Green Finance Briefing: Consumers driving ESG to become a bigger focus for retail banks

Sustainability reporting, environmental practices and ESG investments are now on the radar for consumers in their financial lives. Driven mostly by younger generations, this relatively new criteria is slowly but surely becoming a differentiating factor when choosing a bank. 

Consumers still select their banking providers mainly based on features that directly impact them, such as prices, fees, personal data protection, and customer service. 

Although that's the traditional comfort zone for banks to compete with each other, there might be a new arena on the horizon. Sustainability-related issues may be one of the most viable growth areas for brands hoping to differentiate in a highly commoditized industry, according to a report by Morning Consult. 

Although they rank lower on the list, consumers are showing interest in ESG-related factors. Just over 7 out of 10 U.S. adults say they consider a provider’s impact on the local community, and a majority say the sustainable products and services a provider offers are a key factor in deciding whether to begin a new banking relationship.

But apart from reducing paper waste by requesting electronic statements, the majority of consumers are yet to take sustainable actions in financial services. Things like using rewards towards something sustainable, ESG investments, or taking out green loans to make their homes more energy efficient, are done by a minority of consumers (around 30%).

Only one in five consumers said they researched the ESG ratings of the financial services companies they use, but this metric rises to nearly a third of Millenials. 

Overall, ESG remains a confusing topic, for investors and consumers alike. There is uncertainty over how ESG principles apply to their portfolios, or how much money is allocated to ESG funds. Only 14% of investors said an investment manager discussed ESG investing with them.

But this won't stop them from continuing to play and even increase their stake in ESG investments next year. There are more consumers who want to participate in this market than consumers who don't. 

"This is encouraging news for financial services advisers, but they still have work to do. They will need to make sure their clients are aware of their current ESG allocations, and they’ll need to spend even more time with those who are undecided (34%) about investing in ESG in the next year," Morning Consult said in the report.

This knowledge gap can be an opportunity for financial services providers to educate consumers on sustainability and ESG – consumers expect and appreciate those who act on these issues. 

Value-alignment with one's banking provider is growing in importance, and securing that aspect of the customer relationship could be a winning factor in the future.

One in five Americans (20%) said they have left their bank because of their corporate social governance policies, and 16% have said the same about their credit card issuer, according to JD Power. 

"While ESG initiatives may not be the determining factor for most, there has clearly been a shift in how banking customers view their financial institutions. Americans no longer want their banks to have a passive role in their finances, nor do they want to be tied to corporations that are disengaged from their communities. And that creates a huge opportunity," the study found.

Just look at the charts 

As the economy is moving towards mandatory climate disclosures, it's useful to take a look at where we stand today. 

Turns out that in the US, the quality of disclosures is still relatively low, according to an EY report, which is understandable given that companies are doing CDP reporting for the first time.

And looking at sectors, we can see that those with the most significant exposure to transition risk (energy, agriculture, mining, real estate) score higher than the rest. 

Banking and finance are at the bottom of the list in terms of reporting quality and coverage. EY found it 'surprising that banks have appeared to have not performed as well as some other sectors this year. The numbers could reflect a change in sample size, but also initiatives to reassess climate reporting frameworks. 

What we’re writing

Data Snack: Benchmarking sustainability efforts by banks across economies

Banks are moving towards sustainability in a variety of ways, including digitizing their processes, offering sustainable products, assessing portfolios and educating customers.

An intro to environmental sustainability in banking

Sustainability is a business conversation - climate change is bound to create a shift in resources, bringing with it a reallocation of capital away from the status quo.

ESG giving rise to a new political divide

ESG is drawing political battle lines between Democrats and Republicans. These three letters were an unfamiliar acronym to the wider public not too long ago, but are now at the center of a new political divide. 

What we’re reading 

6 largest US banks to join Fed’s first-ever climate scenario exercise

Texas’ ESG attack sweeps up some funds that aren’t really ESG

BlackRock faces more ESG fallout as Louisiana pulls $794 Million

Auditors fall down on climate risk as corporate polluters fail basic tests, study shows

Wall Street bankers told they can set own CO2 terms after spat

World's biggest reinsurer, Munich Re, will no longer insure new fossil fuel projects

BlackRock, Citi CEOs won’t be returning to key climate talks

World Bank ‘has given nearly $15bn to fossil fuel projects since Paris deal’