How financial services can accelerate the transition to a greener world

 In this guest post, Jay Mukhey, global director of environment social and governance (ESG), Purpose & Impact, at fintech Finastra, sets out how the financial services industry is supporting the net-zero transition

Across the globe today, governments, organisations, and individuals are acutely aware of the urgent need to address the climate crisis. From carbon emissions reduction and offsetting, to net-zero pledges, industries and individuals alike are adopting practices and initiatives that will enable a more sustainable future for us all.

For many, the financial services sector is not the most obvious candidate for accelerating the transition to a greener world. It’s an environment in which return on investment and sustained growth is essential for survival, and yet today it is also characterised by rapid innovation and technology-led disruption.

While these forces may seem to be in opposition, harnessing them together will be essential for revolutionising how we incentivise societies and organisations to change for the good of the planet.

Further to this, there is also increasing pressure from stakeholders, regulators, and international bodies like the Task Force on Climate-related Financial Disclosures (TCFD), for the implementation of ESG-led initiatives that enable financial institutions to do well while doing good.

Cloudy with a chance of change

When it comes to driving change, financial services organisations are in a great place to lead by example and promote cultures and initiatives that reduce our collective environmental impact. To begin with, an assessment of internal processes, initiatives, technology adoption practices, and existing infrastructure must be carried out.

One of the most effective means of addressing all of these, and an essential driver of ESG initiatives in the sector today, is cloud migration. Datacentres are responsible for a large proportion of our digital carbon footprint, so reducing on-premises IT infrastructure and investing in cloud services should be a focus for all.

The likes of Microsoft, Amazon Web Services (AWS), and Google have invested heavily in cloud infrastructure and datacentre efficiency. For example, when compared to on-premises server farms, Microsoft’s cloud infrastructure is up to 93% more energy efficient. When coupled with the fact that 78% of its Azure public cloud servers are powered by renewable energy, and that the emissions from the remaining 22% are offset, it’s clear that increased cloud-adoption is essential for reducing emissions and meeting net-zero targets.

Cloud infrastructure also lets organisations run environments only when required (think of spinning up the disaster recovery environment only when you need to test it or put it into action) further reducing energy demands.

Another problem minimised by the increased adoption of cloud native components is that of legacy software and systems. In the early 1990s, when banks began to digitise, core systems were built with the latest technology—but thanks to the rapid growth of computational power and advancements in programming, these systems quickly became outdated, even though core business functions depended on them.

This problem was overcome by building applications on top of the legacy systems, adding to the code base and consequent energy demands from growing on-premise datacentres. Though cloud migration of legacy core systems must, by necessity, be more gradual, the cloud offers the chance to replace many legacy applications with cloud native components. This enables more frequent releases and makes it easier to stay up to date with the latest release, which further reduces the requirements for datacentres and energy consumption.

Driving the green revolution in banking

While financial services firms are responsible for putting their own houses in order when it comes to their emissions, environmental impact, and long-term sustainability, there is also a tremendous opportunity for the sector to drive and fund the wider transition to net-zero.

The Net-Zero Banking Alliance, for example, which according to the UN represents roughly 40% of global banking assets, has committed to aligning lending and investment portfolios with net-zero emissions by 2050. The key challenge in reaching this goal, however, is that there are very few existing actionable solutions to make it happen. But that doesn’t mean there isn’t a way.

Green finance, in which more affordable capital is made available to companies creating environmentally friendly outcomes is one way this is happening. Supported by API-driven Banking as a Service (BaaS) platforms, which allow lenders and businesses to embed financing options into their offerings, green finance can be easily extended to businesses and individuals on a much larger scale, even enabling access to credit for those with less favourable financial credentials.

Take the example of accelerating solar panel installation and usage across a nation. A combination of traditional and alternative data sources can be harnessed to provide a more granular breakdown of the contextual factors that might support a loan. For example, analysis of open source geospatial data, satellite imagery and weather data can be used to determine the full potential energy yield of solar panels on a residential property. When combined with the unique financial situation of a customer—provided with consent by the customer’s bank—this data can be used by a solar panel installer to provide more favourable financing options.

Not only does alternative data enable cheaper and greener options for customers, it is also a vital component in enabling access to finance. For example, if a customer has a poor credit score, mostly due to historical factors, yet has an exemplary record of paying their energy bills on time, a bank could offer a favourable loan for solar panels, as well as installation by an approved company. Customers with solar panels can also reduce their loans when not at home, as surplus energy can be sent back to the national grid, effectively paying customers for what they haven’t used. Immediately, a circular economy is established whereby banks become enablers of both access to finance and sustainable environmental solutions.

Increasingly, BaaS platforms are emerging as the most effective means of orchestrating embedded finance, which of course includes green finance. It’s an opportunity for all involved to revolutionise lending and access to finance to deliver positive outcomes for customers, the sector as a whole and, most importantly, the planet.

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