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Why sustainability is becoming a priority in the financial industry

Environmental, social, and governance (ESG) requirements make the capital market an important player in sustainable business practices.

Climate change and the destruction of the environment are among the biggest global challenges of our time. Experts believe that the majority of the global warming of the past 50 years is due to the increase in anthropogenic greenhouse gases. Meanwhile, the Earth is almost at the “point of no return.” Therefore, drastic and immediate action is needed to ensure a sustainable future for all.

“Climate neutrality cannot be achieved on the slow train,” said Siegfried Russwurm, head of the Federation of German Industries (BDI), in an interview with the Süddeutsche Zeitung in mid-June 2021. Industry has an important role to play in this. His predecessor Dieter Kempf had already made it clear: “Industry backs the Paris climate agreement. Only a highly innovative and internationally competitive industry is in a position to develop technologies and products that are necessary for climate protection.”

Financial institutions and sustainable business practices

The financial sector promotes economic growth and can at the same time help to reduce the pressure on the environment. As a provider of capital, it plays a central role in the development of more sustainable economies. It provides money for investments and thus contributes directly or indirectly to influencing the development of the environment, climate, and ecosystems. A sustainable financial industry should therefore take environmental, social, and governance (ESG) aspects into account in its investment decisions.

To do so, it should provide financial capital and risk management products and services in a way that promotes economic prosperity while protecting the environment and ensuring social wellbeing. The ESG aspects are considered core factors for measuring the sustainability and social impact of an investment in projects or an organization. They also help to better predict the future financial performance of companies – return and risk.

What is the EU doing?

The EU has committed itself to becoming the first climate-neutral continent by 2050. By 2030, greenhouse gas emissions are to be reduced by at least 55 percent compared with 1990 (Source: Communication from the Commission ‘The European Green Deal’, COM/2019/640 final, 11.12.2019). This goal involves an enormous financial outlay. Around 350 billion euros of investment is needed in energy systems alone – that’s in addition to the 130 billion euros needed to achieve other environmental goals.

Previously, the European Commission developed an initial action plan for financing sustainable growth and defined three basic pillars for a sustainable financial framework:                                                             

  • a classification system for sustainable activities
  • a framework for information disclosure for companies 
  • investment tools, including benchmarks, standards, and labels

Green bonds for sustainable investments

Matrix showing risk, opportunites and financial consequences.

Under the EU's 2021-2027 long-term budget and the NextGenerationEU (NGEU) recovery fund in the wake of the pandemic, the EU plans to spend up to 605 billion euros on projects to address the climate crisis and 100 billion euros on biodiversity projects. Thirty percent of the capital needs are to be met through green bond issues. The European Investment Bank Group has also taken important steps as the “EU Climate Bank” to support change. (Source: European Investment Bank Group, Climate Bank Roadmap 2021-2025, November 2020)

In July 2021, the European Commission also launched an EU strategy for the financing of the transformation to a sustainable economy and for the further development of a sustainable financial system. This is because ESG-related measures and the transition to a lower-carbon economy will require an estimated investment of 1 trillion dollars per year.

Germany as pioneer

From the perspective of political measures and legislation, Germany is one of the pioneers in Europe when it comes to achieving short and long-term goals in the area of sustainable finance. A strategy adopted by the German federal cabinet in May 2021 aims to mobilize urgently needed investments for climate protection and sustainability while addressing increasing climate risks to the financial system. The strategy represents a change of direction within the financial system, with the government in Berlin declaring climate protection and sustainability to be key guiding principles with the aim of making Germany a leading sustainable finance location.

To this end, the German government's Sustainability Advisory Council adopted 30 groundbreaking measures for sustainable finance in its final report “Shifting the Trillions – A sustainable financial system for the great transformation” at the beginning of 2021. These include the reallocation of the federal government's capital investments to sustainable forms of investment, sustainability labels for consumers (sustainability traffic lights), and new sustainability reporting requirements for companies.

Promoters of sustainable business practices

Against this background, not only should financial institutions develop new sustainable business models, products, and services, introduce new risk measures, and adopt new technologies, but they should also become determined promoters of sustainable business practices. To do this, they must understand the financial risks and opportunities of their involvement and act accordingly. The financial sector, including the private banks, have “a special role to play here,” says Torsten Jäger, Director Sustainability at the Association of German Banks (BdB). “Because they are financing the economic transformation and can thus make a key contribution to achieving global and national climate targets.”

Legislators and regulators, in turn, have to recognize the role and potential of financial institutions in sustainable development. They should recognize how politicians can help the financial sector become a responsible and important enabler, rather than an inhibitor, of the change towards a climate-focused economy.

Measuring and evaluating sustainability

It is precisely with this intention of “taking responsibility seriously” that T-Systems has developed the “Syrah” sustainability dashboard, which all public and private organizations can use to define, visualize, measure, and monitor their sustainability indicators. This is just one example of how the Telekom subsidiary not only pays attention to “green” measures within its own company, but also supports its customers in achieving their sustainability goals.

How IT players can help

Even as financial institutions are expected to adhere to sustainability norms, IT players can play an important role in helping them adopt new technologies in line with their sustainability postures and goals. According to a recent report by global management consultancy BearingPoint, financial institutions need to invest more in IT and push the use of trending technologies such as cloud, artificial intelligence, and robotic process automation. This will make it possible for them to penetrate the adoption of digitalization more, which, in turn, will enable more efficient business processes, greater automation coverage, and increased implementation of standard software as a cloud solutions to keep change-the-bank costs at a low level in the long term.

T-Systems, for instance, has recently partnered with 20 municipal administrations in Spain to create Syrah Sustainability. Our work on making the cloud greener is taking shape at the Biere data center in Saxony-Anhalt. And we have also helped a Chinese megacity reduce its CO2 emissions.

For an insightful discussion around the role of IT in Sustainable Finance, write to me.


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About the author

Chitwan Bhardwaj is an Industry Marketing Expert with T-Systems, specializing in financial services. He has 14 years of experience in Domain & Strategy Consulting, Pre-sales, and Marketing.

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