Addressing the environmental impact of the digital future of financial services

Out-Law Analysis | 23 Jun 2022 | 2:55 pm | 3 min. read

There are two inescapable themes which have arisen in the financial services world over the past few years – digitisation and the environment.

These two imperatives are increasingly interacting, and financial services firms must navigate their way through the changes taking place in a way that continues to advance their business objectives and impact the environment in a positive way.

Technology, energy consumption and financial services

As financial services become more digital, there is a growing need to process and store more and more data – whether to engage and communicate with customers, perform back-office operations or enable new, often AI-enabled, products and services to develop. Significant increases in data processing activities can correlate to substantial additional energy consumption.

There is therefore a real need for financial services firms to align their digital transformation objectives with their key sustainability goals. This alignment may be achieved, in part, through reshaping assessments of suppliers of technology and other digital services. 

When procuring new technology or digital services, sustainability can be addressed at the pre-contracting stage. There is growing recognition that due diligence questionnaires can be expanded to account for the environmental impact a technology solution may have.

There is a real need for financial services firms to align their digital transformation objectives with their key sustainability goals

At the contracting stage alignment between digital and sustainability goals can also be addressed. For example, performance indicators and other means of assessing a supplier’s service levels can be developed which factor in sustainability concerns.

For some services, it may be appropriate to set performance indicators which take into account net zero carbon, waste minimisation and circular economy objectives as measures of performance. For others, reporting requirements regarding energy consumption will be essential, together with opportunities to request additional information where necessary.   

As many financial services firms have now made public net zero commitments, reporting on technology use will form part of the measurement and delivery of these goals. Collecting and improving data relating to technology use across the business and supply chain are therefore areas which need close attention.

Cryptoassets and the environment

Cryptoassets have been viewed at times by some as central to the future of finance – as paperless alternatives to traditional currencies and other assets. However, the environmental impact of cryptoasset ‘mining’ has for some time now firmly been at the centre of the debate about financial services and climate change. Digiconomist’s Bitcoin Energy Consumption Index, for example, suggests that the amount of energy required for a single bitcoin transaction is equivalent to the power consumption of the average US household over 48.5 days.

Many cryptoassets, including bitcoin, are mined, which requires ‘proof of work’, a process involving the calculation of unique alphanumeric codes to validate transactions. However, alternative means of issuing cryptoassets also exist which require less energy consumption, such as ‘proof of stake’ methods. These methods have grown in popularity over a number of years, in part due to their potentially lower environmental impact.

Several forms of cryptoassets generated through proof of stake are available and well embedded within the decentralised finance ecosystem. It has been suggested that proof of stake could reduce bitcoin’s energy consumption by over 99.9%.

Further, the World Economic Forum has also pointed to the ways in which cryptoasset mining can support the energy system – by using excess energy usefully, or by turning their systems off when there is a spike in energy demand.

Technology, the environment and the regulators

In the UK, for financial services, environmental regulatory initiatives are being led by the Financial Conduct Authority (FCA). The FCA has brought in a number of mandatory disclosure requirements, which now apply to most standard listed public companies as well as asset managers, life insurers and pension providers it regulates.

The disclosure rules mean an institution in scope must set out whether it has disclosed, in line with Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, its governance of climate-related risks and opportunities; the impact of climate-related risks on an organisation; how an organisation manages climate-related risks; and any metrics or targets used to assess climate-related risks and opportunities.

The FCA has said it is seeking to make sure that its regulatory approach creates an environment in which market participants can manage the risks from moving to a more sustainable economy and capture opportunities to benefit consumers. The opportunity exists now for financial services firms to assess the extent to which their dependence on technology and digital services can be assessed in order to promote greater sustainability.

Rewiring financial services
Digital transformation is accelerating in the financial services sector, particularly in the wake of the global pandemic. As the sector moves towards new digital ways of working and engaging with customers, financial institutions and service providers need to make significant changes to respond to customer expectations. Digital is also changing financial products and services and can have significant impact on sustainability. We investigate the legal and regulatory landscape and highlight the digital opportunities for change.
Rewiring financial services