Environmental, Social, and Governance (ESG) goals are critical business considerations for organizations across sectors including banking. There is increased regulatory scrutiny on this front, and failure to comply with emerging standards and frameworks can result in significant fines as well as damage to brand image and reputation. Over the next five years financial services providers and institutions are expected to put ESG at the heart of all their strategies with a clear focus on meeting consumer and business expectations on this front.1 Pricing strategies can be an effective tool for banks to meet their ESG goals as these can incentivize customer behavior that supports sustainability and social responsibility. With the increased adoption of ESG products by both corporate customers and consumers, banks have started creating a comprehensive product & business strategy for ESG products, with pricing as a key differentiator.
Here are some ESG-focused pricing strategies that can be used by banks:
Green Pricing
This is a pricing strategy that involves offering incentives to customers for adopting sustainable products or practices. Over half of European online customers are willing to pay more for sustainable or environmentally friendly products, indicating a strong demand for green pricing.2 Banks can offer lower interest rates, reduced fees, or rewards to corporate customers for using sustainable products or engaging in sustainable behavior, such as recycling or reducing carbon footprint. By implementing green pricing, banks can not only encourage sustainable behavior but also create a competitive advantage by catering to customer preferences. An excellent example of green pricing is a green mortgage offering launched by Triodos Bank in Netherlands called Bio-based Mortgage.3 This links mortgage rates to the green credentials of the home, or in their words – the greener the home, the lower the mortgage. ABN AMRO’s Green Savings Account, Leeds Building Society and NatWest’s Green Mortgage offerings are other examples.4, 5, 6
Carbon Pricing
Carbon pricing incorporates the cost of carbon emissions into product pricing. By pricing products according to their carbon footprint, banks can incentivize customers to choose those with a lower carbon footprint, such as electric cars or renewable energy sources. According to the World Bank, over 70 carbon pricing initiatives have been implemented globally, covering 23.17% of global greenhouse gas emissions.7 By implementing carbon pricing, banks can not only contribute to climate change mitigation efforts but also create a revenue stream from carbon credits. Recently, C6 Bank launched a first of its kind tool in Brazil that calculates the carbon footprint of each customer (individuals and companies) based on day-to-day expenses made with debit and credit cards.8
Socially Responsible Pricing
Socially responsible pricing incorporates social responsibility considerations into product pricing. Banks can offer discounts or lower interest rates for products that have a positive social impact, such as affordable housing loans or microfinance. According to a survey by Deloitte, 63% percent millennials are more likely to buy from companies that reflect their values, indicating a growing demand for socially responsible pricing.9 With this, banks can not only promote social inclusion but also attract socially conscious customers. One recent example is of Crédit Agricole, a large French bank, that launched a €300 million investment fund focused on the transition of agri-food companies in France and Italy to sustainable practices.10 Under this, agri businesses that are adopting more environmentally friendly practices will get financing at discounted rates.
ESG-linked Loans
ESG-linked loans link the interest rate of a loan to the borrower’s ESG performance. Banks can offer lower interest rates to borrowers that meet or exceed ESG performance metrics, such as carbon emissions reduction or gender diversity. Reports indicate that approximately 70 percent of new corporate loans in 2022 had an ESG component.11 By offering ESG-linked loans, banks can not only encourage sustainable business practices but also differentiate themselves in the market with innovative financing solutions. One example of this is the launch of sustainability-linked loans & bonds by a large French bank Societe Generale.12
Social Deposit Pricing
Social deposit pricing refers to the practice of offering differentiated interest rates or fees based on the social impact or purpose of the deposited funds. It involves incorporating social or environmental criteria into the pricing structure of deposit products. By incorporating social deposit pricing, banks can promote and encourage investments in projects and initiatives that contribute to social, environmental, or community welfare. It allows customers to align their financial resources with their values and support positive change through their deposits. One such example is the Cooperative Bank of Kenya’s Chama Account.13 Chama is a Swahili word that means a group or association. The Chama Account is designed to support social groups, such as investment clubs, self-help groups, and welfare groups.
In conclusion, pricing strategies can be a key tool for banks to meet their ESG goals by incentivizing sustainable behavior and social responsibility. By implementing green pricing, carbon pricing, socially responsible pricing, and ESG-linked loans, banks can contribute to sustainable development. They can also create competitive advantage and new revenue streams. As the climate crisis escalates, key stakeholders, including customers and investors, are holding organizations accountable for their efforts on sustainability. And the repercussions of not meeting sustainability requirements can range from fines to damage to reputation and image. It is crucial for banks to align their pricing strategies with their ESG goals and communicate their value proposition to customers to ensure long-term profitability and customer satisfaction.
