In today’s rapidly evolving landscape, the banking industry faces a momentous challenge: meeting the ever-growing demands of environmental, social, and governance (ESG) issues. As regulations continue to evolve, the spotlight intensifies on the need for greater transparency and disclosure of ESG-related data. This paradigm shift presents an opportunity for banking leaders to harness the potential of technology driven ESG practices to not only address these demands but also drive financial performance. As per industry reports, the global ESG sustainable finance market is predicted to reach $ 22485 billion by 2031. Banking IT leaders can build new capabilities and solutions without incurring technical debt, positioning their institutions at the forefront of ESG integration.
ESG has emerged as a critical aspect of doing business for banks, extending beyond their own operations to activities they finance. The rise of ‘green financing’ is a testament to this movement, calling upon organisations within the BFSI ecosystem to support sustainable development initiatives aligned with the UN Sustainable Development Goals. Embracing ESG is no longer a choice; it has become a high-priority corporate agenda across industries, with the financial services sector playing a pivotal role in driving this transformation. Banks have come to realise that halfhearted commitments to ESG principles not only pose threats but also represent missed opportunities, potentially jeopardising their very existence. As the world undergoes a digital transformation catalysed by the COVID-19 pandemic, the need to adapt and capitalise on this profound market shift has become paramount.
According to FIS’ 2023 Global Innovation Report, 60 per cent of financial services and fintech firms globally are actively developing new ESG products and services. This demonstrates a growing recognition of the importance of ESG considerations in the industry. The market for ESG data and analytics is set to expand from $2.2 billion in 2020 to $5 billion, as per a recent report by Button Taylor. This growth reflects the increasing significance of data-driven insights for ESG decision-making. To facilitate accessing, validating, and managing internal and externally sourced ESG data, banks are advised to establish centralised ESG data stores. This approach enables efficient management of multiple ESG data variables, including policies, frameworks, and data operations. By centralising ESG data, banks can enhance data management practices and ensure consistency in their ESG reporting and decision-making processes, empowering them to have a comprehensive view of their ESG performance and align it with their overall sustainability goals.
Unleashing the Power of the Cloud
Recognising the need for energy-efficient solutions, financial service providers are increasingly adopting cloud-based platforms to drive sustainability. By migrating applications, data, and infrastructure to shared data centers, banks can significantly reduce operational costs and carbon emissions. In fact, cloud migration has the potential to reduce global carbon emissions by nearly 60 million tonnes of CO2 annually, equivalent to removing 22 million cars from the road. The transformative impact of the cloud goes beyond environmental benefits. It enables banks to stay competitive by quickly adapting to new trends in data management, fostering innovation, and accelerating transformation. By leveraging cloud technology to support data infrastructure, banks can not only enhance their ESG practices but also innovate at a pace never seen before, ultimately driving financial performance while advancing sustainability goals. The cloud is truly revolutionising the banking sector and paving the way for a more sustainable future.
Harnessing Automation and AI: Driving Sustainable Banking and ESG Advancement
Tech-driven automation enhances sustainable banking, amplifying efficiency, curbing resource usage, and advancing environmental outcomes. Paper-intensive customer onboarding has shifted to eco-friendly automation. Digital document submission, data extraction, workflow streamlining, real-time updates, and efficient approval yield benefits: reduced waste, quicker processes, accuracy, lower carbon footprint, and resource efficiency. AI-fueled ESG reporting, like Intelligent Document Processing (IDP), connects data dots, validates information, and bolsters compliance. Automation empowers ESG performance tracking and communication across units and suppliers, upholding rigorous standards. AI-powered tools analyse data, discern patterns, and guide decision making, boosting eco-impact, inclusive lending, and governance. AI-driven applications, including natural language processing (NLP), refine back-office efficiency, accuracy, and compliance. Leveraging AI, banks can overcome inaccuracies, counter greenwashing practice of deceptive marketing and advertising tactics, align investments with ESG goals, automate compliance, and engage stakeholders for superior performance. For instance, HSBC launched an AI-powered Index aimed at tracking the performance of companies expected to benefit financially from improvements in ESG risk.
Potential of Blockchain
Blockchain’s decentralised and transparent nature allows for accurate monitoring and examination of critical sectors like supply chain management. By leveraging blockchain, banks can establish a centralised ESG data store, efficiently manage multiple ESG data variables, and ensure accurate reporting while safeguarding against data tampering. Additionally, blockchain brings transparency to supply chain management, enabling the development of sustainable and energy-efficient systems that reduce costs and carbon emissions. By embracing blockchain, banks can proactively enhance their ESG practices, meet regulatory requirements, and unlock financial opportunities in a responsible manner. A real-world illustration of this concept is BNP Paribas’ initiative. They utilised the Ethereum blockchain through their digital asset’s platform, AssetFoundry, to tokenise a bond for a renewable project. This strategy yielded significant advantages, including improved transparency, scalability, and finer granularity for smaller investments. The blockchain approach also verified ESG data across the value chain, setting a benchmark for transparency and accountability in sustainable investments.
Banks that embrace AI, blockchain, and automation can improve risk assessment accuracy, make informed investment decisions, and reduce compliance costs. By leveraging AI’s data analysis and predictive modeling capabilities, banks can identify trends, mitigate ESG risks, and align their investment strategies with sustainability goals. With the increasing demands for ESG transparency and the projected growth of the global ESG market, leveraging advanced technologies such as AI, cloud computing, blockchain, and automation is vital for banks to stay competitive and contribute to a sustainable future. By integrating these technologies into their operations, banks can effectively manage ESG data, enhance reporting accuracy, drive sustainable investments, and streamline compliance processes, ultimately driving financial performance while advancing their sustainability goals.
Views expressed by Vikram Chandna, SVP & Global Head, BFSI and Geo Head, LATAM at Birlasoft.