By aligning with global frameworks and incorporating ESG factors into their strategies, digital banks not only contribute to a greener future but also gain a competitive edge
Financial institutions stand as powerful instruments for implementing Climate Action, underscoring the significance of Finance Day at COP28. Affordable access to finance serves as a compelling incentive for corporations to align with their ESG initiatives, yielding both short-term and long-term results. Digital banks, recognising this opportunity, can strategically tailor their customer segments and formulate an effective go-to-market (GTM) strategy. By harnessing access to cost-effective funds directed toward such initiatives, digital banks can play a pivotal role in driving sustainable practices.
Green Financing
Green Financing is an area where digital banks can take the lead, emphasising investment in low-carbon projects, especially targeting Global South economies that may lack sufficient blended finance support in these markets. The UAE-based Alterra Investment Fund, with an initial $30 billion fund aiming to reach $250 billion by 2030, is a notable example stimulating concessional and multi-lateral development bank (MDB) financing for such projects. Collectively, banks and multi-lateral lenders have committed to providing $270 billion in green finance support.
Digital banks have the opportunity to specialise in offering green financing to companies contributing innovative products, services, and technologies for a sustainable future, positioning themselves as growth fund providers. By engaging in such initiatives, banks can secure more affordable funds, aligning with commitments made at COP28, including contributions from the Green Climate Fund ($3.5 billion), Renewable Energy Fund ($2.5 billion), Climate Finance Fund ($30 billion), and other commitments from multi-lateral banks
Business Strategy alignment with NZBA framework
Alignment with the Net Zero Banking Alliance (NZBA) framework is crucial for digital banks to effectively target specific segments. Utilising the UN Environment Programme Finance Initiative (UNEPFI) Impact Radar tool allows digital banks to pinpoint areas of Social, Socio-Economic, and Environmental Impacts that should be addressed within their Business and Credit Policy.
In addressing environmental impacts, integrating carbon considerations into the decision-making process and asset valuation within credit assessment models for corporate clients becomes imperative. Additionally, employing Portfolio Identification Tools enables the strategic planning of priority lending to business sectors (ISICs) that receive higher ratings for Green Financing.
Digital banks can gain a distinct advantage by designing their business strategy in alignment with the assessment and impact framework of the Net Zero Banking Alliance convened by UNEPFI. This alignment not only enhances their environmental and social responsibility but also positions them uniquely, providing a competitive edge in capital raising for sustained growth.
Customer Engagement and Education
Enhancing customer engagement and education is pivotal for digital banks, and creating more captivating digital journeys can play a crucial role in raising awareness of Climate Change. By raising awareness among customers about the implementation of environmentally friendly processes, such as Carbon Removal and Carbon Emission reduction, digital banks can incentivize them with benefits like cheaper loans and improved finance facilities.
Additionally, launching Environmental, Social, and Governance (ESG) initiatives, such as tree plantations, provides an avenue for banks to encourage corporate participation. By urging corporates to contribute towards tree plantations, digital banks not only contribute to environmental goals but also help corporates earn credits towards their ESG objectives. This approach aligns with sustainability practices and fosters a sense of social responsibility among both individual and corporate clients.
Technology for Sustainable Financing
In the realm of sustainable financing, banks offering trade and supply chain finance products can leverage blockchain-based supply chain networks. These networks introduce transparency and enable the verification of sustainable practices, ensuring a more responsible approach. Additionally, AI models utilised for Credit Assessment should incorporate Environmental, Social, and Governance (ESG) factors in their creation and learning processes. These models, equipped to assess climate risk within risk models, can price products and services accordingly for customers.
Digital banks, often thriving with a robust partner ecosystem in their target markets, can further enhance their sustainability initiatives. Partnering with Green Fintech platforms that offer sustainable financing products provides immediate expertise in ESG assessment. These platforms offer tools for impact investing, carbon footprint tracking, and present green investment opportunities, aligning digital banks with the principles of responsible and sustainable finance.
By aligning with global frameworks and incorporating ESG factors into their strategies, digital banks not only contribute to a greener future but also gain a competitive edge. The emphasis on customer engagement, education, and the collaboration with Green Fintech platforms further solidifies their role in promoting sustainable practices.
(Vinod Yadav, Ex-Chief Technology Officer at AGTB Bank, UAE.)