How can financial services accelerate our transition…

This article was first published in TheCityUK

The consensus around climate action to shape a positive human future has never been stronger. Environmental consciousness is no longer the preserve of a small band of campaigners, but a mainstream phenomenon driven by increasingly conscious consumers. From becoming a trusted advisor to forming new partnerships, we look at five ways financial services firms need to innovate and create new opportunities for their customers to speed up the transition to a greener world through sustainable saving, investment and spending.

The climate emergency has the world’s attention. Governments are uniting to push carbon emissions down and keep global temperature rises under control. People are more engaged in the plight of the planet than ever, and more motivated to act. They realise their choices make a difference, from how they heat their homes and power their cars to where they go on holiday. At PA, we surveyed consumers across the UK during the pandemic and found that 63 per cent feel being ‘green’ is more important than ever.

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Businesses, too, realise their critical role in the transition to a low-carbon future. They see sustainability isn’t just about complying with regulations but represents a huge opportunity to innovate, be more competitive and manage emerging risks. Almost half of consumers told us they try to buy from businesses with strong sustainability credentials, and switched-on businesses realise sustainability is the route to customer loyalty.

Even so, progress is slow. Complexity of information, risks of new ways of doing business and perceived costs all throw up barriers. But financial services firms can catalyse change. For example, by backing new business models that make it easier for consumers to be sustainable, firms can help other sectors combat climate change. And by offering consumers advice based on their historic choices, the industry can nudge and influence them, too.

At PA, sustainability is central to our mission to build a positive human future, so it’s something we’ve helped all kinds of organisations embrace. Based on this experience, we’ve found five ways for financial services to make an impact:

Invest with purpose
Make sustainability more affordable
Form innovative partnerships
Remove the burden of ownership
Be a trusted advisor

1. Invest with purpose
An estimated £930bn of investment assets are in sustainable funds. It might only be three per cent of assets under management, but it’s growing fast, with many big pension funds setting net-zero targets for their investments. We’re even seeing celebrities call for action, with film producer Richard Curtis launching a ‘make my money matter’ campaign to shift pension investments away from fossil fuels, arms, tobacco and gambling. So, it’s no surprise that investments focused on environmental, social and governance (ESG) issues quadrupled in 2020, according to the Investment Association.

These investments are also starting to outperform traditional funds. Asset managers see that analysing ESG risks makes them better at stock picking because it gives them deeper insight into risk and opportunity.

To contribute, all financial services firms must first understand their exposure. Instead of just looking at the spread of lending across sectors, understand the impact that lending has on carbon, biodiversity and social equity. And engage with clients. They likely want to become more sustainable but don’t know how to take the first step. Preoccupied with the day-to-day, they need help to understand the costs and risks, and to build a transition plan.

2. Make sustainability affordable
As consumers, we might be more willing than ever to be sustainable, but making a significant impact is complicated. Take the homes we live in, for instance. Heating them accounts for 14 per cent of UK greenhouse gas emissions. While the ban on gas heating in new-build homes from 2025 is a start, making a real difference means an expensive and disruptive overhaul to existing houses – solar panels, insulation, heat pumps and more. The choices for homeowners are complex. And payback times often extend beyond the number of years they’ll own the house.

Finance can make this easier. In the US, government-backed PACE (Property Assessed Clean Energy) finances energy efficiency improvements, securing loans against the property, not the owner. The owner then repays the costs over 10 to 20 years through additions to their property tax bills. Similar models could work in the ultra-competitive mortgage market. As homes’ energy-efficiency improves, their value rises, so there’s less risk for the lender. A handful of mortgages and other loans like this already exists, and more are sure to follow.

3. Form innovative partnerships
Financial services can’t make the world sustainable alone. Teaming up with other sectors and businesses will be key to developing the products and services that deliver sustainability. NatWest, for example, has teamed up with Octopus Energy to install car points and battery storage in homes. And Swedish challenger bank Klarna has partnered with carbon insight-based FinTech Doconomy to show consumers the total carbon footprint of every purchase. It’s easy to imagine this evolving to automatically show consumers more sustainable options before they buy.

Practically, this means Financial Service providers need to be engaging the broader network of players in the ecosystem, and working with them to understand the value they can bring through collaborations. This maybe beyond just financing, but also about the insight and relationships they have in particular sectors, supply chains or with anchor clients. Establishing the right partnership takes time, and developing successful joint propositions may require a process of learning and iteration, given the evolving nature of customer needs and solution providers.

4. Remove the burden of ownership
We all know about not leaving appliances on standby, buying energy-efficient products and washing our clothes on eco-programs. But it’s hard to avoid generating waste simply by needing to replace products. The full sustainability impact of disposal is huge and hard to unravel, let alone reverse.

Financial services firms can help by backing models based on service which are designed to alleviate an increasingly complex burden of ownership. When consumers subscribe to products as a service, businesses have a commercial incentive to prolong the product’s life, make it more efficient and not build in obsolescence. When it’s time to replace the product, the business gets the old one – and all the resources locked inside it – so they can extract value and minimise reliance on new raw materials.

This isn’t just fringe thinking. Global names like Ikea and Philips are developing offerings like this for furniture and lighting, respectively. Financial services can accelerate this by moving capital into these ideas, or supporting businesses developing similar sustainable strategies. It will mean rethinking lending and risk based on the whole-life value of assets, and training relationship managers accordingly.

5. Be a trusted advisor
Businesses will need help to adopt these new models, and financial services can play this role, advising on how to phase and prioritise investment and measure results. Similarly, consumers need guidance and ideas to help them make the transition to a sustainable future. Even today, very few consumers realise moving pensions into sustainable funds has a bigger effect than green lifestyle choices such as buying an electric car. Financial services can fill this gap with information hubs that curate and aggregate advice, and customers’ experiences, and offer rosters of approved suppliers and advisors as part of a financing service. This isn’t dissimilar to how we worked with ING on their mission to ‘empower customers to stay a step ahead in life and in business’. Here, we helped guide them through new opportunities to collaborate with a range of organisations outside the financial services ecosystem to help them better support and guide their customers.

To seize the opportunity to shape a sustainable future, financial services firms will need to bring in more sustainability expertise at a strategic level to design the service offering, and on the front line to help businesses and consumers directly. The prize on offer is huge, and so is the importance of the work. It’s no exaggeration to say a sustainable future depends on it.