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“From banks lending credit to insurers providing cover against risk, the global finance system powers the economic activities that affect our planet,” says the World Wildlife Fund. Flows of finance dictate whether or not we will achieve a sustainable future for the planet and its wildlife, habitats and people.
The good news on sustainability is that global investment in renewable energy in 2022 matched fossil fuels for the first time, at just over $1 trillion. Half of all energy transition investments were in China, with EU nations and the US combined accounting for around a third.
However, investment in fossil fuels also rose in 2022, and investment in renewables in developing nations remains weak. How do we reverse this trend, ensuring investment patterns are ethically and practically dedicated to a sustainable future?
We look at whether open financial data, otherwise known as open banking, can help drive change.
Sustainable investment
Sustainable investment is becoming increasingly popular as consumers look for ways to invest their money in ways that are not only profitable but also socially and environmentally responsible.
A report by Morgan Stanley in 2019 showed that 80% of asset owners had integrated sustainable investing, up by 10% from the previous year. Driving this change were attractive returns, constituent demand and changing regulatory frameworks.
Our survey of 550 senior decision makers in financial services across Europe, Australasia, China, Japan, the USA, the UK, Russia, and India in 2021 found that 63% of those surveyed said their products are considered ‘green’. 64% told us their upcoming products had been designed to be socially, environmentally and economically friendly.
Barriers to greener investment?
HSBC’s Future of Sustainable Finance 2020 report found that less than half of investors reported obstacles to investing sustainably, down from 61% the previous year. 90% of those interviewed believed environmental and social issues were important.
However, the pandemic and economic downturn may have slowed down the rate of transition. While a survey by Octopus Investments revealed that 80% of investors interviewed planned to double allocations to renewables over the next five years, from 4.2% to 8.3%, divestment (withdrawal) from fossil fuel investment shrank from 5.7% to 4.5% in 2020.
The invasion of Ukraine has polarised trends, say WTW. Most investors are consolidating the view that sustainable investment was the future, but a vocal minority were resisting the transition.
Harnessing consumer interest in sustainable investment requires that they have knowledge, control and choice. Is open banking the key to giving consumers and investors what they need to drive greater ethical and sustainable investment?
The promise of open banking
Open banking allows third-party providers to access banking data, enabling customers to track payments, financial products and services, and manage their finances. It has the potential to create a more open and transparent banking environment, making it easier for customers to make informed financial decisions.
New products and services are created by allowing a broader ecosystem of companies to access financial data.
So, how does open banking encourage sustainable investment choices?
Empowering customers
One reason is that customers have greater access to a broader range of financial products and services, enabling them to compare them, find the best deals and make more informed investment decisions. That includes sustainable investment options.
Open banking has created an environment where consumers can take control of their finances and make choices that align with their values and beliefs.
Innovation
In addition to empowering consumers, open banking has also led to innovation in the sector. Fintech disruption has forced the sector to offer better products and services to retain customers, including greater access to sustainable investment options.
McKinsey believes that “if open finance continues to accelerate it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbent banks.”
Data democracy
One of the challenges of sustainable investment is that while investors are increasingly keen on making eco-friendly and ethical choices, they need help to understand how investment patterns affect sustainability.
Open banking can help track the impact of investments.
For example, the Danish startup make!impact has embedded account aggregation technology, allowing people to connect to their investment accounts in seconds. Its algorithm then helps consumers assess the sustainability of their investments based on the UN Sustainable Development Goals (SDGs).
The company has encouraged younger and more diverse investors – half said they have never invested before – by embracing the principles of open banking and, as a consequence, democratising investment.
Risks
Despite the potential of open banking to drive sustainability investment, the new technology also carries some risks.
Third-party data
The sharing of financial information with third-party providers risks data breaches and fraud. Regulators and financial institutions must implement robust security measures and enforce strict data protection regulations. At the same time, customers should consider the security measures offered by third-party providers with caution.
Greenwashing
The thorny issue of ‘greenwashing’ is also a critical risk. In our 2021 research cited above, more than half of the financial services businesses surveyed believed their competitors were guilty of greenwashing. When we surveyed this group again in September 2022, half of the respondents believed this was still the case and nearly 40% felt that every company was greenwashing in some way.
Open banking offers the promise of transparency, but financial institutions and third-party providers need to deliver the tools to back up these claims, providing customers with clear and easily accessible information about the environmental footprint of their financial decisions.
The UK and the EU have taken steps to ensure transparency around sustainability claims in financial services. More work is needed to enforce strict standards and penalties, benchmark Environmental, Social and Governance (ESG) frameworks and educate customers.
The Three T’s
We argue that firms that put the Three T’s – Trust, Transparency and Technology – at the heart of what they do will be in the best position to leverage returns.
Open banking potentially delivers all three T’s. It utilises disruptive technology, encourages transparency, and engenders trust through greater visibility, choice and control. It is a core way of accelerating ESG in financial services.
Sustainable investment is not only right for the planet and the living ecosystem, but it also offers a substantial ROI. The world is banking on it. Want to find out more about how sustainable investment and open banking can transform the way we do finance and drive a better future? Sign up for our webinar, The Rise of Open Banking and Sustainable Investment, taking place on Thursday, 23 February at 3pm GMT.
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