The financial services industry has seen rapid transformation in recent decades with changing customer expectations, technology and new market entrants. Now it, like many other industries, faces an even greater challenge - climate change.
The financial services industry has a significant role to play in powering, measuring and shaping the solutions necessary to mitigate man-made climate change in years to come.
We have already seen a notable appetite from financial institutions to engage with this issue. At COP26 in 2022, 43 banks from 23 countries, representing assets of $28.5 trillion, formed the Net-Zero Banking Alliance (NZBA), with members committing to align operational and attributable emissions with pathways to net-zero by 2050 or sooner.
ClimaTech – technologies that are explicitly focused on reducing emissions, or addressing the impacts of global warming – will play a key role in achieving this goal. Research by McKinsey indicates that existing, mature technology solutions could deliver about 60 percent of the emissions abatement needed to stabilise the climate by 2050.
Here we explore how ClimaTech is shaping the future of the financial industry across operations, investments and strategy.
1. Financial services are driving growth in ClimaTech
In 2013, the early-stage venture funding for climate tech companies was about $418 million.
By 2021, $87.5bn was invested in climate tech in H2 2020 and H1 2021 – 210% growth in investment year-on-year since 2013, with ClimaTech now accounting for 14 cents of every venture capital dollar.
Reasons for this are clear: the need for climate technology is pressing— which creates large potential markets and investment opportunities. Notable for the financial services industry is how many of these technologies are being not only funded, but also acquired by financial services leaders.
The rise of climate fintech
As green issues become more central to the future of business models, financial services businesses are integrating their broader service offerings with ESG and climate goals to create more sustainable products - both in the sense of environmental impact and market longevity.
This is reflected in recent acquisitions in the space where financial incumbents have snapped up new technologies to increase the relevance and environmental insight of their services.
Key examples include:
- Climate risk analysis firms Carbon Delta acquired by MSCI and Four Twenty Seven acquired by Moody’s (2019)
- Sustainalytics acquired by Morningstar for an undisclosed amount (2020)
- Truvalue Labs acquired by FactSet for an undisclosed amount (2020)
- OpenInvest enabling personalisation of investment portfolios – acquired by JP Morgan Asset Management for undisclosed amount, pre-Series B, having raised ~$25m (2021)
These show that ClimaTech is not only a part of the financial services agenda - in regards to ESG targets and environmental commitments - but actually a driving force for future success and one worthy of investment.
2. The transformation opportunity of financial services operations
As well as promoting sustainable practices within their portfolios, customer-base and supply chains, financial services businesses must also consider their own operations.
Despite widespread digitisation, much of the industry still relies on paper and physical documentation to execute services. Estimates put the industry’s annual paper document output at 507 million communications, equivalent to the deforestation of 50,000 trees each year. An 80% reduction in paper is predicted to save the industry up to £1.3 bn annually.
The challenge of greener financial operations
Paperless operations offer the chance to improve both sustainability and efficiency for financial institutions. Processes based on physical documents are error-prone, often requiring manual data, validation and storage resulting in slower service-levels than digital processes.
Moving to a paperless process offers the chance to reduce environmental impact while also improving productivity, reducing operational expenses and improving customer experience. So why has the industry been slow to adapt?
In an industry where data breaches are especially dangerous and organisations face reputational damage, fines, remediation costs, in addition to compensating lost funds, many institutions prefer to stick to the status quo when it comes to communication. However, in the long term this will not be an option, both from an environmental point of view, but also as more agile, digital-first competitors continue to leverage their operational advantages to provide superior service.
Financial institutions need communication solutions that can reduce reliance on paper documents while transferring data securely between parties. Unipass Mailock is a tailor made secure email solution for financial services businesses, allowing providers, advisers and customers to communicate securely using a single system, reducing reliance on physical documents and processes.
Stakeholders can send sensitive documents and forms to customers over an encrypted channel, directly to their inbox, with all customer replies fully encrypted, including sensitive documents, which are protected on delivery and return. This system is not only faster, but more secure and more environmentally friendly than paper, giving providers a significant competitive advantage.
3. Climate accountability is becoming a key KPI
Climate impact is increasingly moving beyond theoretical commitments into the fabric of incentive structures and corporate planning.
In a recent survey by PwC, 33% of the largest firms by revenue said they would commit to ESG targets in their bonus and incentive plan. This is also reflected in investment strategy, with 29% of European LPs indicating a willingness to trade lower performance for excellent ESG credentials.
In this environment, financial services businesses are building considerations around responsible business growth, staff conditions and environmental impact into their long term strategies.
Measuring impact responsibly
The growth of ESG considerations has had a mixed effect on financial services, with some incentives risking surface ‘greenwashing’ strategies to tick the box of compliance. While these efforts are a relatively new arrival on the corporate scene, their implementation will require time to commit to best practices and establish reliable baselines for impact.
ClimaTech has a key role to play in aligning performance with compliance in this regard. Without innovative, accurate technology, financial services businesses will be unable to realistically analyse their climate impact or prove the validity of their efforts, whether internal or external.
Organisations must determine their own decarbonisation strategy, and each must engage with a range of stakeholders, including investors, customers, regulators and governments. These efforts must be combined with the right tools to deliver meaningful change to have tangible impact.
Reaching the potential of ClimaTech
As the array of ClimaTech tools expands, in line with the scope of the climate challenge facing businesses, financial institutions must make strategic choices regarding which solutions can deliver change and drive outcomes in their green strategies.
While much focus falls on external investments and assets, financial services must also undergo its own cultural and operational shift. This starts with the basic processes that drive the industry.
Unipass Mailock is a secure, environmentally-aligned email solution specifically designed for the financial services industry. Institutions can leave paper behind, creating end-to-end secure communication channels for internal and external stakeholders to move data, documents and gather information securely. Unipass Mailock securely digitises key workflows, helping businesses to:
- Reduce paper output and overall emissions
- Accelerate operations and customer service
- Comply with new security and environmental regulations
- Demonstrate a commitment to change to clients
To find out more about how Unipass Mailock can make your organisation more sustainable, start your free trial today.
Originally posted on 09 06 22
Last updated on July 28, 2023
Posted by: Team Origo
Articles and resources posted by Team Origo have been produced by experts in financial services technology from Origo Services in collaboration with the digital identity specialists at Beyond Encryption.