By Nicholas Larsen, International Banker
According to the annual “Banking on Climate Chaos” report published on May 13, the world’s 60 largest private banks have financed fossil-fuel activity with a staggering US$6.9 trillion worth of funds in the eight years since the Paris Climate Accords (Paris Agreement) were adopted by 196 parties at the United Nations Climate Change Conference (COP21) in December 2015. Such sobering numbers underscore clearly how the efforts of the traditional banking industry to reduce its environmental footprint have fallen short of expectations. The world is now looking to more cutting-edge, digitalised forms of banking to not only drive innovation in the industry but also lead the pack when it comes to environmental change and more sustainable forms of banking.
Whether through their financing activities to support fossil-fuel companies, the environmental footprints of their physical bank branches or the often-copious energy they consume across various daily activities, traditional lenders continue to represent, directly or indirectly, a sizable chunk of the world’s carbon emissions. Just as digital banks have exposed the antiquated nature of the old guard in technology and efficiency, so can they greatly improve on the high carbon-emitting models of longer-established traditional banks.
Indeed, the very nature of digital banking from the outset as a sector that does not have a physical presence in the form of bank branches (or has a minimal branch network at most) and that carries out the bulk of its activities remotely—typically online through internet platforms and/or mobile applications—intrinsically implies that the average digital lender will inflict much less damage on the environment versus a traditional bank with an extensive brick-and-mortar branch network.
For instance, while customers and branch employees may drive to and from physical branches to perform their banking duties, which emits harmful vehicle pollutants and greenhouse gases, the essential facilitation of remote banking—which in itself is a core existential pillar of a digital bank—eliminates the need for this commute, with customers today much more confident to bank without human interaction. In this way, digital banking is significantly more beneficial for the climate.
Consumers, regulators and shareholders are also now demanding greater levels of transparency and accountability from businesses—banks included—for the impacts they are having on the environment. As consumers become increasingly environmentally conscious in the face of approaching climate threats, they are making a multitude of life choices that reduce their impacts on the environment. In response to this paradigm shift, therefore, the banking world is undergoing a significant evolution whereby minimising one’s carbon footprint—typically via formal ESG (environmental, social and governance) policies being integrated into sustainability agendas—has never ranked more highly among the average lender’s list of priorities.
“The eco wave in digital banking has become a trend due to the growing awareness of climate change. This is increasing the focus on environmental protection, including from the media, which in turn motivates further improvements to the situation,” according to Ondřej Machač, manager of the Czech Fintech Association, writing for fintech (financial technology) API (application programming interface) firm TapiX. “As a result, companies and individuals are more apt to concentrate efforts on sustainability and seeking financial institutions that support green or greener projects rather than existing ones.”
It is against this backdrop that the proliferation of digital banking is being touted as a major solution for reducing the environmental impacts of lending institutions—through their online and physical existences, the potentially cleaner lending activities that they choose to pursue and the more sustainable methods of banking that they promote.
“First, the construction and maintenance of physical branches require resources such as building materials, energy, and water. By reducing the number of physical branches, digital banking is helping to conserve these resources,” noted EQIBank, a digital bank catering to corporations and high-net-worth (HNW) individuals, in a February 2023 blog piece. “Additionally, the operation of physical branches requires energy for lighting, heating, and cooling, as well as resources for maintenance and upkeep. By reducing the number of physical branches, digital banking is reducing the amount of energy and resources required to run the banking industry.”
Digital banking is also likely to be entirely paperless, whereby online statements (through such formats as e-mails and PDF [portable document format] files) are issued instead of paper records of customers’ account activities physically mailed to their homes. Digital banking’s paperless environment helps to preserve the number of trees that would otherwise have been felled to produce paper, along with the substantial energy and water consumption involved in the process. Similarly, the lack of a printing process further saves power and other resources, such as ink and fuel. A broader global shift towards paperless banking may also contribute to a decline in the manufacturing of printers, which is also likely to be positive for the environment.
The transition to digital banking is significantly reducing waste and improving sustainability by lessening the need for paper transactions, physical branches and energy consumption, EQIBank noted. “The banking industry has embraced technology and innovation to become more environmentally friendly, providing benefits not just for financial institutions and consumers, but also for the planet,” the bank stated in its February 2023 piece.
An April 2024 study by Aleksandra Amon, Timotej Jagrič and Žan Jan Oplotnik of the Faculty of Economics and Business at the University of Maribor in Slovenia also confirmed this trend. The paper found that neobanks—digital-first financial firms that offer banking services but solely operate online with no physical presence—challenge not only traditional banking models economically but also offer innovative solutions that align with sustainability objectives. “We have found that neobanks significantly positively contribute towards environmental sustainability with reduced paper use and logistics requirements of banking services. By offering more accessible and affordable banking services, they importantly contribute towards higher financial inclusion, and with innovative products towards more competitive and innovative financial markets. AI-based tools they employ are increasing financial literacy and social inclusion.”
That’s not to say that digital banks are without their sustainability challenges. Indeed, the same University of Maribor study highlighted electronic waste and the potentially substantial energy consumption requirements of the banks’ data centres and servers as being distinct, undesirable contributors to the carbon footprints of digital-only institutions.
For a genuine upswing in sustainable finance to transpire, digital banks must confront the carbon emissions that emanate from the activities of their investment targets and customers. This is where the Greenhouse Gas (GHG) Protocol can prove vital. The Protocol establishes “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.” It divides corporate emissions into three distinct categories:
- Scope 1 emissions are from sources directly owned by the company;
- Scope 2 emissions are indirect emissions via the generation of energy purchased by the company, such as electricity or heat;
- Scope 3 emissions are indirect emissions that occur along the company’s value chain (rather than produced by the company itself), including upstream and downstream emissions.
While Scope 1 and Scope 2 emissions are usually negligible for digital banks, it is Scope 3 emissions that are most concerning for the sector, with indirect emissions arising as a result of banks’ investment and lending decisions.
“Scope 3 emissions represent the majority of our carbon footprint, so it’s critical that we measure them comprehensively,” noted British online Monzo Bank on its website. “The vast majority of our emissions (95.97 percent) fall under Scope 3. 3.67 percent of our emissions are scope 2, and 0.36 percent are scope 1. This reflects the nature of our business model as an app-only, digital service-based firm with no branches.” To achieve its target of net-zero emissions by 2030, Monzo aims to reduce the emissions across its supply chain. “This will take longer to achieve, but as a start, we have already begun to ask new and prospective suppliers about their own climate goals and will factor them into our procurement process moving forward.”
Such disclosures represent growing evidence that sustainability as a concept is now very much baked into the core branding and value propositions of the typical digital bank. “We offer all our services digitally, and we don’t have physical branches, which allows us to limit the emissions from our facilities,” noted UK-based neobank Revolut in the Sustainability section of its website, whilst acknowledging that its regular business activities still contribute to climate change. Revolut confirmed its partnership with enterprise sustainability platform Watershed “to help us measure our carbon footprint in real-time, establish clear strategies to reduce our impact in every aspect of our business, and report on those emissions”.
For traditional banks with still-sizeable physical footprints, the deployment of more digital technologies and tools can improve their environmental responsibilities. “Digital technologies, with their capacity to gather, analyse and act on vast amounts of data, are emerging as indispensable tools in this endeavour,” according to the World Economic Forum (WEF), which cites artificial intelligence (AI) as a hugely important technology for helping existing data systems to predict and mitigate environmental risks, such as optimising energy consumption in real-time to reduce emissions.
The WEF has also identified automation processes that can create leaner operational processes, subsequently reducing waste and improving the overall sustainability of production systems. “The integration of digital solutions into ESG strategies is not just about compliance; it’s about positioning businesses as leaders in the transition to a greener economy and creating new competitive advantages for the organization and/or industry.”