Over the past 18 months, there has been rapid acceleration in the launch of green retail financial services products. In the mortgage market alone, recent research from Defaqto suggests an 18% growth in the number of green mortgages on offer, driven by anticipated changes in law and regulation affecting the buy-to-let mortgage market.
This trend looks set to continue. According to our recent report, Safety in numbers: levelling the playing field for green finance, more than half (53%) of firms surveyed plan to launch a green finance product before the end of 2022.
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But the report also reveals that cost is a major challenge for firms, and that more incentives and support for the industry is needed to ensure a pace of change commensurate with the speed at which the financial services industry needs to align itself with the environmental crisis.
With a raft of new product launches on the horizon, retail financial services firms looking to launch a new green financial services product should be especially aware of the following three considerations:
Getting your data in a row
If regulation is the great equaliser in green finance, then data could be the great differentiator. According to our research, the key priorities for firms so far have been the establishment of a strategy (61%), data gathering (50%) and performance measurement (42%).
Putting the right data gathering processes in place at an early stage is crucial to being able to openly disclose and report on the environmental benefits associated with the product.
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By GlobalDataFor example, green mortgages will typically offer preferential terms to properties which meet certain environmental standards (or where work is undertaken to improve the energy efficiency of the property), so it is important for lenders to be able to gather data on the energy efficiency of the property as part of the underwriting process to confirm eligibility of the product.
Perhaps to assist with data analysis, 70% of firms are exploring new technologies to support their green finance strategy, while a further 24% are considering doing so by mid-2023.
Transparency is key
Developing a framework to keep pace with speed and scale of change in the policy, legal and regulatory landscape relating to green finance is key. A large and growing number of financial products are marketed as supporting climate and environmental objectives and an increasing number of businesses are eager to highlight their sustainable businesses against a background of evolving standards.
The UK Green Taxonomy is a core foundation to setting the bar for investments that can be defined as environmentally sustainable, making it easier for companies and investors to understand the environmental impact of their decisions and to avoid the risks associated with consumer harms such as greenwashing. Consultation on the technical screening criteria, that form a central part of the taxonomy is expected imminently.
With the Competition and Markets Authority also having issued its Green Claims Code late last year, which was designed to help business understand and comply with their existing obligations under consumer protection law when making environmental claims, transparency to consumers about the environmental benefits of retail financial services products remains a priority.
Seizing the opportunities presented by growing consumer demand
Research across the retail financial services sector continues to identify a significant growth in demand from consumers for financial services products/providers that align with their values, particularly from an environmental perspective.
What’s clear from this research is that capturing this demand has significant upsides and there are substantial opportunities for growth. Such growth is already visible across the retail financial services sector with a recent YouGov survey showing that 57% of UK consumers are willing to pay more for environmentally friendly products, increasing up to 69% of consumers for the younger generations.
Over the last few years we have seen significant shifts in the landscape for green finance and there are no signs of this slowing with governments, regulators, industry and investors all driving the substantial growth in the range of green finance products in the market.
Ready availability of private finance is critically important to meeting global environmental targets. As more data continues to emerge about the market opportunity as well as the legislative, regulatory and ethical drivers, green finance will represent a key product development trend in the retail financial services sector this year.
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