Banks: The Right Hand of Climate Policy

The commitments made at COP26 are just a start. What’s needed for real progress on climate change is considered, concerted action – and as the saying goes, money talks. Banks have a critical role in translating commitments into actions by influencing where, how and when money is spent. Whilst regulators, like the Bank of England, has so far shied away from directing money flows to more rather than less sustainable businesses, pressures are mounting on banks to wield their considerable financial power in support of climate commitments. To do so, banks will need granular information on a host of factors that determine environmental impacts over time and risk across all sectors and all kinds of assets and investments.

Getting Analytical about Emissions

Many banks are making good progress on their own emissions by reducing office space, sourcing sustainable electricity and radically cutting business travel.  However, to be credible in driving change in their customers banks must ensure their own environmental performance is up to scratch across the board. As scrutiny increases, other aspects of day-to-day operations will be highlighted. So far, banks, along with most industries, have escaped close examination of the environmental performance of their data centres – but this will change. Research suggests that the best data centres, operated by hyperscale cloud providers save 88% of the carbon-footprint of on-premise facilities. Banks typically have several data centres for operational and resilience reasons; moving processes to the cloud can radically reduce data centre emissions. Using the opportunity to tune analytics, for high efficiency can deliver even better environmental performance. With the right planning and smart multi-cloud implementations, these solutions can be just as resilient as on-premise data centres.

However, banks’ real power to influence the climate debate is not from their own operations, rather from the customer emissions they finance, and regulators know this.

Financed emissions: Net Zero together or not at all

Already consumer and NGO pressure has put the reputational risk of bank lending and investments in extractive and carbon-intensive industries under the microscope.  But there is still much work to do. Recent research found that despite Net-Zero statements only three of Europe’s top 25 banks have committed to halving financed emissions by 2030 and less than half have committed to end investments in coal-related businesses.  However, there are signs the industry is starting to get its act together.  Forward-thinking banks have committed to Net-Zero on their financed emissions as part of the Net-Zero Banking Alliance, an industry-led initiative convened by the United Nations.  This involves commitments to reduce financed emissions to Net-Zero by 2050, with strong intermediate targets as well as the requirement for all plans and progress to be publicly disclosed.

Though these are currently voluntary commitments its likely they will increasingly become wrapped up in regulatory and reputational demands to act. A 2020 survey of central banks and regulatory authorities found that 55% of central banks are already monitoring climate related risks, and 15% of respondents already included climate risk in stress-tests. Seventy-nine per cent expected to do so in the future.  Indeed, the Central Bank and Supervisors Network for Greening the Financial System is clear: Climate change is one of the biggest threats to financial stability and all banks need to tackle it head on.

From compliance commitments to competitive advantage

However, focusing on compliance will only take you so far. A research paper by McKinsey argues, banks have the potential not only to mitigate climate risk, but to create competitive advantage through a stronger, data-driven focus on environmental issues. McKinsey identifies Five Principles for Climate Risk Management – suggesting that:

“[B]anks need to quantify climate factors across the business and put in place the tools and processes needed to take advantage of them effectively.”

This view was validated in ING's 2021 climate report which states “Building a strong data analytics operation is critical to the success of our climate approach”.  ING also said “just as critical [] is how we’re able to integrate it into our front-office systems so we can offer insights to our clients.”

Granular data, available at scale and across the whole organisation is essential to realise these opportunities. This data will need to be ingested from hundreds of sources and integrated with customer records and transaction data to provide clear, relevant and timely data upon which sustainable risk and investment decisions need to be based.

It All Comes Down to Data

The challenges are not insignificant – specifically around the quality and comparability of emissions data in different sectors. However, banks play a role as both customers and providers of data that can drive more positive environmental outcomes.

At Teradata we have recently been asked by a major European bank how it can better use data internally and with customers to increase environmentally positive outcomes. Our proposals included not only integrating diverse data sets to produce detailed assessments of financed emissions, but collaborating with customers and their data to define, and then finance, the most effective mitigation strategies. Rather than simply withdrawing finance from high impact sectors (like energy, agriculture, construction and transportation), it provides a proactive approach for banks to support climate-positive progress.

To do this banks need to create a ‘green data brain’ that constantly combines, integrates and analyses climate, risk, operational and customer data to provide insightful analysis. This will not only help banks manage their own climate risk – estimated by McKinsey to equal up to 15% of their balance sheet, but to leverage as much as $500 billion in new opportunities related to environmental change annually.

With government and stakeholder scrutiny increasing, risk exposure growing and half-a-trillion of annual opportunity in the balance, investing in a green data brain is smart business as well as the right thing to do. Get in touch with your Teradata industry consultant team to find out more or tune in for my next blog which will explore how to build the analytics foundations to deliver on environmental policy commitments.