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The financial industry is actively joining sustainable initiatives, spurred on by technology and data analytics to pursue a greener economy for the future
Banks are paying increasing attention to climate change and, above all, to how to reduce their carbon footprint — and that of their clients — in order to reduce the gas emissions that impact the environment.
This environmental indicator measures the amount of greenhouse gases that companies and individuals generate through their consumption of goods and services, and that accelerate climate change. All economic activities produce emissions that can be measured according to its impact and expressed as tons of CO2 equivalent (CO2eq) emitted. For example, when charging a cell phone or using electricity for lighting, refrigeration or heating, or during the transportation of goods or people in automobiles and airplanes.
While this is an issue that affects the entire globe, the relevance for the European market dates back to 2015, when the Paris Climate Conference (COP21) put the financial industry at the center of the debate on environmental degradation. Since then, G20 leaders have declared their intention to expand so-called "green banking" initiatives, such as supporting the market for sustainable bonds to finance clean and renewable energy projects.
As a result, financial institutions are quickly stepping in to support, and lead, the transition to a world with a smaller impact on the future.
On the one hand, banks are developing new approaches, technologies and methods to quantify the intensity of the emissions generated by the recipients of their lending and investments, according to a PWC study. In other words, they are taking steps to know their clients’ true environmental footprint in order to help them mitigate the impact and finance activities with a more sustainable profile.
Measuring the amount of emissions financed is a tangible first step in building trust in financial institutions and their goal of integrating climate change mitigation into their core business of providing capital.
For example, BBVA is incorporating technologies leveraged with data analytics to enable companies to identify the amount of greenhouse gases they send into the atmosphere through their daily activities — a mechanism that in turn provides information with which to explore new lines of sustainable business.
Banks are also articulating simple solutions to aid users by graphing their consumption and emissions, thereby motivating them to change their actions and contribute to green initiatives.
Santander Bank, for its part, developed a methodology to calculate the CO2 emissions associated with each transaction a customer makes using their credit or debit card. The formula values the emissions in euros and lists them by area of activity.
"Banks are entering the sustainability playing field to lead it," said Ana Riveiro, Director of Sustainable Investments at Banco Santander during the business gathering "Green Banking: Strategies to reduce environmental impact," organized last month by the El Economista newspaper in collaboration with Veritran.
"Banks are allies in the move towards a sustainable economy. Technology and digital tools will reduce the sector's environmental impact and help banks minimize their footprint and that of their customers while generating profitability," said Gabriela Giannattasio, vice president for EMEA at Veritran during the same event in Madrid.
Data also plays an important role in this context. Since carbon emissions are often linked to spending, an efficient way to estimate a customer's footprint is to use their transactional information.
Customer spending can be broken down into categories such as food, education and transportation, among others, and banks can thus provide estimates of emissions for each area and make graphs available on digital channels. Through feedback loops, the calculations are refined, enriching the information and helping to steer decisions progressively towards sustainable finance.
Offering green products as a means to offset the carbon footprints is also important; for example, the purchase of carbon credits to finance reforestation, renewable energy or new green technology.
For corporate banking, data also helps institutions with their quest to reduce the volume of emissions that they capitalize on through lending and/or investments.
Financial institutions need up-to-date environmental, social and governance (ESG) information to make informed decisions about their portfolios. The use of artificial intelligence (AI) to forecast corporate clients’ carbon intensity is one example.
Another method of forecasting involves gathering metrics deemed relevant to predicting corporate emissions and fusing them with machine-learning models. The goal is to identify the relationships revealed by the data and learn from them while highlighting investment opportunities and capital needs in strategic niches.
Financial institutions are aware that all these measures are essential for the medium-term future. "It is estimated that between now and 2050, 8% of global gross domestic product (GDP) will need to be invested in the ecological transformation," said Alfonso de la Lastra, Head of Sustainability Strategy at BBVA. “While there will be public aid, private investment is imperative and, in this respect, banks have a fundamental role to play as channelers of all this capital," he added.
It is clear that banks will continue to play a central role in the current ecological transformation, aided by technology and data. Their mission is to continue to advance ESG processes as part of their ongoing mission to identify the most sustainable business opportunities, with a view to building a better future for all.
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