What is Green Banking and What to Look Out For

what is a green bank
This post was last updated in 2023
 
There are so many terms that get thrown around in this space – green banking, eco-friendly banking, ethical banking and sustainable banking? What does it all mean and what do we need to keep an eye out for as consumers? 
 
In general, green banks have a strong focus on the environmental impact of their operations. They run in a way that minimises their carbon footprint and they engage in lending and investment activities that minimise negative impacts or maximise the positive benefits to the environment. 
 

In this blog post, I have gathered information from various research papers and financial institutions to delve into this further and address the following questions: 

This information will help you understand the different terms out there and allow you to set your own expectations on what a green bank should offer. 

What is green banking?

In general, green banks are environmentally focused. This can take many forms – from minimising the environmental impact of their operations, to offering eco-conscious products and services, to considering the environment in their investment and lending decisions. 

Naturally, green banks can vary in the extent they consider these aspects.
 
In defining “green banking” it helps to first consider the different definitions that exist for “green finance”. This is relevant since banking is a part of the financial sector and elements that make the financial sector “green” are also applicable to banking. 
 
A summary of the different definitions that exist for green finance was provided by the United Nations Environmental Program, in a paper where they defined the general concept as part of one of their inquiry papers. They noted the following definitions, offered by different financial institutions: 
  • People’s Bank of China: Policy and institutional arrangements that attract private capital investment into green industries
  • Government of Germany: An approach focused on the move towards low-carbon and resource-efficient economies
  • Indonesian Financial Services Authority: Support from the finance industry to achieve sustainable development
  • Organisation for Economic Co-operation and Development (OECD): Supports economic growth while reducing emissions, minimising waste and improving efficiency in the use of natural resources
  • Swiss Federal Ministry of Environment: Responsible investment which creates a positive environmental, social and governance impact
 
A specific definition for “green banking” was offered in the paper Green Banking: Going Green, which listed the following as features of green banking: 
  • Banks can help environment through automation and online banking. 
  • Green banking focuses on social safety and security through changing the negative impacts of the society. 
  • In financing, it always gives priority to investments / loans which consider risk factors regarding environmental conditions. 
  • It always cares for sustainable and green growth in industrialisation and for social purposes. 
  • It creates a congenial atmosphere inside and outside the bank. 
  • It considers the clients as its family members, and as such, guide and supervise the projects to reduce pollution and thus implement scientific methods in the real sense by implementing environmental due diligence (EDD) checklist. 
  • It reduces cost and energy, thus saving money and increasing GDP of a country. 
  • It changes the mental faculties of the officials and customers, in line with green sensibilities. 
  • It helps institutions, men and the nation in general live with dignity.
These are broad high-level descriptions.
 
But among them all, there is a common obvious thread – that green banks operate in a way that protects the environment and does not cause further harm. 

Functional, banks can do this by:

  • Conducting themselves in a way that reduces emissions, minimises waste and improves efficiency in the use of natural resources
  • Offering products and services that minimise waste and/or have a low carbon footprint 
  • Divesting away from activities that contribute towards climate change or negatively impact our natural resources 
  • Investing in activities that mitigate climate change and encourage efficient use of our natural resources
 
The last two points are what we need to keep in mind as consumers of banking services and products – when we give money to a bank, it doesn’t sit there, untouched. Banks use the money we give them to invest in projects that give them a sizeable return. 

 

Where that money goes matters. 

 
It can be used to fund projects that have varying impacts on the environment. Of course of late the heat (excuse the pun) has been on how much money banks provide to fossil fuel companies and this is closely tracked. 
 
 
how much do banks invest in fossil fuels
 
Instead of using their funds to invest in activities that cause further harm to the environment, green banks support environmentally friendly businesses and projects. They can be instrumental in the move towards renewable and clean energy sources. And they can play a key role in supporting sustainable land and water management practices.
 
So again, the expectation is that green banks consider the environment in their operations and in their lending and investment practices.
 
Unfortunately, since there are no standards around this, the extent to which a bank considers the environment before it can label itself as a “green bank” can vary greatly.

What is the difference between green banking, eco-friendly banking, sustainable banking and ethical banking?

Green banking and eco-friendly banking are often synonymous terms to encompass banking practices that take the environment into account. While sustainable banking is a broader term that generally encompasses social, economic, governance and environmental considerations. Ethical banking is banking with values – and these values can vary. 
 
The distinctions noted above between green banking and sustainable banking have been drawn from the definitions adopted by the United Nations Environment Program (UNEP), which was referenced previously. As discussed previously, while these definitions are around financial systems as a whole, there are still relevant when it comes to banking. 
 
The diagram below from the UNEP provides a good visual of the distinction between green finance and sustainable finance:
green banking
Source: https://unepinquiry.org/wp-content/uploads/2016/09/1_Definitions_and_Concepts.pdf
 
Green finance encompasses all things environmental while sustainable finance considers environmental, social, economic and governance issues. 
 
It helps to know what some of these terms mean: 
  • Environmental refers to the quality and functioning of the natural environment and natural systems
  • Social refers to the rights, well-being and interests of people and communities
  • Governance deals with the relationship between the company’s management, its board, its shareholders and other stakeholders and how that is managed. 
  • Economic refers to impacts on economic conditions at local, national, and global levels.
 
ESG reporting has been adopted by an increasing number of companies over the last couple of years. In fact, ESG reporting mandates have grown by 74% in the last four years.
 
A great summary of ESG and the different aspects considered under each arm is provided below, taken from a summary provided by the consulting firm Price Waterhouse Coopers:
 
ESG reporting
Source: https://www.pwc.com.au/environment-social-governance.html

 

This provides more context around the terms environmental, social and governance. 

 

The “economic” element of sustainable finance requires little explanation as it covers the more traditional elements that banks focus on – that being a focus on economic growth and profitability. And this is an essential element in sustainable development. 

 

As stated by the UK Government in 2001:

 
“Maintaining high and stable levels of economic growth is one of the key objectives of sustainable development. Abandoning economic growth is not an option.”
 
So sustainable banks would consider all four elements in their operations – the traditional economic considerations along with environmental, social and governance issues.  Banks can do this by applying traditional economic models, along with models that assess ESG risks, when making lending and investment decisions.
 
Green banking is a narrower term that considers environmental impacts alone, excluding social, governance or economic considerations. It encompasses strategies that tackle climate change, for example supporting efforts to reduce climate impacts and supporting investment in clean energy. It also involves supporting climate adaptation measures, which is concerned with how well an investment addresses our resilience to droughts, floods, fires and other climate-related natural disasters. Finally, it encompasses other environmental issues like waste and land management.
 
While this appears to draw a strong line, in reality, it is difficult to separate these concepts. Environmental considerations also have an impact on social, economic and governance issues. And no financial institution in this day and age is operating outside of any one of these considerations. So the terms sustainable baking and green banking can get intertwined. 
 
eco friendly banking
 
As for eco-friendly banking, it’s not a term used in the banking industry. The only bank that I found that has used this term is the financial services company Atmos, based in America. It prides itself on being eco-friendly and they define eco-friendly banking as follows:
  • Eco-Friendly Banks are Paperless
  • Eco-Friendly Banks are Transparent
  • Eco-Friendly Banks are Energy Efficient
  • Eco-Friendly Banks Support Sustainable Causes
It’s not a definition as such, but it gives you a clue about what it means to be an eco-friendly bank.
 
On the whole, eco-friendly banking is a term synonymous with green banking and like green banking, it can encompass broader environmental issues such as water, waste, pollution and land management, along with climate change mitigation and adaptation.
 
Ethical banking is something entirely different. It is about a set of governing principles, that can consider environmental, social and governance aspects, depending on the values adopted by the bank. 
 
The best definition I think is from the Corporate Finance Institute:

Ethical banking is a fairly broad term used to describe banks that operate around a set of principles and ideals that are used to govern how they interact with their clients, their community, and the world in general.

These principles are generally designed to promote social equity and sustainable development. As noted by Banktrack: “…ethical banks’ believe that profitability should not only be measured in financial terms, but also in social terms”.

 

Often you find that banks that are considered highly ethical, do not invest their money in the following activities:

  • Deforestation
  • Tobacco companies
  • Human Exploitations
  • Gambling
  • Pornography or sex slave trade
  • Animal cruelty
  • Weapons (including guns or other arms)
  • Fossil fuels and mining of precious minerals
Since it is values-based, the aspects considered necessary to be an “ethical bank” can vary depending on the values adopted by the bank. There is no universal definition – naturally!

 

But of note, some of the concerns for ethical banks can overlap with those that green banks focus on – such as deforestation, fossil fuels and mining of precious minerals.

 

This is why, on the whole, you will find all these terms – green, sustainable, eco-friendly and ethical – used interchangeably.

What is a green bank in Australia and what should I look out for?

A green bank in Australia can take two forms – it can be financing institutions that provide funds to clean energy projects. Or it can be banks that have integrated environmental considerations into their operations – from no longer funding fossil fuel projects to offering eco-friendly products. 
 

So yep, let me give you another definition of “green banking” to consider. 

 

Another way of defining a “green bank” is to narrowly define it as an institution that lends money to climate mitigation and adaptation strategies. This is a definition that seems to be relevant when looking at green banking in Australia.

 
Because if you search for “green banks in Australia”, you would be led to the Clean Energy Finance Corporation (CEFC). The CEFC claims to be the world’s largest green bank.
 
The CEFC is an Australian government-backed finance corporation that has committed to investing $10 billion in clean technologies and other climate change mitigation projects. 

The Clean Energy Finance Corporation is one of only a handful of national green banks in OECD countries. Its main purpose is to help scale up investment in clean energy projects, thereby contributing to Australia’s transition to a low-carbon economy. The Corporation has helped overcome barriers to private investment in low-emission solutions and cleantech.

 They are not a banking organisation that you and I as consumers would be concerned with – they are purely an investment bank.
 
In calling themselves “Australia’s largest green bank”, they are lining themselves with the following definition of green banking (taken from Finextra, an independent newswire and information source based in London): 

Green Banks are mission-driven financial firms that utilize innovative finance to speed the transition to sustainable energy and combat climate change. They are mission-driven, which means they care more about installing renewable energy than making a profit. They are continually developing a pipeline of clean projects and looking for market prospects.

This is what the CEFC is – a bank that loans money to projects that address climate change. 
 
So what about the other type of green bank? The kind that I have been referring to earlier in this blog post, that private consumers deal with for their banking needs? 
 
Thankfully there are some organisations out there that have independently assessed Australian banks to determine which can be considered “green”. 
 
Finder is one assessment body we can rely on. Each year they conduct an assessment to determine Australia’s green bank of the Year. The Finder Green Awards look at factors like “greenhouse gas emissions, renewable energy use, waste management and more”. 
 
They adopted a broad definition of green banking, as noted in the previous section. They define green banking as follows: “Green banking refers to any banking activities that are done in a sustainable way that aims to reduce their impact on the environment.” 
 
What is interesting are the assessment factors they consider in deciding who wins the awards. The criteria they consider are summarised in the table below:
Source: https://www.finder.com.au/australias-green-banks
 
That is a nice succinct summary of what makes a bank “green” and handy assessment criteria to rely on when looking at Australian banks.
 
Another handy assessment tool/ reference point is the Market Forces website. Market Forces have looked at more than 100 Australian banks, noting how much each has invested in fossil fuel projects. 
 
This is the initial reference point I relied on when choosing a bank. It does mean I am initially taking a very narrow definition of a “green bank”, but I have found that those that do not invest in fossil fuels are also banks that have a strong environmental focus in other areas.

These are two things to look out for when looking at Australian banks. But there is a wealth of information out there. If you are interested, I provide a summary of this in the blog post Going Green – Environmentally Friendly Banks in Australia.
 
 
So that’s a review of green banking, how others have defined it and what you can rely on as a consumer in Australia. 
 

The unfortunate thing is that there are no clear standards around this. However, there are some measures out there that you can rely on – whether that be looking at how much a bank invests in fossil fuels projects to awards that have assessed a bank’s commitment to protecting the environment. And its something worth looking into. 

 
xxx Tahsin 
After more information? You may be interested in....

7 of the Best Australian Banks – For You and the Environment – there are 7 banks worth looking into if you care about the environment and key information on these is outlined here 

How to Go Green in Banking and Choose the Best Bank For You – for a step-by-step process to help you choose the best green bank for you

Green Banking – Essential Characteristics To Look Out For – outlining the characteristics of and features of green banking to look out for plus what it means to be a net zero bank

Why Green Banking Matters: Creating a Sustainable Future – if you are wondering if it is worth looking into green banking, you will find some honest answers here 

Green Banking Products – Align Your Money with Your Values – for a summary of all the different green branking products out there, with links to banks that offer these

Which Banks Do – and Don’t – Invest in Fossil Fuels – for a summary of which Australian banks do and don’t invest in fossil fuels and those that do invest in renewable energy 

Greenwashing? The Big Four Banks and Climate Change – for information on CBA, NAB, Westpac and ANZ outlining their current position and past actions relating to climate change

Green Banks in Australia – Options Worth Considering – for information on the big four banks in Australia, four green banks in Australia and further details on Teachers Mutual

Going Green – Environmentally Friendly Banks in Australia – for further information on Bank Australia as well as CBA and Westpac, looking at their environmental policies 

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