Sustainable banking: more important than ever in 2020

All over the world financial institutions and governing bodies are recognizing the need for a more inclusive, forward-looking financial system.

Sustainable banking: more important than ever in 2020


With 2020 just around the corner, a phrase that is frequently invoked in the financial services sector is sustainable banking. As a result, it is important to understand what this phrase exactly means and how banks and governments are approaching the topic.

Sustainable banking, or sustainable finance, refers to any form of financial service integrating environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large.

Leading financial services providers are slowly realizing the importance of adapting their business practices to meet the most pressing needs of our time. This includes promoting energy efficiency, making societies more inclusive, and tackling global inequality.

Due to their critical role in society, banks can have an outsized influence on the trajectory of events. Crucially, they are beginning to recognize that sustainability initiatives are not only good for the planet, but are good for business as well.

The proposed realignments are significant and can be complex. Banks must define entirely new metrics by which they judge business performance. One such metric is the Paris Agreement Capital Transition Assessment, developed by the Second Degree Investing Initiative, a think tank based in Paris, France. In order to increase capital flows to green, climate-friendly and inclusive projects and sectors, the initiative helps financial institutions integrate climate objectives and long-term climate-related risks into their portfolio management.

ClimateSeed is a social business launched BNP Paribas that provides a user-friendly digital platform to allow organizations to offset unavoidable greenhouse gas emissions by contributing to United Nations Sustainable Development Goals projects all around the world.

The movement towards sustainable banking is not being driven solely by the private sector, but is joined by a widespread recognition by national governments of an urgent need to act. To that end, there has been real progress by financial sector regulatory agencies towards sustainable policy initiatives.

In October, the International Finance Corporation, part of the World Bank Group, released its second Sustainable Banking Network Global Progress report. The report documents the significant steps taken by emerging market countries all over the world toward implementing national sustainable finance policies. 22 emerging countries have such policies in place, demonstrating significant progress from the first report published two years ago.

Another major sustainable finance initiative comes from the European Union. The EU set up a technical expert group to develop a Green Bond Standard which serves as a benchmark for low-carbon investment strategies. From their report published earlier this year, they listed five benefits of green bonds: converting bond markets to green, enabling corporate and institutional transition, making green and climate investible, progressing the policy debate on green finance, and expanding the green loan market.

The standard provides for a clearer understanding and validation of green projects. With the framework, the EU is creating higher environmental accountability and ultimately increasing the flow of capital to responsible investing. 

No longer does profitability need to be sacrificed in the pursuit of prosperity. In fact, banks that lack a clear plan to address the most pressing issues of our time risk falling behind. In an age of increased awareness and sensitivity to social and environmental issues, sustainable banking practices can serve as a real competitive advantage. A paper published by three researchers from Cyprus International University in 2018 showed that sustainable banking practices positively and directly affected bank loyalty and corporate image.

Environmental and societal trends are showing no signs of slowing down in 2020. Customers value companies and banks that are mindful of the planet, people, and profits. It is time for financial institutions to shape a future we can all live in: a future that is inclusive, sustainable, and just.

Efma members, connect to our innovation portal here to explore more CSR projects from the community.

Keywords

Corporate social responsibility (CSR)

Geography

International