Addressing the environmental impact of the digital future of financial services

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 minimization and circular economy objectives as measures of performance. For others, reporting requirements regarding energy consumption will be essential, along 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 been firmly at the center 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 stake proof are available and well embedded within the decentralized finance ecosystem. It has been suggested that stake proof 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 organization; how an organization 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.

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