Green growth: Unlocking sustainability opportunities for retail banks (2024)

A recent survey by McKinsey shows there is a meaningful and growing appetite among American consumers for climate-linked financial products—but consumers need further education and advice to make informed buying decisions, and providers need to differentiate themselves from the pack. Generic environmental, social, and governance (ESG) offers will not be enough to win in this changing landscape (see sidebar, “About the survey”).

Here are five insights from the survey and their implications for financial institutions:

1. Demand for green financial products is both strong and broad—and is not limited to a niche segment

Nearly 40 percent of US consumers report interest in enrolling in a climate-linked financial product (Exhibit 1). The survey referred to these products specifically (for example, a green checking account or a climate-screened index fund), not as generic sustainability or ESG products. Of the interested consumers, the majority see this as a potentially major change in behavior, rather than a passing curiosity; two in three would allocate more than 40 percent of their savings or monthly credit card spending to a green retail banking product.

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The segment of interested consumers went well beyond high-earning city dwellers—in fact, consumer interest is not highly correlated with geography or income. For example, 24 percent of these interested customers live in rural areas, which is roughly equal to the share of the total US population living in rural areas, according to the US Census Bureau (Exhibit 2).1“Nation’s urban and rural populations shift following 2020 Census,” US Census Bureau, March 10, 2023. Likewise, interested consumers were not limited to the top end of the market—for instance, the balance size of savings accounts was roughly the same among consumers interested in green savings accounts as it was among those who weren’t interested in the accounts (Exhibit 3).

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2. Green offerings are a business opportunity for financial institutions, not a concession

Many green financial products are designed and sold as “concessionary” offerings—for example, discounts on borrowing for electric vehicles or enhanced rewards on a credit card. One side effect of this approach is that concessionary products, because they are less financially accretive, tend not to scale into attractive businesses.

However, our research shows that in many instances, consumers are willing to pay more for climate-linked financial products, especially in the context of savings, investing, and personal advice, if those products create measurable or demonstrable impact in exchange—but that can be a big “if.”

We observed this in the case of a green savings offering, where consumer deposits are ring-fenced for lending activity to sustainable borrowers. Up to 40 percent of consumers said they would choose a green savings account with an annual percentage yield (APY) that was 20 percent lower than a traditional savings account. A quarter of consumers said they would take an account with a 60 percent lower APY. This research was carried out in late 2022, when national savings rates had already increased, and these impacts therefore implied relatively meaningful financial trade-offs.

We saw the same phenomenon with respect to climate-linked investments. ESG funds have for years charged higher-than-average fees. However, the emerging opportunity is not for derivative ESG offerings. The opportunity would seem to be to create more specific, actionable, climate-linked products that connect to both an investment thesis and a thesis of societal benefit (Exhibit 4).

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3. Consumers are eager for advice and support from their financial partners

Consumers are often overwhelmed and confused by the transition to more sustainable ways of living. They are inundated with offers—such as rooftop solar systems, electric vehicles, electric heat pumps, insulation upgrades, sustainable investment products, and personal carbon calculators—but they do not have easy access to quality technical and financial advice on how, or whether, to incorporate these offers into their lives.

This is a space where banks are well positioned to serve their customers; for instance, two in three consumers would rather partner with their bank on financing a solar panel purchase than work directly with a solar panel installation company. Consumers may prefer banks because of perceived trustworthiness, perceived expertise, existing relationships, and the perception that many of these decisions—whether investing in a 401(k), buying an electric vehicle, or replacing an old furnace—will fundamentally be investment decisions that naturally require a thoughtful financial analysis (Exhibit 5).

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4. Consumers need to be educated—they may not yet have strong perspectives about which green offerings best suit their needs

While consumer interest in climate-linked financial products is genuine, consumer understanding of those products—the types of products, their impact, their benefits, etcetera—is quite low. Financial institutions will need to educate customers on the climate and financial-value proposition of their offerings, both to frame the appeal of those offerings and to direct consumers toward products that suit their needs.

In our survey, we showed consumers four different value propositions associated with a green savings account (Exhibit 6). The consumer response to the four different product offers was almost evenly split. This might indicate truly even preferences across all four types, but often such a result is consistent with consumers not understanding the product offer deeply enough to express a real preference. This same phenomenon of even distribution across three very different product offers repeated itself with respect to investment products.

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As financial institutions create more offers in this space, it will be critical that they educate customers on those offers. But it is also critical that these product offers be robust in their claims on climate impact—risk modeling and reputational risk for these products must be tightly managed. To ensure the development of a sustainable and inclusive economy, sustainability-related claims need to be backed by genuine actions.

5. Consumers do not yet differentiate between banks on climate topics, leaving an opportunity for banks to stake a claim as credible, innovative, and leading in this emerging market

Across banks, there is almost no separation in how consumers perceive climate offerings and a bank’s performance on climate commitments. According to multiple indicators of consumer confidence, few if any players truly stand out as a green leader (Exhibit 7).

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We asked consumers four questions about their financial partners’ green credentials. No bank scored higher than 59 percent across any of the questions, and the average scores are all well below 50 percent, ranging from 24 percent to 42 percent.

Even after five-plus years of green efforts, including paperless billing and social responsibility pushes, financial institutions have yet to establish themselves as credible partners on the climate transition.

Firms can start working now on defining and communicating an engaging, accessible climate brand to support their product and service ambitions, or risk remaining in the middle of the pack.

Capturing the green opportunity

Some financial institutions are already thinking creatively about capturing the green opportunity. For example, one mortgage lender has included an option for rooftop solar installation and financing as a standard part of its home purchase package. One wealth management firm has developed targeted investment products focused on specific value-creation hypotheses for the climate transition, rather than generic ESG or impact investment products. Another wealth manager is conducting personal balance sheet risk assessments for clients that incorporate climate risk into personal property and assets.

There are a few steps we believe financial institutions can take right away to begin to capture the opportunities:

• Find product market fit by identifying a real customer need that can be served in a unique way with a financial product—and quickly conduct tests to understand discrepancies between consumers’ stated interest and actual behavior.
• Identify the steps needed to build, launch, and scale climate products—including data, technology, operations, underwriting, risk, marketing, and sales considerations.
• Design the organizational operating model to support the new product, including dependencies on the “core” (for example, technology, distribution, and risk).
• Determine the markers of success in the first two to three years (before most new products break even).

Changing policies, expanding incentives, and rapidly decreasing technology costs have the potential to transform the way Americans live. Now, more than ever, financial institutions are well positioned to partner with consumers on their decarbonization journeys and could reap the strategic and financial benefits.