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How technology can play a pivotal role in bringing sustainable financing to the banking sector

Sustainable banking has increasingly moved to the forefront of mind for both consumers and businesses across Australia. Driven by a broader interest in sustainability across all facets of modern-day life, sustainable banking has the potential to have huge societal and environmental impact. While the sustainable finance sector is still relatively small, it is fast growing, with increasing appetite from financial services sector clients and investors.  
Subramanian (Subi) Kuppuswami, global head of sustainable banking, finance & investments at TCS BFSI, explores the future of the sustainable finance sector and how technology can play a pivotal role. 

What role do banks play in developing and achieving sustainability goals? 

Banks play a crucial role in allocating financial resources and are increasingly expected to play a pivotal role and exert influence to support sustainable corporations, initiatives, and objectives. 

With the global push for transition to more sustainable and low carbon green economy, Australia has its own unique challenges with its economic dependence on natural resources. The country is generally considered to be behind the curve in its approach to climate change and zero emissions. Australia ranks 35th as of 2020 in the sustainability index in a global assessment of progress made by countries in achieving the UN Sustainability Development Goals and 31% of Australian bank portfolios are within the fossil fuel material, utilities, and energy sectors — significantly higher than the global developed market average of 10%.

As a result, Australian banks are increasingly facing pressure from international and domestic investors to curb their lending to fossil-fuel companies and to proactively support the Paris Agreement’s climate goals. 

With such significant influence, banks’ action, or inaction, can go a long way towards having genuine impact on climate change goals. Additionally, banks are increasingly aware that ignoring social and environmental issues can considerably increase their exposure to credit, compliance, and reputational risk. 

What steps are some of the leading banks taking?

More and more banks are introducing sustainable financing and investment practices and policies. These approaches include only investing in and seeking out sustainable industries and initiatives, such as community partnerships, carbon neutral initiatives, renewable energy, and community housing. 

Banks are active in not lending to unsustainable sectors such as coal, fossil fuels, and live animal exports — instead committing to operating a socially responsible business.

Some banks have introduced green home loans. These loans, typically with a lower interest rate, enable customers to initiate their own sustainable changes and invest in small-scale renewable technologies such as solar panels and electric vehicle charging stations.

In a first for the Australian agriculture industry, this year, one of the major banks provided a sustainability-linked loan to a Queensland-based beef producer. The three-year loan outlined three sustainability performance targets and clear parameters that the producer must uphold. These focused on reducing greenhouse gas emissions, improving animal welfare outcomes, and workplace health and safety innovations. 

This loan exemplifies an innovative sustainability-led financial structure, linking sustainable targets with financial costs to the wider benefit of the environment and economy. Achieving these goals will help the producer gain internationally recognised ESG credentials and in turn assist the organisation to secure further capital and customers in the future. 

What role does the Australian financial services sector play?

Australia’s financial services sector has come together to create the Australian Sustainable Finance Initiative (ASFI). The coalition comprises 80 organisations across major banks, insurers, super funds, civil society, and other stakeholders to develop and implement a roadmap to increase the sustainability of the financial system in Australia. 

The roadmap, launched last year, made 37 recommendations to enable the financial services sector to strengthen Australia’s financial system and to support its recovery from the impacts of COVID-19, achieve net-zero emissions, and support a resource-efficient and inclusive economy. 

The recommendations focused on four key areas:

  • Embedding sustainability into leadership

  • Integrating sustainability into practice

  • Enabling resilience for all Australians

  • Building sustainable finance markets

How can digitalisation of the sector play a role in its sustainability? 

Technology is at the heart of the financial services sector’s commitment to tackle climate change and introduce ESG practices. 

Financing the sustainable development of financial services and sectors is one of the key challenges for making a substantial contribution to environmental objectives. Significant investment, channelled through the financial system, is required to achieve these goals. However, Australia is not unique in finding that this system is not yet fit for purpose, with too little capital invested in meeting sustainable development goals. 

However, digital finance and fintech innovations, such as Artificial Intelligence (AI), big data, blockchain and the Internet of Things (IoT), can offer innovative solutions to help scale up sustainable finance practices.

Offering access to high-quality and comparable data is essential in sustainable development opportunities and helping investors to understand how their capital will perform within different parameters. Through the innovative use of technology, financial institutions can model the financial impact of climate change on specific assets or portfolios, to help clients understand and mitigate against their risk exposure.

Additionally, data and AI can be used to translate financial transaction data into carbon footprints which, when integrated with digital banking services, provide insights into the environmental costs of purchases, and subsequently work to incentivise greener investments and purchases. 

Technology will also help to reduce the costs of searching for, generating, and using this data, therefore improving the ability to track the ‘greenness’ and further ESG analysis of investments. Providing investors with access to social impact data will help to increase transparency across the sector and will help to generate further interest in and engagement with sustainable development.