3 Signs ClimaTech Is The Next Frontier For Financial Services

The financial services industry has a significant role in powering, measuring, and shaping the solutions necessary to mitigate man-made climate change in the coming years.

We have already seen a notable appetite from financial institutions to engage with this issue.

At COP26 in 2021, 43 banks from 23 countries, representing assets of $28.5 trillion, formed the Net-Zero Banking Alliance (NZBA), with members committing to align operational and attributable emissions with pathways to net-zero by 2050 or sooner.
ClimaTech – technologies that are explicitly focused on reducing emissions or addressing the impacts of global warming – will play a key role in achieving this goal.

Research by McKinsey indicates that existing, mature technology solutions could deliver about 60 percent of the emissions abatement needed to stabilise the climate by 2050.

Here we explore how ClimaTech is shaping the future of the financial industry across operations, investments, and strategy.

1. Financial Services Are Driving Growth In ClimaTech

In 2013, early-stage venture funding for climate tech companies was about $418 million.

By 2021, $87.5bn was invested in climate tech in H2 2020 and H1 2021 – a 210% growth in investment year-on-year since 2013, with ClimaTech now accounting for 14 pence of every venture capital pound.

The reasons for this are clear: the need for climate technology is pressing, creating large potential markets and investment opportunities.

Notably, many of these technologies are being not only funded but also acquired by financial services leaders.

The Rise Of Climate FinTech

As green issues become more central to future business models, financial services businesses are integrating their broader service offerings with ESG and climate goals to create more sustainable products - both in terms of environmental impact and market longevity.

This is reflected in recent acquisitions in the space where financial incumbents have acquired new technologies to increase the relevance and environmental insight of their services.

Key examples include:

• Climate risk analysis firms Carbon Delta acquired by MSCI and Four Twenty Seven acquired by Moody’s (2019)
• Sustainalytics acquired by Morningstar (2020)
• Truvalue Labs acquired by FactSet (2020)
• OpenInvest, enabling personalisation of investment portfolios, acquired by JP Morgan Asset Management for an undisclosed amount, pre-Series B, having raised ~$25m (2021)

These show that ClimaTech is not only part of the financial services agenda regarding ESG targets and environmental commitments but actually a driving force for future success and worthy of investment.

2. The Transformation Opportunity Of Financial Services Operations

As well as promoting sustainable practices within their portfolios, customer base, and supply chains, financial services businesses must also consider their own operations.

Despite widespread digitisation, much of the industry still relies on paper and physical documentation to execute services.

Estimates (now removed from the EY website) put the financial services industry’s annual paper document output at 507 million communications, equivalent to the deforestation of 50,000 trees each year.

An 80% reduction in paper is predicted to save the industry up to £1.3 billion annually.

The Challenge Of Greener Financial Operations

Paperless operations offer the chance to improve both sustainability and efficiency for financial institutions.

Processes based on physical documents are error-prone, often requiring manual data validation and storage, resulting in slower service levels than digital processes.

Moving to a paperless process offers the chance to reduce environmental impact while also improving productivity, reducing operational expenses, and enhancing customer experience.

So why has the industry been slow to adapt?

In an industry where data breaches are especially dangerous and organisations face reputational damage, fines, remediation costs, and compensation for lost funds, many institutions prefer to stick to the status quo when it comes to communication.

However, in the long term, this will not be an option, both from an environmental point of view and as more agile, digital-first competitors continue to leverage their operational advantages to provide superior service.

Financial institutions need communication solutions that can reduce reliance on paper documents while transferring data securely between parties.

Mailock is a tailor-made secure email solution for financial services businesses, allowing providers, advisers, and customers to communicate securely using a single system, reducing reliance on physical documents and processes.

Stakeholders can send sensitive documents and forms to customers over an encrypted channel, directly to their inbox, with all customer replies fully encrypted, including sensitive documents, which are protected on delivery and return.

This system is not only faster but also more secure and environmentally friendly than paper, giving providers a significant competitive advantage.

3. Climate Accountability Is Becoming A Key KPI

Climate impact is increasingly moving beyond theoretical commitments into the fabric of incentive structures and corporate planning.

In a recent survey by PwC, 33% of the largest firms by revenue said they would commit to ESG targets in their bonus and incentive plans.

This is also reflected in investment strategy, with ​​29% of European LPs indicating a willingness to trade lower performance for excellent ESG credentials.

In this environment, financial services businesses are building considerations around responsible business growth, staff conditions, and environmental impact into their long-term strategies.

Measuring Impact Responsibly

The growth of ESG considerations has had a mixed effect on financial services, with some incentives risking surface ‘greenwashing’ strategies to tick the box of compliance.

While these efforts are a relatively new arrival on the corporate scene, their implementation will require time to commit to best practices and establish reliable baselines for impact.

ClimaTech has a key role to play in aligning performance with compliance in this regard. Without innovative, accurate technology, financial services businesses will be unable to realistically analyse their climate impact or prove the validity of their efforts, whether internal or external.

Organisations must determine their own decarbonisation strategy, engaging with a range of stakeholders, including investors, customers, regulators, and governments.

These efforts must be combined with the right tools to deliver meaningful change and have a tangible impact.

Reaching The Potential Of ClimaTech

As the array of ClimaTech tools expands, in line with the scope of the climate challenge facing businesses, financial institutions must make strategic choices regarding which solutions can deliver change and drive outcomes in their green strategies.

While much focus falls on external investments and assets, financial services must also undergo its own cultural and operational shift. This starts with the basic processes that drive the industry.

Mailock is a secure, environmentally-aligned email solution specifically designed for the financial services industry.

Institutions can leave paper behind, creating end-to-end secure communication channels for internal and external stakeholders to move data, documents, and gather information securely. Mailock securely digitises key workflows, helping businesses to:

• Reduce paper output and overall emissions
• Accelerate operations and customer service
• Comply with new security and environmental regulations
• Demonstrate a commitment to change to clients

References:

COP26 Net-Zero Banking Alliance, United Nations, 2021

Innovating to Net Zero: An Executive's Guide to Climate Technology, McKinsey, 2021

The State of Climate Tech, PwC, 2020

State of Climate Tech, PwC, 2021

MSCI Strengthens Climate Risk Capability with Acquisition of Carbon Delta, MSCI, 2019

Moody’s Acquires Majority Stake in Four Twenty Seven Inc., Businesswire, 2019

Morningstar to Acquire Sustainalytics, Finextra, 2020

FactSet Enters Agreement to Acquire Truvalue Labs, Factset, 2020

JP Morgan to Acquire OpenInvest, Reuters, 2021

Going paperless cost savings to top £1bn for UK financial firms, NS Business, 2018

Getting ESG and CEO incentives right, ICAEW, 2022

The Evolution of ESG-Linked Financial Incentives, Travers Smith, 2022

Reviewed By:

Sabrina McClune, 05.06.24

Sam Kendall, 05.06.24