The Future of Ethical Banking: The Industry’s Key Concerns Revealed

The world depends on global finance working towards a fairer financial system for people, the environment and culture with a focus on sustainability, climate change and social justice. This July at Fintech Times we have put the spotlight on ethical finance/ethical banking, including environmentally and socially aware practices.

As we come to the end of July’s focus on ethical banking and sustainable finance, it seems only fitting to find out the industry’s key concerns for the sector going forward.

Although ethical banking presents a huge commercial opportunity for banks, there are a few barriers that the financial services industry as a whole must overcome for ethical banking to be effective.

Education and transparency

Anna Krotova, which directs the implementation of Mambu’s sustainability and ESG strategy, says: “While there is a higher demand globally for green banking products and an ethical banking ethos in general, there is still a lack of consumer understanding of all that green banking entails. If banks want to facilitate for the transition to ethical banking and exploiting the opportunities they can potentially deliver, they must be willing to invest in consumer education.

“Additionally, greenwashing remains a key issue, with high levels of consumer mistrust. Banks and financial institutions need to rethink how they communicate their sustainability practices with their customers, and ensure they are clear and honest about their progress.

“The EU Sustainable Finance Disclosure and the EU Taxonomy are central laws which, in principle, should ensure that consumers and other stakeholders have better transparency about the banks’ ethical practices. We must now monitor closely and hold the financial industry accountable for any shortcomings and adapt to stricter legislative measures if necessary.”

Better data

Bertrand GaconCEO and co-founder of Impacta fintech company that uses a collaborative approach to measuring the impact businesses have on the world makes it easy.

He gives three important concerns.

• Lack of standardized, reliable impact data
• The correlation between financial performance and impact performance has not yet been established
• Regulation proceeds quickly, but not always in the most appropriate direction

Regulatory awareness and culture change

There are several challenges that must be overcome in order for the banks to adapt to this industry shift, says Jay Nair, SVP, branch manager, financial services and public sector at Infosys.

“First, new regulations are constantly emerging, affecting both traditional and ethical banks. Staying in sync with the regulators is certainly a major challenge for banks operating in this space. Data will undoubtedly play an important role in helping banks with adhering to the requirements, but many companies face challenges with data.

“For example, new data types will have to be defined, captured, processed and reported against.
In addition, the banks will have to invest in training and upskilling of employees. There is a need to move away from viewing ethical banking as a box ticked and ensure that staff are trained and can actually demonstrate this commitment through their day-to-day behaviour.

“This requires a significant focus on cultural transformation. To this end, greenwashing has emerged as another key challenge for banks and their customers to overcome, which often arises for businesses looking to take opportunistic advantage of ethical banking as a trend.

“Finally, banks must face the challenge of achieving industry coordination. Many issues span entire supply chains and cut across banking ecosystems such as rating agencies, investment funds and so on. It is critical to develop common standards, operating models and shared infrastructure.”

Reporting standards

Despite the growing demand for ethical banking and sustainable products, the industry faces many challenges, such as reporting inequalities, says Krzysztof Grzeszczuksenior innovation advisor at Netguru.

“Apart from the costs of transformation, there are currently no common standards for ESG reporting, which sometimes makes it difficult to validate the impact a company has on its stakeholders,” he says.

“However, this should not be an excuse for companies not to focus on purpose and sustainability. Ultimately, investors, banks and customers will redirect their money to those who know how to run their business responsibly.”

Responsible lending

Finally, the industry must make responsible lending decisions.

“Ensuring customers are aware of their affordability is even more important during this current cost of living crisis,” it advises James Wilkinson, co-founder of the car finance marketplace Zuto. “The industry must also go beyond finance and address the impact we have on people and the planet.