In the SME arena, banks look to provide innovative funding to technology start-ups dedicated to climate transition solutions or tap into other sectors with high potential in this area (such as financing agriculture loans for progressive farmers). OCBC Bank and HSBC both offer green SME financing and support, while BBVA and CaixaBank finance green agriculture.

For retail customers, banks can offer sustainable alternatives to investment or savings products, such as individual pension plans managed with responsible investment criteria. BBVA offers people green pension plans.

Customers will appreciate banks that help them on their own path to an ESG transition. In fact, banks are uniquely positioned to accelerate consumers’ ESG immersion. The savviest banks will create ecosystems of complementary products and services that make their customers shine as ESG supporters themselves. In retail, for instance, banks can use their unmatched distribution and financing capabilities and work with leading industrial sources. A bank could start with partnerships with EV manufacturers to distribute and finance cars within the banking network, then partner with renewable electricity suppliers, other industrials with ESG solutions, such as solar panels, and extend the system to include insurance products and even the development and financing of circular economies.

This is visionary banking at its best!

National Westminster Bank, commonly known as NatWest, is already taking such an approach. It is supporting customers’ switch to electric vehicles by promoting the UK government’s EV8 app, which educates consumers about EVs and how they can reduce their carbon emissions while saving money. NatWest offers EV financing and has partnered with Octopus Energy to offer customers discounted rates for EV charge points. The bank is also helping its home-owning customers through a partnership with ThermaFy, which will assess the energy efficiency of residential buildings.

To create such products, services, and complementary ecosystems, banks will need capabilities for setting up partnerships, management of ecosystems, innovative marketing, and oversight of customer journeys.

An orderly ESG house: centralized to decentralized

To achieve the kind of completeness we describe above takes profound modification of how ESG permeates a bank. It is not enough to name a chief ESG officer or set up a stand-alone ESG department. ESG matters have to be discussed and addressed throughout the organization to come to full fruition.

Key ESG functions will be centralized, including production of extra-financial performance indicators, oversight of their reporting, and definition of the bank’s sustainable and net-zero strategy.

Beyond that, ESG functions will be decentralized, compelling their application and active management throughout the bank:

Strategy managers will oversee sustainable strategies.
Marketing will direct development of ESG-dedicated products and services.
Compliance will ensure green and social know-your-customer requirements are fulfilled.
Risk specialists will weigh and quantify ESG-related risk against the bank’s overall risk appetite and ICAAP standards. They will conduct climatic stress tests and ensure ESG scores encompass green and social impacts of the bank’s ESG-related efforts.
Finance will produce the extra financial reporting, manage portfolio liquidity integrating green and social factors, and monitor the bank’s progress toward net-zero attainment. This group also will manage assets allocated to savings achieved through green and social impacts.

More ESG housecleaning: new operating model

Banks’ operating models will also have to meet the challenge of what we call granularity when it comes to which clients will want and need ESG-related products and services. We believe they will have to be prepared to respond to the needs of a greater number of smaller commercial clients with correspondingly smaller funding needs. Where a bank may traditionally finance a major coal-powered plant’s multimillion-dollar project, it may now finance a number of smaller companies that make or install solar panels, for example. The funding for each may be less but would be much more ESG-supportive—and there will be more of them. This granularity will require new capabilities for collaboration across business units, staff training to handle the new customers and their needs, and an innovative data and IT strategy to handle an influx of complex new information.

We foresee banks developing new platforms to finance ESG projects for SME clients. The number of related transactions will likely be smaller but increase. Banks’ current platforms focus on the large transactions of corporate behemoths, so they are not fit for the new purpose.

Leading-edge players will also rethink customer journeys for SME clients and partner internally across business units to deliver financing at the local level. Crédit Agricole is already doing this. It created Unifergie within Crédit Agricole Leasing & Factoring to bring financing solutions and expertise in corporate and investment banking to ESG projects.

Better managing ESG data will also be important. Financial leaders will be at the forefront of gathering, documenting, and reporting ESG data for their activities, but also for their corporate, SME, and retail clients. Banks (and insurers), after all, will probably have the most data about their customers’ ESG-related activities, accumulating it during risk profiles for financing and other banking products.

How that data is structured will be essential. There will be special considerations for how ESG data is organized for internal use in marketing, impact assessment and prioritization, and definition of ESG-related KPIs. For external use, ESG data will need to be structured for reporting to regulators and rating agencies, as well as to illustrate monetization potential for bringing in new ecosystem partners.

Controlling banks’ public image

We talked earlier about how communication, rankings, reporting, and data on ESG factors has been uneven at best and damaging to financial institutions at worst. Today, banks tend to communicate very generally about their ESG efforts, with no assessment of real impact. In our research, for example, not a single bank told the public how much its efforts have contributed to society in financial terms. To outsiders, this looks like greenwashing—and sometimes it is, which makes it difficult for banks that are sincere about supporting a better society and environment to be recognized.

ESG rankings are another area where vagaries and inconsistency driven by so many agencies hasn’t helped. Few rankings illustrate clear impact on ESG issues, let alone disclose how they are calculated.

Banks’ hesitancy to share ESG data out of wariness—or the failure to manage it well enough—threatens their credibility when it comes to ESG participation.

We believe it is imperative that banks regain control over how they are depicted by external agents. This is possible with an ESG data-driven environment that includes:

Regular, specific, and example-based communication that promotes ESG activities, required investments, and their results as they affect the financial institution, customers, the economy, and the world. Banks that are clear communicators of genuine ESG support and data leave no room for doubt about their authenticity.
A proactive approach to ESG rankings. By working jointly, financial services firms, including banks, can share comparable data and participate in constructing consistent rankings.
Unified reporting standards. Regional and local entities, such as the ECB and US Securities and Exchange Commission, are working on consistent ESG standards as part of IFRS.
ESG data transparency. Communicating real ESG impact will become a new normal.

True leaders are appearing

Banks that engage in the idea-creation process help shape the global ESG agenda. Today, it is common to see banks implementing their own ESG strategy, but they have room to grow by stating clearly how they can create value for the economy through ESG—how it can jumpstart innovation and contribute to a global ESG transition. That’s when banks become local leaders.

On a regional level, they can lead even more by participating in regional discussions and regulations, rankings, and agendas. At this point, banks have woven ESG reporting into public communications. Allianz and BNP Paribas are working along these lines.

Finally, like a big brother, banks that have established themselves as local and regional leaders can support other banks to become ESG leaders. While a bold thing to imagine, it is entirely possible for the greater good. As a bank that has figured out the ESG challenge for itself, it can support others in its market with guidance, benchmarks, and advice, in effect becoming an ESG ambassador.

The Kearney approach to strong ESG outcomes

At Kearney, we have seen businesses successfully support some of the most pressing societal and environmental issues of today, from ESG transformation and net-zero achievement to sustainable sourcing, resource circularity, and equitable and inclusive workplaces and communities. Addressing ESG transformation, net zero, and equitable and inclusive workplaces are probably three of the most prevalent matters banks currently face.

Our approach to ESG transformation supports teams at each of four phases of a sustainability process we call DARE (see figure 5).