In the face of the climate crisis, companies across the globe are focusing on sustainability. The banking sector is no exception.
Banks play a crucial role in the fight against climate change. In 2020, the U.S. financial sector was responsible for financing roughly 1.97B tons of carbon dioxide. If U.S banks and asset managers were a country, they would be world’s 5th largest emitter - just ahead of Russia. As it stands today, even the most well-intentioned individuals and corporate entities can find their efforts undermined via passive investment into the fossil fuel industry by their banks.
However, the banking landscape is changing quickly. Green finance initiatives are gaining traction among investors and consumers alike - and are even paying dividends.
As global attention increasingly turns towards those stepping up to the climate challenge, financial institutions are pivoting to a new modus operandi grounded in green finance initiatives and sustainable banking practices.
Below, we’ll discuss the history of green banking and examine how green finance initiatives are reshaping the banking sector.
Examples of Green Finance
According to the World Economic Forum, green finance is “any structured financial activity that’s been created to ensure a better environmental outcome.” This structured financial activity may consist of:
Sustainable investments
Green bonds and loans
Micro-lending to developing communities
Eco-loans for electric vehicles
Lower mortgage rates on eco-friendly homes
Green savings deposits
Carbon footprint calculators based on consumers’ spending data
Green banks also support investments into climate-change mitigation solutions, such as:
Renewable energy
Energy efficiency
Air pollution reduction
Environmental conservation
Water quality improvements
Improved food security
Green job creation
Climate-resilient development
Net-zero carbon emission initiatives
By contributing capital to these types of sustainable projects, green banks can fight climate change while securing economic returns for investors.
The History of Green Banking
Green banking started in the early 2000’s with the adoption of the Equator Principles by a handful of major global banks. The Equator Principles marked the first set of standards for environmental and social risk management in projects to ensure that the projects they finance are developed in a socially responsible manner and reflect sound environmental management practices.
Since then, a growing number of green banks and green finance initiatives have cropped up across various countries. According to a report from Reuters, global companies took in a record $859 billion dollars in sustainable investments in 2021. And this number is only expected to rise in the coming decades.
Why Is Green Banking Growing In Popularity?
Historically, the sole goal of banks and other financial institutions was to earn a profit.
Today, there is mounting evidence to support that sustainable finance actually provides a better return than traditional investments. A study evaluating 2000 individual performances of ESG asset classes and regions found that nearly half exhibited a positive relationship between ESG and corporate financial performance. In response, investors are increasingly attuned to their social and environmental implications of their investments, in addition to the financial return.
Investors aren’t the only ones concerned with corporate sustainability—consumers are, too. Many consumers prefer to patronize organizations that put sustainability at the forefront of their operations. Over one-third of consumers are willing to pay more for environmentally-friendly products and services.
With these incentives in mind, banks that embrace green finance initiatives can enhance their investor interest and strengthen their consumer relationships. Moreover, emerging market trends speculate that “climate-smart investment opportunities” has the potential to grow into a $23 trillion dollar opportunity by 2030 - more than the value of all the companies traded on the New York Stock Exchange.
With trillions of dollars needed to fight climate change and with numerous climate milestones to hit in order to remain under the 1.5ºC threshold, green finance can help investment into and ultimately achievement of these ambitious and critical goals.
Government-Supported Green Finance Initiatives
Many green financial institutions have arisen organically in response to the threat of climate change and consumer demand. However, governments and regulatory agencies also play an important role in encouraging green financing.
For example, the United Nations has been helping various countries align their financial systems with sustainable development goals set for 2030.
These goals include:
Ending poverty and hunger
Protecting the planet from climate change and degradation
Managing natural resources sustainably
Encouraging prosperity through economic, social, and technological progress
Cultivating peaceful, inclusive societies
Some other notable organizations that promote green finance are as follows:
Network for Greening the Financial System (NGFS) – The NGFS is a group of central banks that focuses on addressing the risks to the climate and environment. It shares best practices for the financial sector and provides strategies to shift to a more sustainable economy
G20 Sustainable Finance Working Group – Established in 2016, the G20 Sustainable Finance Working Group addresses obstacles to green finance and develops solutions to them to increase green investments. It has also developed a roadmap for sustainable finance, reporting, and investment in alignment with the Paris Agreement.
UN-Sponsored Net-Zero Banking Alliance (NZBA) – The NZBA brings together major international banks, including some Latin American and Caribbean banks, to pursue net-zero lending and investment portfolios. Its goal is to reach net-zero emissions by 2050. This alliance currently includes over 40% of global banking assets.
Sources:
World Economic Forum. What is green finance and why is it important https://www.weforum.org/agenda/2020/11/what-is-green-finance/
Equator Principles Association. The Equator Principles. https://equator-principles.com/about-the-equator-principles/
Investopedia. The 3 Pillars of Corporate Sustainability. https://www.investopedia.com/articles/investing/100515/three-pillars-corporate-sustainability.asp
Business Wire. Recent Study Reveals More Than a Third of Global Consumers Are Willing to Pay More for Sustainability as Demand Grows for Environmentally-Friendly Alternatives. https://www.businesswire.com/news/home/20211014005090/en/Recent-Study-Reveals-More-Than-a-Third-of-Global-Consumers-Are-Willing-to-Pay-More-for-Sustainability-as-Demand-Grows-for-Environmentally-Friendly-Alternatives
Settle in Berlin. Tomorrow Bank review: are green credentials enough to sign you up https://www.settle-in-berlin.com/german-bank-account/tomorrow-bank-review/
United Nations. Transforming our world: the 2030 Agenda for Sustainable Development. https://sdgs.un.org/2030agenda
NGFS. Origin and Purpose. https://www.ngfs.net/en/about-us/governance/origin-and-purpose
G20. G20 Sustainable Finance Working Group. https://g20sfwg.org/#about_us
United Nations Environment. Net-Zero Banking Alliance. https://www.unepfi.org/net-zero-banking/