Financial services have always played a vital role in the markets where they operate, helping to support societies and allowing them to prosper. However, as issues surrounding ESG have become more transparent to businesses and the general public since the COP26 conference, there is mounting pressure to add a purpose to banking and financial services that go beyond transaction handling and lending.

The sector's commitment to driving change through ESG has led to added pressures from regulators to provide thorough monitoring and reporting of lending practices, in part to mitigate the risk of greenwashing within the sector and provide a clear insight into the impacts of new initiatives.

Retail and commercial banks across the globe are already affecting change with the promotion of sustainability, voluntarily doing more to address the needs of customers. Lloyds Banking Group’s ‘Helping Britain Prosper’ vision tackles the challenges of ESG head-on, securing more sustainable returns and capital generation by outwardly focusing on housing access, inclusion, education, and regional development while targeting a reduction of their own carbon emissions by >50 percent by 2030.

By prioritizing their own support in the areas of renewable energy financing, low carbon transport, sustainable farming, investments and pensions, Lloyds are transparently offering real-value solutions to real pain points in the UK economy. While satisfying individual groups of valuable consumers, the investments align succinctly with a sustainable financing portfolio, with over £52 billion in pledged investment by 2024 as part of their ESG strategy.

With an increased awareness of environmental sustainability in the banking and finance sectors at both board and consumer levels, the negative impacts of fossil fuel usage and its financiers are being dragged into the spotlight more than ever.

HSBC fell foul to such practice in 2021, rapidly gaining a reputation as one of the biggest enablers of fossil fuel use around the globe. The London-headquartered bank had reportedly allocated $130 billion in funding for Canadian oil pipelines, gas farming in war-torn Mozambique, and other such projects. As a result of their investments, the bank was faced with an activist shareholder revolt, which has been a wake up call for similar world banks to really ‘put their money where their mouth is’ at a strategic level.

However, there are lessons to learn, and lessons that have been learned, from these 'dirty investments’, and it all goes back to restructuring strategies to tell the story of ‘banking on purpose’. Banks are now required to report on their environmental impact to independent regulators. This dramatically changes what banks can invest in, and how they operate as their impact on the environment is regularly under scrutiny. With HSBC leading the line from their own mistakes, it is now the time to start phasing out the bad lending practices, and to begin to review the lending frameworks and decision making in line with environmentally friendly and justifiable operations.

Until recently, world banks have been primarily set up to lend on a value-driven risk vs return basis. However, decision making is starting to change to align with ESG considerations. While return on investment probability is still a considerable factor, delving into the environmental impacts and insightful lending across portfolios is more crucial than ever before when it comes to maintaining reputation at a consumer, shareholder and board level.

To ensure that they stay sustainable while still attracting a competitive level of business, world banks need to be able to accurately track their environmental impact, and make adjustments to their approaches. To do this, banks will require new data models and ways of working which will have a significant impact on how they currently operate. With pledges from the likes of Lloyds Bank and other banks of similar stature, the phasing out of old practices is officially underway.