Private banks need to think about transaction-linked emissions too
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Private banks need to think about transaction-linked emissions too

The newest ESG trend in retail banking might be a niche offering for now, but all banks will have to take it seriously someday.

Illustration: iStock

Carbon tracking is becoming increasingly common in banking, thanks to the fintech firms coming up with new solutions to add data-driven carbon-accounting tools to lenders’ products and services.

In retail, the latest trend is to measure the carbon footprint linked to customers’ daily spending according to the transactions on their mobile banking records.

The concept is seen as a way for banks to appeal to a younger generation of clients with a feature that is both digitally savvy and climate conscious.

And since the ultra-wealthy Generation Zs are also climate conscious, why should private banks not integrate the solution into their carbon tracking toolbox as well? After all, the emissions linked to a customer’s latest gas bill hardly compare with those linked to the purchase of a private jet.

Technical implementation will be difficult, but banks should consider that the carbon footprint of each transaction may one day fall into the remit of their own reporting obligations.

A closer look

The carbon-tracking landscape is becoming more sophisticated, with a variety of solutions available to different types of banking client. In retail, banks are partnering up with fintechs to estimate the carbon footprint of clients according to their purchases and transactions.

One example is Ecolytiq, a German sustainability-as-a-service provider working with banks to generate the emissions information of purchases for consumers. The model is a big selling point.

The company uses publicly available datasets at country-level, such as household energy consumption, in addition to the merchant category codes (MCC) tied to transactions to classify consumers’ expenses and provide an estimated carbon footprint. The user can also supply more data so that the technology can capture preferences.

The question of carbon emissions associated with transactions could one day fall under the remit of banks’ own reporting compliance

Ecolytiq partnered with Visa in 2021 and has been working with several commercial banks, including Rabobank, Mashreq Bank and Qatar Investment Bank.

Another example is Cogo, which is working with banks such as NatWest. Cogo applies a category-specific calculation to individual transactions, returning estimated transaction carbon spend, as well as an aggregated footprint for each customer.

But if the point is to find clients with large carbon footprints so as to maximise the potential for avoidance that tracking offers, why not tap into the world of high net-worth individuals?

Technical difficulties

The difference is in the implementation of the solution. Transaction-based carbon trackers rely on publicly available data sets to make estimates and raise customer awareness of the impact of their spending habits.

Private banks are not reaching out to work with fintechs mainly because implementation is trickier in a private banking context. High and ultra-high net-worth clients typically have more sophisticated requirements in terms of portfolio carbon tracking, needs that must be tailored to each client based on exactly what they are spending their capital on.

And while there are publicly available data sets for the average household spend on electricity or gas, it is harder to find that information for fine art collections or luxury goods. Simply put, you cannot standardise transaction-based carbon tracking across all clients in private banking in the same way that it can be done in retail.

Private banks will, therefore, tend to focus their carbon-tracking efforts on portfolios and funds. While most private banks offer environmental, social and governance factsheets for funds, some lenders are responding to the more sophisticated demands of clients by looking at whole sets of carbon metrics such as implied temperature rise or absolute greenhouse-gas emissions, usually for the investment portfolios rather than the daily transactions of their clients.

Buy now, worry later

This doesn’t mean that private banks shouldn’t care about carbon tracking, however. It is a trend that could become the norm for transaction services, especially because the question of carbon emissions associated with transactions could one day fall under the remit of banks’ own reporting compliance.

According to the Partnership for Carbon Accounting Financials – the main industry body that drives emissions reporting in the financial sector – the topic is on their radar as part of a long list of potential areas for future development.

This won’t happen in 2024, as other categories need to be prioritised first, but as with all PCAF guidance, methodologies will be updated and developed as the international financial sector’s needs evolve – so retail banking may be added as a category in future reviews of the carbon-accounting methodologies.

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