The financial industry is uniquely positioned to fast-track the transition to a low-carbon economy. Specifically, commercial banks have an essential role to play in reducing their financed emissions. And while commercial banks around the world have confirmed their commitments by joining the Net Zero Banking Alliance and aligning with the Paris Agreement on climate change, many banking leaders may not know where to start from a process and planning perspective.
While it’s a journey, the following are three steps commercial banks can take today to strategically kickstart their transition to “net zero”:
Prioritize due-diligence and data analysis
Commercial banks should set quantitative targets for reducing emissions – that’s a given, but there is a lot of data-gathering and analysis that needs to go into identifying these targets.
This isn’t just an internal exercise. A bank must also assess the current carbon footprint of its existing clients and conduct a thorough analysis of its entire operations. This might mean gathering data from a number of smaller companies working within the overall structure. Banks will also need to identify the targets their clients have set and ensure they have a clear understanding of how progress against those targets is tracked.
Pulling all of this data together can be incredibly time-intensive, and with a long time horizon, banks will need to ensure they are set up to reassess critical data regularly. Cloud technologies can help banks streamline this process and maintain an always-on, single source of truth for critical emissions data.
Determine business impact and risks
Once data is gathered and a baseline is established, banks need to identify and address potential risks associated with their emissions targets.
The degree to which a bank can achieve its net-zero goals will depend, in many cases, on how well it can rebalance its lending strategy while protecting its revenue. It would not be unusual for the business to examine the need to sacrifice short-term profitability for long-term margins to achieve its goals of carbon footprint reduction. A bank with a customer portfolio predominantly within the oil and gas industry, for example, may realize a decrease in loan revenue as decision-makers look to diversify.
This is where scenario modeling and intelligent forecasting capabilities come into play. Leaders can use these capabilities to model a number of unique scenarios and analyze potential business outcomes. For instance, if the bank decides to reduce lending commitments within the oil and gas industry, what would their financed emissions look like in five years’ time. Similarly, what would that decision do to profits over the next three to five years. Modeling is also critical as banks think about potential external factors that could have a significant impact on their financed emissions goals, from a drawn-out recession to rising political tensions.
Banks can also incentivize clients to implement sustainable initiatives by offering adjusted rates and new lending options, or by offering green bonds to finance environmentally friendly projects. This can help banks protect existing relationships in addition to driving progress towards their emissions goals.
Monitor and report progress
Finally, banks must use real-time data to track and report progress throughout their entire journey to net zero, not just in the planning stage. For instance, commercial banks need to plan for the disclosures that will be required as part of the global net zero transition, but those disclosures will likely shift over time as global requirements and new regulations come to pass.
Regularly pulling and aggregating the amount of data required to monitor and accurately report a bank’s progress towards its goals in this environment would take an army of people to manage, with more risk for data-quality issues as more manual work is involved. Cloud technologies can be leveraged to drive automation and reduce potential risk. These connected tools can help commercial banks understand the impact a shift in reporting requirements might have on their current targets and identify gaps that might hinder their ability to meet these new regulations.
Pledging sustainability goals is an admirable endeavor for the banking industry, but it requires a comprehensive approach. Banks must set clear goals, assess risk and business impact, and regularly measure and report progress. By taking these steps, commercial banks can harness the power of data to support strategy setting, decision-making and reporting in their stewardship of emission reduction.
Adam Rhodes is principal solution consultant, UK and Ireland, at Anaplan.
