Sustainability and ESG strategy in the banking sector
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This episode is our first live episode that we recorded in Luxembourg within the framework of the Sustainable Banking Forum. Our thanks go to Daniel Theobald and Jörg Ackermann who invited us and gave us the opportunity to share our thoughts on sustainability in the banking sector.
We share our insights on how sustainability can work in institutions. Moreover, we discuss the question if banks are still in the spirit of time and what kind of challenges the banking sector has to overcome nowadays.
Learn what kind of new strategic approaches the banking sector could and should take and get inspired to make a difference in this world.
How should sustainability work in institutions?
A forward-looking direction for banks has never been more important when it comes to sustainability and ESG.
In Christian’s opinion, climate change is the biggest market failure in history. The market, including the banks, is to solve this nowadays. However, the question is: Can banks invent something really disruptive that changes the world for the better? Or do banks create more harm than good by trying to do so?
Jürgen’s answer – from an economist’s point of view – is as follows: Climate change is not a market. It is an external force disrupting many things in these times. It affects markets in a way we have not thought of before.
The economic term externalities describes this fact in a good way. It refers to things spilling over unintendedly. For the first time in recent history, global activities – and especially those of banks – spill over to a degree that endangers our planet.
Have banks thus done more harm than good?
Banks have been bad-mouthed for their behaviour; just to name the financial crisis of 2008. Banks did not play the responsible role that we would have expected.
Still, the history of banks dates back to the Middle Ages, when money changers took care of people’s money somewhere in Italy. They helped travellers to not be put at risk. So in that aspect, they had an important role.
Banks play an intermediate role, they alleviate and facilitate business. But this is also a problem for the banks because they are a target to be replaced and displaced given their interim role.
Furthermore, technology tends to disrupt the traditional banking industry. That challenges banks to develop a new and different approach. Occupying an intermediate role in a digital age is a big obstacle that needs to be overcome.
Stories like Airbnb or Uber have proven to have disrupted existing business models by using technology. The big, traditional banks ought to think more deeply about that fact. Can they be easily replaced? Is anyone going to miss them if they are not there anymore?
Bankers will likely respond: “Of course we will be missed!”. Jürgen doubts that, however. Things are changing so rapidly, we have to have some kind of a plan because hope is not a strategy.
Are banks capable of solving problems like sustainability for humanity?
We cannot expect banks to be the drivers of change. Sustainability just as climate change is a geopolitical issue. It has to be solved on a governmental level. Then it goes down to the different areas of the broad system.
Of course, banks do still play an important role today as engines of the financial sector of our economies. But there is also the real sector and this is where the pressure derives from. Governments put a huge amount of pressure on the real sector like manufacturing industries to get a CO2 footprint which is balanced. That’s where it gets difficult.
Banks as financiers of the real sector have to go along and develop their own strategies that align with what is needed in the real sector of the economy.
Is the current business strategy of banks still valuable for the future?
We have to be clear about the definition of banks in this regard. What we mean when we talk about banks is private or corporate banking. What is the role of banks in private banking? A private person puts her or his money in the bank account. Banks transform that into lendings.
There is a maturity transformation. Banks borrow short-term and they lend long-term. However, private customers do neither need a bank with overheads nor traditional branch offices. This is the legacy cost of the traditional banking industries. They have to find ways to
make sure they get it right on people’s front (if a bank like Deutsche Bank fires 5,000 employees, there is a big outcry in the economy).
Banks – especially German ones – are facing a lot of overcapacity in the market, having more players than they need. True consolidation is utterly required which has not been done over the past few years. Governments bailed out to well-known banks in Germany. There is an immense need for fundamental reforms.
Customer centricity in the banking sector – just a buzzword?
Unfortunately, customer centricity is almost non-existent in the banking sector. Whatever is promised to private customers is not delivered; for whatever reason. This is disastrous. If traditional banks really want to move forward and survive and if they do not want to become the dinosaurs of our century, they will have to come up with something that satisfies the customers. Otherwise, private customers will find other ways to satisfy their needs.
Sustainability and ESG: What kind of strategic actions can banks take in order to apply it?
There is no ESG strategy as such. Something overarching is required. This is what we typically call a business or corporate strategy. The ESG criteria have become so important that one cannot ignore them anymore. It is not possible to jump on a bandwagon and run behind people who only promote ESG.
Looking at banks, there are three main areas of actions:
Avoiding bad things that do not fit in the ESG matrix.
Promoting positive things that have a good impact on the ESG matrix.
As stated above, banks are not the driver of the change, but they CAN be the driver of change. As facilitators of businesses, banks can thus be catalysts. They have clients whom they have to align with as the customers are in need of ESG as a part of their overarching strategy. So the banks can implement that for themselves.
Promotion and change instead of avoidance as a strategy
Strategy is all about being proactive. Not waiting for things to happen. It is about looking ahead and anticipating things as well as the consequences of changes. The key is promotion and change rather than just avoidance. A proactive approach for banks would be talking to the clients and asking them what they expect. Customer centricity, or better put stakeholder centricity, needs to be lived.
Will banks become the yardstick for responsible corporate governance with their past role model?
This is irrespective of the area of business. Banks have to be responsible for what they are doing and will be doing. The social component is an important one because we live in a social market economy. What needs to be done on the banking front is sorting out customers’ concerns of paperwork. Banks need to explain and help customers what they can and need to do.
Banks should create some kind of information advantage and turn something that challenges them and that they don’t like into an advantage.
Strategic levels beyond ESG and sustainability
Besides ESG and sustainability, there is also the risk strategy of banks as well as the product strategy, business strategy and corporate strategy. If banks haven’t dealt a lot with sustainability in the past, how can they now be in tune with the times and become sustainable?
Banks, just as any other leader or business owner, need to develop a sense of urgency for sustainability – with a long-term perspective and beyond their own tenure. ESG is something that everyone has to invest in. This is unnegotiable.
How can banks help enable customers and provide security in these unstable times?
To answer this, one needs to distinguish between private and corporate banking. Private customers need a trusted advisor on the banking side who does not want to take advantage of the customers. The corporate level needs transparency and honesty.
Concluding, Jürgen says that if you really want to make a difference in this volatile and uncertain world, you have to walk your talk. Be clear about your organisation’s purpose. What kind of good things do you want to do to the people out there? What is your real impact on the environment and society? We require excellent leaders who take good care of both their clients and employees, and who understand: responsibility also means accountability.
Christian Underwood: https://www.linkedin.com/in/christianunderwood/
Underwood GmbH: https://www.underwood.de
Hoffnung ist keine Strategie: http://www.hoffnungistkeinestrategie.de
Daniel Theobald: https://www.linkedin.com/in/daniel-theobald-llm/
PWC Luxembourg: https://www.pwc.lu
Das Buch Hoffnung ist keine Strategie jetzt hier vorbestellen: https://www.underwood.de/buch
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