Unlocking the Potential of Sustainable Banking: Capitalizing on the Future of ESG Investing and Beyond-Banking Offerings

As the global economy slows, the difference between banks will continue to widen. In the event of a long-term recession, return on equity for banks globally could fall to 7% by 2026, with European banks facing even more challenging prospects. Banks in Emerging Asia, China, Latin America, and the United States are estimated to account for 80% of the $1.3 trillion in global banking revenue growth between 2021 and 2025.

The banking sector as a whole is undervalued compared to other industries, with global market capitalization for the sector dropping from $16 trillion in 2021 to $14.5 trillion by May 2022. Half of this valuation is from traditional banking institutions, while the other half is from specialists and fintechs, which has increased from 30% five years ago. The low profitability of the banking industry and lack of future growth contribute to this undervaluation, with only one in six banks considered "North Stars" with high profitability and growth.

Banks now have an opportunity to increase their resilience and secure future growth by optimizing their balance sheets and costs, improving their risk management practices and technology infrastructure, and transitioning to more future-proof platforms. Banks also need to embrace new growth trends such as ESG investing, beyond-banking offerings, and advanced analytics.

Sustainable Finance: A Major Theme for Banks

Sustainable finance has grown rapidly from almost nothing to become a major theme for banks. It now accounts for 11% of the bond market volume and 13% of the global syndicated loans market volume. Europe historically led the issuance of sustainable debt instruments, but has since been overtaken by North American issuers. The next phase will still focus on low-emissions power generation, but other aspects of the energy transition will also become priorities, including electrification, energy transmission and distribution infrastructure, and emissions reductions.

Banks have an opportunity to finance the $820 billion in direct financing needed for net-zero emissions goals and facilitate an additional $1.5 trillion in investments for corporates between 2021 and 2030. However, they need to address issues such as credit risk, complex project economics, and a lack of established standards for sustainability-related financial products.

"The next era of sustainable finance presents new opportunities for corporate and investment banks, lenders, wealth managers, and others who are willing to embrace the challenges."

"Sustainable finance has become a major theme for banks, growing from almost nothing to now accounting for 11% of the bond market volume and 13% of the global syndicated loans market volume."