With the demand for green banking products expected to reach new heights in the next few years, and with the clamor from both millennials and Gen Z-ers for better ethical initiatives, more green products, and expanded green processes, what can financial institutions do to bulk up their offerings?
Sustainability is one of the biggest trends in consumer behavior we’ve seen in the past years, and it will likely be an important factor in banking for years to come, particularly as millennnials and Gen Z-ers mature. According to a 2021 survey by Deloitte, sustainability is one of the top five concerns of both millennials and Gen Z.
This is nothing new. In fact, this has been a growing concern for the younger generations for a while now. What may be noteworthy is the growing assertion that they’re willing to back up their concerns with cash. As early as 2015, a Nielsen report found that up to 73% of millennials were ready to choose higher price points if a product or service aligned with their ideals. Additionally, “The State of Consumer Spending: Gen Z Shoppers Demand Sustainable Retail,” a report released in 2019, also concluded that a majority of Generation Z (about 62%), greatly preferred buying from sustainable brands.
Already, many banks are beginning to align business operations with sustainability goals. In fact, more than a third of the global banking industry have already adopted the Principles of Responsible Banking. But with the demand for green banking products expected to reach new heights in the next few years, and with the clamor from both millennials and Gen Z-ers for better ethical initiatives, more green products, and expanded green processes, what can financial institutions do to bulk up their offerings?
The obvious and glaring first step is to go digital. This cuts paper use, reduces the fuel consumption associated with various branch commutes, and even reduces branch operating hours (and heating and cooling bills), thus reducing carbon emissions. Beyond this, however, going digital allows a financial institution to use integrated data to personalize for this segment, allowing them to offer products that resonate with the growing cohort of consumers with sustainability on their minds.
One of the first products that comes up when people talk about green or sustainable banking are green mortgages. Essentially, a green mortgage means a lender will offer incentivized terms to a house buyer who can prove that the property they’re buying meets a set of environmental standards.
Depending on the country you’re in, this may mean different things. In the US, for instance, a green mortgage, also called an energy-efficient mortgage (EEM), may be one of three kinds: FHA, VA, and conventional. A VA mortgage is handled by the Office of Veteran Affairs, and is only open to US veterans. A conventional mortgage is what most people are used to getting. In this scenario, a participating conventional lender theorizes that because a home buyer is purchasing an energy-efficient property, the buyer should be paying less in utility bills and can afford higher monthly payments. He can therefore afford to borrow more, putting him closer to his dream home. Finally, a Federal Housing Administration (FHA) mortgage allows you to borrow money to make energy-efficient improvements to an existing home, or to a house you’d like to buy or build. However, these have a more stringent set of rules, and have restrictions on how much of the loan a buyer can allocate towards energy-efficient improvements.
Some lenders have chosen to use green mortgages as a jump-off point to green loans. A green loan is credit extended to a customer on the understanding that the money will be used towards services or products that will benefit the environment. A green loan can cover home renovation to integrate energy-efficient appliances, install solar panels, purchase a hybrid or electric car, better home insulation, etc. There is a slight catch, however. While the interest rates for these types of loans are often lower than standard, they often prohibit you from using the funds for things that aren’t directly green. For instance, if you’re getting a green loan for home renovation, in most cases, you can only use the proceeds from that loan for the green aspects of the renovation, and may have to borrow conventionally to fund everything else.
Carbon offset or carbon credit savings accounts are still fairly new. These kinds of accounts are unconventional in that while they are ostensibly savings accounts, and thus accrue interest, the saver will not benefit from this investment. Instead, the money earned will go towards offsetting carbon. In the UK this year, Oxbury introduced an account that pays an appealing 0.7% on a 1-year fixed-rate bond, promising to use the interest earned towards planting trees.
For customers with an eye to investing, bundled green investments like the ones online investment manager Nutmeg offers are a great way to simplify the process. In this scenario, the bank or investment manager takes responsibility for vetting investments and filtering out those that don’t make the cut. They can then group these according to a social ideal, and offer them as a ready-made portfolio. Portfolios may be geared towards businesses with ethical labor practices, companies with environmental credentials, or other combinations of factors. Green investments can then be expanded to integrate with ISAs, pensions, and other savings and investment instruments.
As the younger generations mature, the desire for green banking products will only intensify. According to Deloitte, three out five people in the UK want their banks to have a more positive contribution to society. Already we see challenger and neobanks offering green initiatives as a matter of course. Neobank Starling, for instance, will plant a tree for every successful referral and has pledged not to provide services to companies that systemically promote unethical behavior. Tandem, another neobank based in the UK, is trialing a green mortgage program. And Tomorrow, based in Germany, uses sustainable wood for its debit cards, eschewing the evils of single-use plastic.
More and more millennials and Gen Z-ers are taking a hard look at the institutions they have aligned with, and as evidenced by past behavior, these generations are not averse to packing up if they find that their needs aren’t being met. And the scrutiny doesn’t stop there. Banks are also under pressure from regulators, employees, clients, and investors.
As digital finance itself has become essential to the industry, so too, it seems, will green and ethical banking. The road ahead is still paved with questions and uncertainty, but that also means there is opportunity to be had: right now, the field looks clear for those who want to lead the way.
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Main photo credit: Pexels
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