The Road to Net-Zero: The revenues cross-over chart that's got banking executives thinking

This blog is the story of two charts—both with far-reaching implications for the future of finance services. 

You may have seen the first chart already. It shows what we all want and hope will happen: the transition to carbon neutrality via a progressive reduction in greenhouse gas emissions between now and 2050. If they don't reach zero—and they won't—residual emissions will be offset by carbon capture technology or credible systems of carbon credits (giving us the famous 'Net Zero'). If and when we reach that point, we'll be emitting no more carbon than can be absorbed by the planet's carbon cycle.  

While plenty could happen between now and 2050 that could prove this chart wrong, the direction of travel is clear. Governments, investors, inventors and the public are all looking for ways to make a success of net zero. The role that carbon has been playing in energy, transport and agriculture (to name just three) will need to be replaced. For the world economy to make that transition, we're going to need a lot of novel business models and a mass of new technologies.  

You can query the exact timing, but the trend is hard to dispute.  

Our second chart takes this exact same trend and applies it to a bank's revenues. Every tonne of reduction in global GHG emissions implies a drop in the revenues a firm can earn from servicing GHG clients (defined as companies whose business models depend on emitting GHGs). The only way a bank or insurer can make up for that lost business is by growing revenue from clients whose business models are not dependent on carbon. 

In other words, however fast you think the red line will fall, that’s how fast the green line needs to rise.

Banking and insurance executives can view this long-term trend in one of two broad ways. The first approach is Wait And See (let's shorten it to WAS). Under the WAS approach, financial services firms can afford to sit back and watch as their clients undertake their transitions. Make no mistake, though, we’re talking about significant, multi-layered changes. Whether you're a retail customer remortgaging your property to boost its EPC rating or a global logistics firm trying to decarbonise the value chain, the truth is you're in this for the long haul.

A financial services firm could sit back and wait for its clients to transition. It could assume that the fall-off in revenues from carbon-reliant business models will automatically be replaced as clients figure out what to do. And perhaps customers really do have no other choice except to stay loyal? Under this optimistic scenario, total revenues (the dotted line in our second chart) remain stable or even grow—because customers in the real economy all find a way to switch from one business model to another without any help from the FS industry. 

But are these assumptions realistic? Especially when many rival FS firms are choosing quite a different approach? 

We can shorten the second way to ACT (Assisted Client Transition). Under this approach, FS firms actively support their clients to decarbonise. They help them to evolve their business models, to engage with fresh incentives and laws, harnessing innovation and managing novel risks. They go out and earn new business and create markets where they don’t yet exist.

Now imagine you're a customer. You know full well you can give your business to a wide range of FS firms. As you implement your net zero plans, which kind of bank, insurer or asset manager is likeliest to earn your trust ? One that watches from the sidelines; or one that actively tries to help? 

We know from our recent survey of FS executives (The road to net-zero: acceleration tips) that firms which make a net zero commitment have a far keener appreciation of what it takes to decarbonise. That surely gives them an advantage in building up strong relationships with their clients.

Optimally serving those customers on their own net zero journeys requires wide-ranging changes in how an FS firm does business. The upside is the chance to replace the diminishing revenues from carbon-reliant business models with sustainable, long-term, profits. To do so, however, FS firms need to rethink their end-to-end processes. As our survey results show (see chart below), the fundamental sub-routines of finance are all now up for reappraisal.

From customer screening to corporate strategy, from planning to product design, there is a wall of work to do if FS firms want those transition revenues. Looking at the wider trends, though, do FS firms really have a choice? To the extent that the planet decarbonises, carbon-based business forms are likely to go extinct.  

So are you planning ahead for the cross-over, or hoping it takes care of itself? That's the question calmly staring out from our second chart.