As financial markets and the wider economy take strides to transition, the development of objectives to accelerate sustainability needs to be prioritised. In order to ensure this – and bolster the integrity and competitiveness of the financial system – safeguarding consumers is key. While there have been developments in risk management, taxonomies and disclosures, less attention has been given to how financial services providers can engage with, influence and support consumers.
The topic was broached in an OMFIF roundtable, in partnership with VISA. OMFIF and Stephen King, vice president of Sustainability Solutions at Visa, were joined by Carlos Martín Tornero, senior ESG specialist and lead associate at the Financial Conduct Authority, and Sarah Kemmitt, consultant at the United Nations Environment Programme Finance Initiative.
In a discussion on how to engage consumers in the shift to net zero, Tornero highlighted the FCA’s three pivotal operational objectives: consumer protection, system integrity enhancement and competition. In facilitating the international competitiveness of the UK economy, Tornero pointed out an increased interest in sustainable investments and objectives.
Retail clients are seeking green deposits, bonds and other tools but this is hindered by a lack of environmental, social and governance products, varying ESG ratings and a misunderstanding of what labels mean for banks in practice.
Demand for green mortgages is relatively low due to affordability issues. On the assets side, banks need to know their financed emissions and possess the information to set targets and transition. The conversation indicated that banks see the targets set by science-based policy by 2030 within the current policy setting as largely impossible. In addition, policy reversals in areas like grid capacity for electric vehicles – where there is huge investment potential – are highly unhelpful in scaling transition.
Yet, King of Visa’s Sustainability Solutions noted that as a way of taking advantage of ‘embedded finance’ opportunities, banks can establish an ecosystem where financing comes to them. Kemmitt supported this by noting banks can enable consumers to align their financial activities with sustainability goals, while banks’ knowledge hubs and partnerships foster holistic solutions, such as property retrofitting and eco-friendly auto finance. Incentivisation mechanisms, such as preferential rates for green mortgages, can also further urge sustainable consumer behaviour.
There is a clear imperative for market transparency and the mitigation of greenwashing risks. While financial regulators cannot pre-empt consumers’ sustainability preferences, they can empower them through transparency and the establishment of sustainability disclosure requirements and labelling regimes. These measures stand to go a long way in enhancing market trust and facilitating informed decision-making among retail investors.
Pushing for standardised sustainability disclosures and mandatory reporting signifies a shift towards greater transparency and accountability within the financial sector. Not only does this process reduce uncertainty, it allows for scalability as King highlighted open data sources, enhanced data granularity and transactional insights as a means of empowering consumers to make informed choices and encourage sustainable practices. With the increasing need for product level data to incentivise and drive greater scale of investment and asset allocation, King finds that there are ‘fast followers’ not ‘first movers’.
Transition plans are now a key focus to support target setting and goals to reach net-zero objectives. For banks, these will be an amalgamation of the firms in their value chain and a way to build information. As financial institutions navigate the complexities of sustainability integration, a multifaceted approach that balances regulatory oversight and consistent frameworks, drives stronger information, innovation and consumer empowerment will be integral.
Emma McGarthy is Head of the Sustainable Policy Institute at OMFIF.
