Green banking
Green banking is an emerging financial paradigm focused on funding sustainable business practices and promoting environmental responsibility within the banking sector. Unlike conventional banks that prioritize profit maximization without regard for environmental effects, green banks aim to consider both financial returns and the environmental impact of their investments. This shift has been driven by increased public awareness of environmental issues such as climate change and resource depletion, leading to a demand for investment in businesses that contribute positively to sustainable development.
Specialist green banks, which began to emerge in the 1980s and 1990s, finance ventures in renewable energy and other environmentally friendly sectors, often supporting projects before they gain wider acceptance among traditional banks. Green banks operate on a "double bottom line" approach, balancing financial performance with social and environmental considerations. They are also part of a broader trend towards socially responsible investing, which evaluates potential investments based on various corporate social responsibility metrics.
Transparency is crucial for maintaining trust with environmentally conscious investors, prompting many green banks to publicly disclose their investment portfolios. Initiatives like the Dow Jones Sustainability Index encourage businesses to adopt sustainable practices by providing them with recognition and potential investment opportunities. Overall, green banking reflects a growing commitment among financial institutions to align their operations with broader sustainability goals, responding to the needs and values of modern investors.
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Green banking
Summary: Green banking is the process of funding sustainable business enterprises and providing financial incentives to economic agents to follow sustainable business practices.
Although banks may cause limited environmental impact through their internal day-to-day activities, they are inextricably linked to the commercial activities they fund, which may include businesses that inefficiently use energy and cause significant environmental damage. Traditionally banks have a sole concern to maximize profits through investing depositors’ funds in ways that gain the highest returns, irrespective of environmental damage that may be caused from the businesses in which they invest. Since the 1980s, environmental concerns have become increasingly mainstream as public awareness of issues such as biodiversity degradation, global warming, and fossil fuel depletion has increased. This awareness has stimulated calls for sustainable development, which aims to enhance the welfare of human beings and the natural environment in ways that do not restrict possibilities for future generations. In the early 2020s, about twenty-seven green banks operated in twelve nations around the world.
Enhanced public awareness of energy and environmental challenges has been matched by an increasing number of bank depositors who are concerned with more than simple financial returns. These environmentally conscious investors have required banks to invest funds in business enterprises that positively contribute to sustainable development and do not cause further pollution and wasteful energy consumption. Specialist green banks emerged during the 1980s and 1990s in response to the escalating availability of capital from these environmentally conscious investors.
Green banks are distinct from conventional banks in that they are concerned with a double bottom line and not simply maximizing financial returns on investment. Green banks are concerned with the environmental impact resulting from their investments, and they seek to support business enterprises that have a positive impact on sustainable development. These specialist green banks fund environmentally friendly investment opportunities in fields such as renewable energy and organic farming. Green banks have financed renewable energy projects long before conventional banks have perceived them as legitimate investment opportunities. This has enabled pioneering green projects to grow into viable businesses and contribute to the development of renewable energy industry and the wider green economy.
Green banking is part of a larger movement of socially responsible investment, which aims to assess investments along a range of corporate social responsibility indicators and not simply in terms of their environmental impact. Green banks such as Triodos Bank in the Netherlands and the Cooperative Bank in the United Kingdom assess investment opportunities in terms of their positive social contribution in addition to their environmental impact—the double bottom line referred to earlier.
The growing availability of social and environmentally conscious depositors has caused many conventional banks to follow suit, establishing socially responsible investment funds that evaluate investment opportunities not only in terms of potential financial returns but also in terms of corporate governance, environmental, social, and economic factors. These investment funds may differ from specialist green banks in that they do not exclusively seek sustainable investment opportunities, but choose to invest in business enterprises that perform well across a range of social and environmental indicators. These funds invest in business enterprises with strong social and environmental performance in their industry—for example, a train manufacturer that uses energy-efficient manufacturing techniques and supports a philanthropic community program.
A key challenge for green banks and socially responsible investment funds is maintaining the trust of environmentally conscious investors. Investors do not want their deposits used to fund business enterprises that simply use public relations to build a perception that they are green. This challenge has caused transparency to be a key facet of green banking, and a number of green banks have made their investment portfolios publicly available, giving environmentally conscious investors the opportunity to self-audit the green credibility of business enterprises that have benefited from bank loans. Green banks have a responsibility to evaluate companies on the basis of their environmental performance and avoid issuing loans to poor performers—or risk damaging their reputation as a green bank.
In 1999, the Dow Jones Sustainability Indexes (DJSI) were launched in collaboration with Switzerland’s SAM Indexes. The DJSI track the performance of leading sustainability-driven companies worldwide, bridging the gap between environmentally conscious investors and companies implementing sustainable business practices. The indexes grade and rank companies’ sustainability performance based on the SAM Corporate Sustainability Assessment. Companies are evaluated along economic, environmental, and social criteria to determine their sustainability performance.
The DJSI use a best-in-class approach and pick firms in the top 30 percent of performers in a specific industry to be included in the index. Banking mechanisms such as the DJSI and FTSE4Good Index, based in London, provide businesses with powerful economic incentives to become greener. Companies that are able to obtain high rankings on these indexes can attract attention from sustainable investment funds and enhance their business valuations.
Bibliography
Bouma, Jan Jaap, Marcel Jeucken, and Leo Klinkers. Sustainable Banking: The Greening of Finance. Sheffield, UK: Greenleaf, 2001.
Cowton, Christopher J., and Paul Thompson. “Do Codes Make a Difference? The Case of Bank Lending and the Environment.” Journal of Business Ethics 24, no. 2 (2000).
"Green Banks." Environmental Protection Agency, 22 Apr. 2024, www.epa.gov/statelocalenergy/green-banks. Accessed 31 July 2024.
Jeucken, Marcel. Sustainable Finance and Banking: The Financial Sector and the Future of the Planet. Sterling, VA: Earthscan, 2001.
Scholtens, Bert. “Corporate Social Responsibility in the International Banking Industry.” Journal of Business Ethics 86, no. 2 (May 2009).
Simpson, Neil. "Sustainable Banking Stories That Give Us Hope." Bank Green, 29 Nov. 2023, bank.green/blog/sustainable-banking-stories-that-give-us-hope. Accessed 31 July 2024.