Using technology and fintech partnerships to scale ESG-related lending and corporate banking
The role of technology in supporting ESG-related lending in corporate banking is crucial in meeting the rising demand for greener products, satisfying regulatory requirements, and attracting employees who want to see their employers' demonstration of purpose. Banks have the opportunity to provide financial instruments to fuel green projects, such as building sustainable housing, providing alternative energy sources, and clean water supplies. However, there are challenges that banks need to overcome before strategies are set in stone. To understand the organizational goals and planned ESG products of banks, we asked 250 ESG heads from banks across the globe for their opinions.
According to the research, many corporate banks are still working on the initial stages of their overall ESG strategies. Their primary ESG goal, cited by almost half (49%), is to reduce carbon emissions from their organizations. Banks are also concerned with setting definitions and terms for ESG goals (43%), securing longer-term funding (44%), and aligning board/management/governance on sustainability initiatives (46%). Banks are currently focusing on the need to tell a story about their commitment to ESG targets, rather than innovating with new products and services.
The most popular products and solutions offered currently that were surveyed are sustainability-linked supply chain finance, followed by green-linked loans and green bonds. Less popular at present are green deposits, green guarantees, and sustainability-linked deposits. The number of banks that plan to offer green guarantees is higher (14%) than those that offer them currently (11%), for example, while the proportion of banks that plan to offer green deposits rises to 17% from those that offer them now (11%). Banks also plan to offer more products related to sustainability-linked deposits in the future (12%), compared with today (7%).
The impetus to provide ESG products will gather pace over the next one to two years. Just over three-quarters of ESG heads report that they will increase their green lending exposure, with the majority (55%) saying this will happen in the next 12 to 18 months, and a further 21% planning for their exposure to grow from 18 months’ time onwards. Only 3% said they would decrease their green lending exposure, while 9% said there would be no change in their position.
To meet the growing demand for ESG-related lending in corporate banking, banks need to collaborate with fintechs. According to the research, ESG heads say that their biggest need from fintech partners is the delivery of ESG-specific products that their bank can use, potentially satisfying the need from corporate clients for ready-made solutions, as well as meeting their requirements. The next largest area of demand is for products that help with monitoring, which would meet the growing need for regulatory reporting in the ESG area. One-in-ten ESG heads say that they need advice from fintechs on carbon emissions, with a similar proportion looking for clear definitional platforms that would help deliver insight into product development.
There is a lack of third-party apps and data around environmental-related topics, and this makes environmental variables difficult to model because of climate change and regional differentials. Banks and fintechs can work together to overcome these challenges by collaborating on the development of new technologies that will help capture this data, provide accurate modelling and insights, and enable more informed decision-making.
In conclusion, banks need to work with fintechs to innovate new products and services that meet the growing demand for ESG-related lending in corporate banking. Technology can help banks overcome the challenges they face, such as the need for accurate modelling and data capture and enable them to provide more informed decision-making. The future of sustainable finance looks bright, and banks have the opportunity to play a significant role in the transition to a low-carbon economy.
