How financial enterprises can drive green innovation

The investment challenge

Panelist Jonathan Moore, Head, Client and Transaction Services, HSBC, agreed that partnerships around technology would be key to solving some of the biggest challenges in finance. “Being solution-agnostic, but also technology aggregators is where we see genuine innovation come to life,” he said.

They opined that innovation will need capital—giving financial services an important part to play. According to the International Energy Agency, by 2030, the annual cost of clean energy investment worldwide will need to be nearly $4 trillion (£3 trillion). The UK alone will need to invest £50 billion a year by 2030 in the view of the independent Committee on Climate Change. “It’s massive,” said Olivier Guillaumond, Global Head, ING Labs and fintechs, adding, “There’s a huge amount of money needed. Obviously, governments will do their part, but banks and financial institutions are very well-positioned to take a lead.”

At the recent COP26 climate summit, the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of more than 450 financial institutions controlling over $130 trillion of assets, pledged to align their investments with net zero emissions by 2050. The panel also agreed that innovation would be vital, and digital adoption was necessary.  

The data gap

Assessing risk is an area where innovation is urgently needed. While metrics to assess social and governance impact exists, climate impact is harder to quantify. TCS’ research has found that about 20-30% of the additional data financial institutions require to assess climate risk is currently unavailable. 

“If you don't have the quality of information, you have the risk of financing the wrong industries and that’s where the whole greenwashing issue comes in,” said Prab Pitchandi, Global Head, Chief Data Officer, TCS. He explained that advances in artificial intelligence (AI) and machine learning (ML) can help. 

AI and ML enable investors to look at alpha—returns on investments above a benchmark—in broader terms than traditional risk and performance metrics. This means more accurate correlation of environment, social, and governance (ESG) factors with economic performance, which in turn means more capital should flow into sustainable assets as investor confidence rises in greener assets. 

Drawing strength from an ecosystem

Moore agreed that banks can’t tackle their emissions in isolation, saying, “When we look at any company, including our own, up to 80% of emissions are linked to our supply chain.” He said banks could partner to unlock emissions reductions in their ecosystems. “We’ve seen a lot of automotive companies undertaking emission reduction seminars and workshops with their tier one and tier two [suppliers] and supporting SMEs, underpinned by supply chain and green supply chain finance.” 

Guillaumond said green financial innovation was helping to support ING partners. “We are happy to link interest rates to the specific [sustainability] performance of our clients,” he explained, adding, “The better the performance, the more attractive the terms of the loan.”

PEOPLE POWER

Another recurring theme of the panel was the capacity for banks to harness technology to empower people as well as the planet. Guillaumond explained that ING was making the intellectual property for its Terra climate alignment measurement tool open source.

By unlocking sustainable innovation that could also deliver to customers, banks can make a huge impact, said Jonathan Moore. The intellectual diversity of financial services and technology teams—bringing together different capabilities, backgrounds, and experiences—can also be critical, he added. 

According to Pitchandi, the challenge ahead will be as much about culture as technology. “Banks are there to make money and manage risk at the same time,” he said, adding, “How you integrate these societal principles into the culture of an organization is extremely critical for all of us to reach net zero.”