWest, has become increasingly vocal about the significance of solving climate change challenges and is using her position within NatWest to put words into action. Not only was NatWest banking sponsor for COP26, the bank has made the strategic move to cut back on fossil fuel exposure and instead, pledge £100 billion for sustainable-energy projects by 2025 and phase out all global coal-sector lending by 2030 as part of the Powering Past Coal Alliance. Rose has also introduced a future bonus scheme that will be dependent on the bank hitting its environmental targets.

NatWest’s commitment follows similar pledges made by Lloyds Bank – who has set an ambitious goal of reducing carbon emissions they finance by more than 50% by 2030, and HSBC, who intend to transform both their own operations and supply chain to net zero across the bank by the same year.

Outside of individual advocacy, we’ve witnessed a wave of green-inspired technology. This includes Sugi, an app calculator that helps you track and compare the annual carbon impact of individual investments, Åland Index, a cloud-based climate impact index, the world’s first net zero pension from Cushon, and a carbon footprint tracking feature on the NatWest app.

How ECS is supporting banks and the ESG agenda

It’s no coincidence that the latest ESG regulations focus on measurability and accountability. Not only does it remove ambiguity around sustainability goals, it’s a nod to the vast amounts of data in the hands of financial institutions.

As noted by the Business Reporter:

“Studies have estimated that 70 per cent of CO2 emissions are driven by consumer behaviour. Banks and financial institutions can be key enablers in fighting climate change because they see and process all our transactions. This provides them with a wealth of information about consumption patterns and preferences.”

At ECS, we believe this data is only of value if it can be unified and used.

Mandatory TCFD-aligned climate reporting – from January 1st 2021, the Financial Conduct Authority (FCA) requires all premium listed companies in the UK to make better disclosures about how climate change affects their business and is consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The Chancellor, Rishi Sunak, also announced that TCFD-aligned disclosures in the UK will be fully mandatory across the economy by 2025.

Recognising a need to organise and unify sometimes 100s of data sources (ranging in legacy, host, and technical debt), ECS helped developed the architecture to support an inhouse data model capable of sourcing, storing, and evaluating all data that feeds into the bank’s climate agenda. This model produces real-time reporting for regulatory obligations and banking customers. Both repeatable and scalable, this model is successfully in use at a top five UK bank serving 19million customers a year.

Data modelling to inform lending decisions – as with any bank that specialises in lending, the risk to its investment portfolio is dependent on economic and environmental changes. ECS established a framework and built out the necessary processes and controls to evolve our client’s choice of data model into a sophisticated analytics tool. These additions have made it possible for the data model to assess environment factors before banks make decisions to lend, invest or insure. For instance, we can give banks transparency over flood risk in relation to geographic code or using emissions data to map out the kind of properties they are lending against. It’s also possible to extend these insights to customers so they can make more informed choices, green-conscious investments and be proud of the organisation they bank with.

Cloud migrations – In 2016, the overall power usage of the world’s data centres exceeded Britain’s total electricity consumption. Private business data centres are the worst offenders but are also the closest to home to evolve. Cloud migrations can cut business IT operations’ carbon footprints by up to 80%, and with our pool of practiced cloud engineers we can modernise your data platform and mainframe into the cloud so you can start to move the needle on your net zero targets. We are also set up to review existing Cloud Data Platforms for Data lifecycle efficiency and operations optimisation.

Total Climate Impact Measurement and Management – ECS established a fresh perspective and measuring architecture for decision-making, enabled by a Total Climate Impact Measurement framework. This framework is a comprehensive look at what businesses need to know about risk, opportunities, and maintaining a positive social impact. It can include the creation and integration of climate physical and transition risks with credit, market, operational, and reputational risks. This can help firms embed an end-state analysis of climate risks within their capital framework, preventing over-capitalism in the long term.

Next steps

ECS adopts an agnostic view across the latest in data technologies to enable rapid provisioning, refreshing, and rewinding of fully integrated application and data stacks. We are currently supporting two UK high street banks with various data migration programmes and have successfully delivered a new climate data warehouse based on AWS and Snowflake cloud-native platforms for one of the top five banks in the UK.

Many organisations have already built the first iteration of reporting at significant IT, people, and external consultant cost. We can help automate this, move it to the cloud and save significant costs, create low energy windows and improve the quality.

If you’re interested to learn more about how we automate mandatory climate reporting, accelerate cloud migrations and establish sustainable data models that inform responsible lending, reach out for a chat today.

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