Sustainability in the Financial Services Industry

The financial services sector is comprised of companies that offer a range of services from banking to investment and asset management to insurance. Although financial service companies have relatively small direct environmental footprints, a number of companies have made progress in becoming more sustainable by reducing the impact of their operations. Many companies have energy efficient buildings and have dramatically reduced their consumption of paper. However, the non-direct impacts of the industry, including the impacts of companies in financial services institutions’ investment portfolios, are substantial. The challenge for many industry players will be how to incorporate environmental risks and opportunities into their investment and risk analysis.

Sustainability Drivers

As sustainability becomes a larger business imperative for companies in every sector, investors and financial institutions need to be able to identify and assess environmental risks and opportunities. Many companies have already agreed to adhere to voluntary investment standards, such as the Equator Principles, which set environmental and social standards for project finance. In the same way, some of the largest global banks have adopted the Carbon Principles, which set standards to assess carbon risks for power sector financing. For insurers, the physical risks from climate change and extreme weather events are likely to be an increasing factor in how companies price risk.

In addition, changes in regulation, rising energy prices, and natural resource constraints will drive new infrastructure, technologies, and solutions, many of which will require investment capital. Leading companies will have opportunities to get involved early. Some companies are also already identifying products and services to accommodate changing consumer behavior, such as insurance for hybrid vehicles, pay as you drive insurance and green building insurance. As interest in sustainability increases, we can expect companies to seek competitive advantage by introducing more of these offerings.

Challenges and Opportunities

To gear up for sustainability challenges, financial institutions should ask:

• How can we improve our understanding about the impacts of environmental and energy regulations so we can identify investment opportunities linked to sustainability?
• How can we better assess risks in our investment portfolios and insurance risk underwriting?
• What types of financial products and services can we offer that address consumers’ and customers’ interest in sustainability?

Viridis has worked closely with leading financial services companies to navigate these and other issues.

Case Study

An industry-leading U.S. auto and property insurer needed to develop and implement a comprehensive plan for managing all aspects of the company’s environmental programs. Viridis conducted extensive analysis of the company’s current environmental approach and performance in the context of a swiftly changing, competitive, and regulatory environment, as well as in light of the company’s heritage, culture, and market positioning. Viridis benchmarked the client against direct and indirect competitors as well as companies recognized as global sustainability leaders; developed and facilitated an Innovation Workshop to identify potential new products and service ideas with green dimensions that would appeal to customers; performed in-depth analysis of emerging environmental regulations pertaining to the client’s business; and developed a communications strategy – including a signature issue -- that allowed the company to engage with internal and external stakeholders on its environmental activities. Finally, Viridis developed strategic options and prioritized quick-win opportunities to immediately improve the company’s environmental performance, as well as longer-term, eco-efficiency and new product and service opportunities.

Along the way, Viridis worked closely with senior leadership to show how the recommended actions and priorities would be integrated into the company’s management structure and business strategy and include the key stakeholder groups: agents, employees, and customers. One year after our work began, the client was prepared to launch a communications program, prominently featuring the CEO, to share their progress and engage stakeholders. By working with Viridis, the client was able to shift sustainability from the position of a set of unknowns and partially-managed risk areas to a well-structured function with clear objectives, metrics, and strategy for differentiation and growth.