" class="no-js "lang="en-US"> EXCLUSIVE: 'Taking the Heat' - Dave Wallace, NMD+ in 'The Fintech Magazine'
Wednesday, November 30, 2022

EXCLUSIVE: ‘Taking the Heat’ – Dave Wallace, NMD+ in ‘The Fintech Magazine’

As global warming threatens to exceed environmental targets, the banking industry and its suppliers really can help save the world, says Dave Wallace

In the middle of last year, I wrote an article on the impact of climate change on the financial services industry. It was a truly eye-opening experience. One of the things I was particularly struck by was the fact that central bankers are preparing for the worst. Through an umbrella organisation called the Network For Greening The Financial System (NFGS), central bankers and supervisors from around the globe are looking at how the financial services industry could and should be responding to the challenge of a warming world.

These are not people who glue themselves to the tarmac and protest loudly in the streets. As central bankers and supervisors with economics, accountancy and actuarial backgrounds, they are much more conservative in their approach. But they do have access to information, and they have concluded that urgent action is required.This fact alone was sobering enough for me to go from someone with a passing interest in the subject, to someone much more actively involved.

Reading through a few of the reports that the NFGS had produced, I boiled their biggest concerns down to:

  • The financial shock caused by extreme weather events and rising sea levels
  • The economic shock caused by rapid decarbonisation

In essence, a consequence of a warming world is that more extreme weather is forecast, and sea levels are set to rise. From droughts to flooding, hurricanes to forest fires, extreme weather events will have potentially catastrophic impacts on people and the places they live. The financial sector will be under enormous strain from insurance claims, and stranded assets, as swathes of land are rendered uninsurable or uninhabitable Water shortages and famine could lead to immigration and a refugee crisis, increasing pressure on the financial system.

The other shock that could occur is as a result of rapid decarbonisation. The finance system is inextricably connected to the oil industry. As countries and citizens respond to climate change, a fast move away from oil-based economies could result in the value of assets plummeting, impacting long-term savings and also stranded assets.One thing that made me sit up straight was the mention that weather events predicted for 2050 appear to be happening now. In the summer of 2021, one-third of the US was under extreme weather.

As I say, the output of the NFGS is sobering. It is worth mentioning that the UN has recently published a 3,000-page report as part of its ongoing commitment to monitor what is happening, post the 2015 Paris agreement, which looked to limit warming to 1.5°C above pre-industrial levels.

The world is on a path to missing that target with increases of more than 3°C forecast. To achieve 1.5°C, the world needs to reduce CO2 emissions by 50 per cent by 2030 and reach net-zero by 2050.Coming out of COP26 in Glasgow, it was noticeable that the cheerleader-in-chief for the event was Mark Carney, himself an ex-central banker. Mr Carney used COP26 to launch the Glasgow Financial Alliance For Net Zero (GFANZ), a coalition of more than 450 banks, insurers and asset managers across 45 countries, to align the $130trillion of private capital they are responsible for behind the drive for net zero.

This was when the penny dropped for me – money talks!

The financial services industry moved out of the shadows and took a pole position in the race to address a warming world.So, why is the financial services industry so well-placed to support the climate change agenda?

Obviously, there is the capital aspect; as Mr Carney points out, the industry is responsible for lots of money. But looking under the hood, the financial sector is excellent at:

  • Managing complex operations securely
  • Dealing with governments, regulators and regulation
  • Undertaking measurement and reporting at scale
  • Dealing with large numbers and varying types of customers
  • Manufacturing products and services
  • Being experts in technology
  • Being able to deliver marketing communications at scale

Some of the things required for solving climate change are:

  • Understanding complex issues
  • Dealing with governments, regulators and regulation
  • Massively importantly, undertaking measurement and reporting at scale
  • Dealing with large numbers and varying profiles of audiences
  • Manufacturing products and services
  • Technology and digital transformation expertise
  • Communications

You get my point – my verbal Venn diagram illustrates the embarrassment of riches that the sector offers, and companies are starting to step forward. Most of the larger institutions have committed to net zero by 2050. Some hope that the net will be stronger than the zero, so they can offset their way to targets. But to do so opens a business up to acquisitions of green-washing.

The Science Based Targets initiative (SBTi) defines net zero as: “Achieving a state in which the activities within the value chain of a company result in no net impact on the climate from greenhouse gas emissions. This is achieved by reducing value chain greenhouse gas emissions, in line with 1.5°C pathways, and by balancing the impact of any remaining greenhouse gas emissions with an appropriate amount of carbon removals.”

Every effort must be taken to get to the zero before offsetting is considered. This is not going to be an easy thing to achieve. I think of climate change like the Hydra, the many-headed beast of Greek and Roman mythology. If you chop off one head, another will grow. To illustrate the point, I often cite the example of Meta wanting to build a new data centre in the Netherlands. This data centre will be so large that it will suck in 10 per cent of all the renewable energy that the Dutch produce. Meta has pledged to be net zero, and so it wants that renewable energy.

But that creates a problem for the Dutch government, which is then having to look at re-jigging its climate targets. So, how are companies looking to address the race to net zero? The challenge that FIs face is that most of their emissions (well over 90 per cent) are what’s called Scope 3: suppliers and customers produce these emissions in relation to the activities of an organisation. Think of a customer using mobile banking or the software needed to deliver that experience. But due to the scale of institutions and their customer reach, this is potentially a very positive move.

“As countries and citizens respond to climate change, a fast move away from oil-based economies could result in the value of assets plummeting, impacting long-term savings, and also stranded assets”

Why? Because the journey to net zero needs to be as efficient and as fast as possible.

The worst thing that could happen is that, as organisations across all sectors try to make sense of what they need to do, there is massive duplication of effort. When thinking about net-zero goals, it is easy to think about it through the lens of reducing the energy consumption of hard assets, e.g. hardware and software, things that consume electricity. In fact, most of what you see in the public domain talks about this very thing.

There are start-ups, such as Go-Code-Green, that will help companies understand the carbon footprint of their technology and software. But that is only one aspect. There is the soft asset aspect as well. Think about the people involved and the energy associated with each and every one of them. Any duplication will include people and therefore create more waste, which is self-defeating. Avoiding duplication has to become the new mantra. There needs to be agreement on definitions, KPIs, data collection and target setting.

The more this is done across businesses rather than within businesses, the better. And banking, because of its place in economies, is ideally placed to help:

  • Enable it with external reporting, including to investors
  • Provide dashboards for internal monitoring and portfolio steering
  • Provide input for risk models and insights that will allow new and better products and services

DNB has identified that its business and corporate customers lack a basic understanding of everything ‘green’. From clarity on what ‘green’ actually is, to what KPIs are needed to measure action and what action they should take, it believes that its data hub will be able to help. It is taking the output of the EU consultation process around the taxonomy that will define environmentally sustainable activities and clarify what ‘green’ is within various sectors. It is also working with the United Nations Environmental Programme Finance Initiative (UNEP FI) to define targets.

This knowledge will power the data hub, enabling its corporate customers to be more informed and, therefore, more empowered to act. DNB will be, in effect, sitting between the EU and regulators and its customers, helping make sense of the regulation and then passing this knowledge to them. This is the role that banks will increasingly play: enforcers and monitors of policy.

Through climate tech, companies such as CoGo, ecolytiq, Duchonomy, and Enfuce banks are assisting personal and small business customers in understanding the carbon impact of their spending decisions and then providing education and options around the reduction. This is another example of how banks can use their scale to inform and educate, a truly efficient way of getting the right information into the hands of millions of people.

Due to its scale, the banking industry is supported by many suppliers. So I was interested to understand what those suppliers were doing regarding net zero. Many companies seem to be very early in their journey, so there are considerable opportunities to avoid duplication and for companies to collaborate on what to measure and how to measure it, target setting and practical action plans. One company that has a mature strategy is Infosys.

I spoke with Manish Mahorta and Samad Masood about its approach. Since its founding, sustainability has been an essential objective. With some offsetting, energy efficiency and renewable energy, Infosys achieved carbon neutrality in 2020. policyBeyond energy, it has developed a framework for ‘practical sustainability’ that works at a much more holistic level, ensuring that what it does goes well beyond hard assets and impacts company values and culture. Like DNB, its approach is data-driven. The starting point for Infosys is a sustainability plan that informs what data to collect and how to collect it.

Then a business plan is developed, but with growth areas viewed through sustainability criteria. Infosys believes that a sustainability-first culture is essential for success, so it invests heavily in education for its employees and, increasingly, its customers. Banking (and suppliers) to the banking industry really can help save the world.

At its most basic, the industry can help:

  • Make sense of and contribute to regulation
  • By providing (or not) products and services, it can become an enforcer of policy
  • It can use its technology to provide data that can help inform better choices
  • It can help set targets and educate its customers through frameworks and e-learning

Ultimately, it can lead to reduced wastage, so that the race to net zero is as fast and low-carbon as possible and not a new contributor of emissions in its own right.

ABOUT THE AUTHOR…

Dave Wallace is founder of NMD+, which helps financial services improve customer relationships, and is co-founder of the Web3 Marketing Association. Based in the UK, he is a speaker, author and podcaster on many aspects of financial technology.


 

This article was published in The Fintech Magazine Issue 25, Page 96-97

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