How can financial services clean up their ESG act?
One sustainable way forward
Leaning into operational sustainability & GHG physical operations reduction practices
By Sean O’Dowd and Alexis Balashov
Environmental, Social & Governance (ESG) topics have dominated headlines, investment, and business model operational uptake in the Banking, Financial Services, and Insurance (BFSI) sector for the past several years. For the sector, the opportunity is enormous and its impact potentially earth changing. Out of the the ESG framework pillars - environmental or sustainability (to tackle decarbonization) appear to be the current dominating factor that Financial Services can lean into. It’s big business for Financial Services – and many have taken notice.
Unbridled opportunity not going unchecked
The largest financial players in the world recognize energy transition represents a vast commercial opportunity as well as a planetary imperative.
Financial services will play a significant role in sustainability. It will need to support the transition to a net-zero economy through lending and financing decisions and through facilitating their clients’ transition. Yet the IPCC’s (Intergovernmental Panel on Climate Change) decarbonization pathways report stated that financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming to below 2°C (3.6°F)
There is a lot to be done and it stands as one of the largest opportunities for the sector now and years to come. While financial services has profited on technology growth industries such as the internet, cloud, AI/ML, and cyber, the synergies and revenues expected from current and future efforts to monetize decarbonization are massive. Bloomberg Intelligence estimates that 2022 Global ESG assets under management may surpass $41 trillion this year (which represents roughly one third of all AUM) and $50 trillion by 2025. ESG lending activities constitute about $4 trillion in debt markets, which could swell to $15 trillion by 2025. Wholesale banking is well positioned to act as transition finance advisors to help clients achieve Net Zero and build new “green” revenues. All told, these activities are helping financial services tap into billions of new revenue pools.
As such, there has been a collective call from the press, investors and public alike to have greater transparency and standards applied to the sector's financial dealings in an effort to minimize greenwashing, improve benchmarking and ensure impact. Further, the sector (effectively all industries) have come under scrutiny regarding their own ESG impact, adoption and progress.
Sorting out the current compliance matrix
Global regulators have pursued action on these various topics in earnest and heightened oversight is coming. Given the enormity of the ESG market and problems the frameworks aim to tackle, there are a litany of groups and measures globally that can be difficult to navigate. This patchwork of regulation is reflective of the prevailing view that ESG measures are no longer optional. This compliance tool article: Mapping ESG regulatory requirements does a good job of outlining and organizing a number of the global regulations and governing bodies in play.
Heightened oversight is coming not only for the investment products offered but also the corporate policies and financial statement reporting requirements of these companies as seen with a recent SEC proposal. And more extensive country plans such as the UK’s Net Zero Strategy with 2030 nationally determined contributions and net-zero by 2050. New proposed SEC reporting, for example, could require companies to disclose all Scope 1 and Scope 2 greenhouse gas emissions which include those directly associated with an organization's energy consumption.
Banks, capital markets, and asset managers across the globe will need to not only clean up their ESG business dealings, but also show meaningful progress in improving their ESG corporate practices. Pursuing these improvements has become so critical for modern financial services that regulators are moving to improve transparency and reporting to a greater extent compared tothe implementation of capital adequacy requirements (Basel III & Dodd-Frank) and risk measures over the past decade.
Where to start?
Operational Sustainability in Data Centers as an Immediate Path Forward
The BFSI sector can play a significant role in global ESG developments through focusing on improving their own corporate ESG progress. A critical component of progress towards meeting ESG goals is Operational Sustainability, something which started and continues to be a dominant theme for the Manufacturing, Retail, and Shipping sectors.
For BFSI companies, the primary path to managing their own GHG (greenhouse gas emissions) footprint and environmental impact will be from physical operations across branches, corporate offices and notably data centers.
In financial services, the inputs and outputs of their business/operations are data and information, of which there is an unprecedented amount. The BFSI sector is known to be extremely data intensive; producing vast amounts of data to quantify, analyze, and monetize on a massive scale. The market has even taken to referring to data as the new oil and for BFSI, as its lifeblood. Its refinery is costly, operationally intense, inefficient, and environmentally a latent threat.
The processing of data and information for BFSI happens in thousands of data centers globally. ( Chart: Number of data centers worldwide in 2022, by country). And worldwide, it is estimated that data centers consume about 3 percent of the global electric supply and account for about 2 percent of total GHG emissions. That’s about the same as the entire airline industry - and these estimates don’t factor in the pandemic-related digitalization boom. As such, data center efficiency improvement and energy reductions are key. Thus, it’s important for BFSI companies to maximize the energy efficiency of their data centers, which is not currently the case. In fact, BFSI server utilization is sometimes as low as 15-20%. Efficiencies are subsequently lost, IT management expenses are questioned, and the potential of reaching a net-zero target contribution are diminished.
Atlantic Ventures’ recent study: Improving Sustainability in Data Centers*, highlights the various Initiatives and Technologies improving Data Center sustainability.
Looking at the above table, the key reasons why next generation architecture impacts are so high and attainable in the near term is because infrastructure as code and newer architectures introduce new form factors (i.e.hardware reductions), over-provisioning elimination and automation.
Not only is infrastructure-as-Code (i.e HCI) inherently lower in power consumption, they are designed to manage the scale out (and down) today's infrastructure, data and application needs of the financial services industry. The ecosystem involves a multitude of ecosystem partners as well to amplify improved energy efficiency such as new processor designs, colocation and cloud usage, though keeping in mind that hiding greenhouse gas emissions in the cloud is not the easy button.
Oliver Wymans’s report Climate, Crypto, and Competing in This Cycle highlights the critically of sustaining digitization investment in financial services to transform their business and the rising opportunity of ESG
The success of investment programs to build more agile, scalable, and efficient operating models has been mixed to date. No one is all the way there, but all banks need to deliver on this goal and there is significant risk that banks take their eye off the ball during windfall years like 2020-2021 or exhaust change-the-bank budgets on remediation efforts (at the expense of transformation). Transforming the IT stack over the next 5-10 years to offer core products and services and expand into new frontiers, like Digital Assets, will be critical. We see the profitability gap between leaders and laggards widening in the next cycle if this trend continues.
ESG topics are among the most critical issues of our time, exhibited through their distinctly transformative effect on industries and societies. The fulfillment of many ESG mandates can only be accomplished through continued digital transformation and IT innovation. From sustainable energy in data centers, to robust IoT cybersecurity, to advances in digital workplace efficiency.
Research from Accenture sees technology as a vital enabler of sustainability - from accelerating Net zero transitions to building more sustainable value chains. Yet, only 7% of businesses have fully integrated their technology and sustainability strategies. Sustainability is the new urgent imperative for CIOs and the window of time to move is small.
*The Atlantic Ventures paper contains information based on reports, studies, publications, surveys and other data obtained from third-party sources. While Nutanix, Inc. (together with its subsidiaries, “Nutanix”) believes these third-party reports, studies, publications, surveys and other data are reliable as of the applicable publication date, they have not independently verified, and Nutanix makes no representation as to the adequacy, fairness, accuracy, or completeness of any information obtained from third-party sources. Except as required by law, Nutanix assumes no obligation, and expressly disclaims any obligation, to update or revise any information obtained from third-party sources, or to provide corrective or supplementary information, in case of any inadequacy, unfairness, inaccuracy, or incompleteness of the information contained therein.