Hub for Sustainable Finance The future is digital and green
... and coronavirus has brought it closer, argues Huw van Steenis.
Originally appeared in The Times
For just the second time in 40 years, the governor of the Bank of England will not give his annual Mansion House speech this week. This week also marks the first anniversary of the publication of the Future of Finance1 review that I led for the then governor, Mark Carney, published at last year’s Mansion House. Reflecting on the conclusions of the review and the early impact of the pandemic, the shift to digital finance and green finance is occurring faster and in more places than we even thought a year ago.
Huw van Steenis
Huw van Steenis
Huw is Chair of the sustainable finance committee at UBS, former adviser to Bank of England governor Mark Carney, and a member of the World Economic Forum’s Global Future Council on Financial and Monetary Systems.
Here are five of them:
Here are five of them:
A dramatic acceleration in the shift from cash to digital payments
Contactless payments are up 44 per cent in the lockdown, according to Nationwide, whilst ATM withdrawals are down 60 per cent, according to Link. Lockdown measures have propelled customers to switch behaviour permanently, according to Charlotte Hogg, chief executive of Visa Europe.
One striking feature has been the shift in older generations trying digital payments for the first time as they stay at home. PayPal said the over-50s were its fastest growing segment in April and May.
The UK was already steadily shifting away from cash — but we may have leaped forward by two to three years according to Megha Kansal at McKinsey. In Sweden, cash payments have fallen by 80 per cent over the past decade. Last year our base case was that we thought Britain may only be four to six years behind. As a result, Mr Carney committed the Bank to an ambitious agenda to modernise payments which is already bearing fruit.
Digital payments bring many benefits. But the Swedish experience shows that, without a co-ordinated plan, the pace of change risks excluding some groups, particular the elderly and vulnerable. The cash infrastructure also risks becoming uneconomic. If the pandemic means we may be only a couple of years behind Sweden, it underscores the need for a joined-up plan for payments, as well as broadband and mobile networks, that leaves no one behind.
Switch from the offline economy to the online
We are seeing a huge shift online and some great success stories. The US payment firm Stripe found that businesses registering to transact online more than tripled.
However, the UK was slow to learn lessons from other countries and to provide life-saving finance to small businesses2. The market may have become more concentrated and less diverse as a result of the crisis.
The Singaporeans are offering digital acceleration grants to help get more small businesses online. At last year’s Mansion House, the Bank committed itself to championing a platform to boost access to finance for small businesses.
The importance of a data-driven approach
This would invest not only in collecting high-quality data, but also in improving systems and hiring outstanding talent to assess the information. This is just as true for finance and financial regulators.
Last year we showed that some staff members who supervise banks receive reading material that is the equivalent of reading twice the complete works of Shakespeare each week. Machine learning will strengthen the ability to spot irregularities, criminal activity and get a better view of the system’s overall health and emerging risks. The virus has amplified this need.
The financial industry is likely to accelerate sharply its use of data science. So too must the regulators, if they do not wish to be left behind.
Critical importance of operational resilience
Few would have thought the stock markets or the entire banking industry could have operated with 90 per cent+ of staff working from home. Financial institutions are likely to go all-in on shifting to cloud hosting and automation of processes. This is likely to have a lasting impact on branches, the number of jobs in finance and where they are located.
Climate change, like the pandemic, may upend the financial system
The sharp fall in energy prices raised the spectre of worthless “stranded assets” and project cancellations. For some, these had been theoretical constructs many years out. However, as lenders and bond investors saw the potential catastrophic loss in value, financiers are beginning to re-appraise their portfolios and I wager will take climate transition risks far more seriously.
Mr Carney led groundbreaking work to view climate risks as financial risks. Last Mansion House he announced climate stress tests for the financial system and 14 other central banks are following in his footsteps.
Last week the Bank of England published for the first time its own climate-related footprint3, another of our recommendations. All major UK financial institutions have also agreed to report voluntarily on Climate-related Financial Disclosures standards. But there are many who still don’t. Of the 7,300 listed firms in Refinitiv’s database, according to its chief executive David Craig, 57 per cent still don’t disclose their direct and indirect CO2 emissions. It is time to make mainstream disclosure mandatory, as we argued last year, and the pandemic will prompt these disclosures to become mandatory.
The transition to a low-carbon economy poses risks and opportunities. Investors, lenders and insurers need a crisper view of how companies will fare as the environment changes, regulations evolve, new technologies emerge and customer behaviour shifts. Without this information, financial markets cannot price climate-related risks and opportunities effectively.
The pandemic is creating enormous turmoil, but the future of financial services looks more digital and greener by the day.
