Green Banking - Essential Characteristics To Look Out For
This post was last updated in 2023
In the blog post, What is Green Banking and What to Look Out For the term “green banking” was defined as “banks that have a strong focus on the environmental impact of their operations”.
But what does that mean in a practical sense? What actions and practices would a bank need to put in place to be able to call themselves a “green bank”?
As a consumer, what characteristics should we be on the lookout for to ensure the bank we are considering is truly a “green bank”?
If these are questions you have then this blog post is for you. In this blog post, I provide answers to the questions:
- What are the characteristics of green banking?
- What are the components of green banking?
- What are some other examples of green banking?
- What is a net zero bank?
These characteristics and examples will help us understand what to look out for, so we can make a conscious decision when choosing who to bank with.
What are the characteristics of green banking?
Green banks can exhibit a range of characteristics from ensuring the products and services they offer have minimal impact on the environment to ensuring funding is diverted away from projects that lead to further degradation of our environment.
In putting together the blog post What is Green Banking and What To Look Out For, it was clear that green banks have four characteristics that are common among them all:
- They conduct themselves in a way that reduces emissions, minimises waste and improves efficiency in the use of natural resources
- They offer products and services that minimise waste and/or have a low carbon footprint
- They divest away from activities that contribute towards climate change or negatively impact our natural resources
- They invest in activities that mitigate climate change and encourage efficient use of our natural resources
As mentioned in the blog post, that is the expectation consumers have when it comes to green banks. But not all banks claiming to be green exhibit these characteristics. And even those that do, do so in varying degrees.
But this gives you a rough idea of what to look out for when choosing a bank.
What are the components of green banking?
There are several ways the question of “components of green baking” could be looked at – from what characteristics green banks exhibit, to the products and services offered, to the goals and objectives green banks adopt.
In addressing the question of components of green banking, I focused on what areas banks can apply the characteristics mentioned in the previous section.
In this sense, green banks are made up of two components – their day-to-day operations and their financing arrangements. This can be separated further into four components – employee-related practices, daily operational practices, customer-related practices and policy-related practices.
Firstly, looking at this from the “two-component” perspective – banks have two functions/ roles where they can apply green banking practices:
- Green banking through internal operations – this refers to banks adopting green banking activities in their day-to-day operations and
- Green finance – this refers to banks providing financial assistance to environmentally responsible projects and not investing in projects that lead to the degradation of our environment.
Another way of looking at the components of banking was provided by Shaumya, K and Anton Arulrajah, Anthonypillai in their paper Measuring Green Banking Practices: Evidence from Sri Lanka.
They argued that banks can demonstrate their commitment to green banking practices in the following four areas:
- Employee-related practices
- Daily operational practices
- Customer-related practices
- Policy-related practices
Having these components in place would create a well-rounded, fully committed green bank.
Employee-related practices are elements that encourage an environmental or sustainability mindset in employees and the work that they do. It is about training and education as well as embedding sustainable practices by holding employees to account for the environmental impact of the decisions they make. That can be done by tieing performance to measures that assess the environmental risk or setting up a reward system to encourage practices that support green banking.
Daily operational practices are concerned with how the bank carries out its day-to-day functions and the impact that has on the environment. This component is addressed by ensuring the bank’s carbon emissions are kept low, energy is used efficiently in the offices they operate from, waste streams are minimised, recycling and reuse is encouraged and energy-efficient office equipment is utilised. I would add to this: by ensuring procurement decisions consider environmental impacts.
Customer-related practices relate to the products and services the banks offer their customers and where banking funds are invested. A bank can address this component by offering green loans and green investments, diverting capital towards green businesses and incorporating environmental risks into lending practices.
The final component is policy-related practices, which is concerned with developing green goals, setting environmentally friendly policy guidelines, integrating environmental goals and objectives into strategic planning and developing partnerships with organisations that help banks achieve their green goals.
There is no universally accepted definition of green banking so if a bank does not have all four components in place, it does not mean that can not label itself a green bank.
But these would be components I would be looking for when it comes to choosing a bank. There are very few that can tick all the boxes, but it is possible and my expectation is that a truly green bank has adopted some practices in each of these four components.
What are some other examples of green banking?
Some examples of green banking include offering products like green loans and investments, integrating environmental risk into day-to-day decision-making, making commitments to achieve net zero or committing to reduce waste and energy consumption.
From a review I have conducted of green banking practices in Australia, I have seen banks demonstrate their commitment towards a greener future in the following ways:
- Adopting a zero emissions target for their business operations
- Committing to sourcing energy from 100% renewable sources
- Improving recycling and reuse practices within their offices
- Adopt energy-saving practices in all their offices
- Lending to retail customers only – no large corporations
- Ensuring risk models adequately take into account environmental risk when assessing investment options
- Having a framework to support environmentally friendly banking practices
- Regularly reporting on their environmental impact
A comprehensive list of examples can be found in the paper Transition towards green banking: role of financial regulators and financial institutions. The paper notes the following examples:
- Loans to micro-, small-, medium- and large-sized enterprises for them to invest in green projects such as renewable energy, energy efficiency, forestry and climate-smart agriculture
- Loans to individual clients for them to install small-scale renewable power and more energy efficient and climate-smart equipment, appliances, houses and vehicles and purchase climate-resilient seeds
- Long-term, usually non-recourse and syndicated loans to finance large-scale renewable energy projects and climate-resilient infrastructure projects
- Charge lower insurance premiums for eco-friendly actions such as using electric/hybrid vehicles and recycled parts when repairing a damaged vehicle
- Use green bonds including asset-backed securities (ABS) and mortgage-backed securities (MBS) to finance green projects and refinance existing green assets
- Invest in start-ups and venture firms developing green and climate-smart technologies
- Invest in a fund dedicated to financing green projects
- Buy and sell green bonds and carbon credits on a client’s behalf to facilitate and promote green investments
- Buy and sell green bonds and carbon credits using a bank’s accounts to help facilitate the market
- Offer advisory services with fees or on a pro-bono basis for the financial structuring of a project
- Provide capacity-building support and consulting services to borrowers or developers to better access a bank’s products
A lot of this has very little to do with our day-to-day interactions with banks, and a lot of this is very hard for us to confirm unless we have inside knowledge of the bank’s funding and investing activities. But I thought I would provide this information so we have an appreciation of the different examples of green banking, as it is not just about banks offering products and services branded as “green”.
What is a net zero bank?
For banks, net zero means ensuring emissions associated with operations and financing activity is reduced, where possible, and any remaining emissions are offset. Most banks committed to net zero are committed to limiting global warming to 1.5C and achieving net zero emissions by 2050.
The UN defined net zero as “cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere, by oceans and forests for instance”.
So an organisation achieves net zero when it balances the carbon emits against what it removes from the atmosphere.
When it comes to banks, this typically means that operational emissions – those from direct activities – and financing emissions – emissions associated with lending and investing activity – are reduced as much as possible, with any remaining emissions “cancelled out” through carbon offsets. When a bank is committing to net zero, this is generally what is behind that commitment.
In Australia, the five biggest lenders to the fossil fuel industry – CBA, Westpac, ANZ, NAB and Macquarie Bank – have all signed up to the Net Zero Banking Alliance (NZBA). Being a signatory to the NZBA is often put forward as evidence these banks are committed to being “net-zero”.
As a signatory to NZBA, it means these banks are committed to the following:
- Transition the operational and attributable GHG emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner.
- Within 18 months of joining, set 2030 targets (or sooner) and a 2050 target, with intermediary targets to be set every 5 years from 2030 onwards.
- Banks’ first 2030 targets will focus on priority sectors where the bank can have the most significant impact, ie. the most GHG-intensive sectors within their portfolios, with further sector targets to be set within 36 months.
- Annually publish absolute emissions and emissions intensity in line with best practice and within a year of setting targets, disclose progress against a board-level reviewed transition strategy setting out proposed actions and climate-related sectoral policies.
- Take a robust approach to the role of offsets in transition plans.
The 2050 net zero goal is in line with the commitment to limit global warming to no more than 1.5°C as called for under the Paris Agreement.
If a bank is committing to being net zero, it is typically committed to these goals.
The NZBA’s vision is to drive the baking industries toward achieving net zero emissions and they hope to do this by providing:
- a common standard/interpretation of what it means to be aligned to a 1.5 degrees trajectory,
- accountability in demonstrating the fulfilment of the commitment,
- action in promoting banks to join the Alliance.
- capacity building within member banks by showcasing potential approaches for how to implement the commitment
- peer learning and sharing experiences to accelerate progress,
- resources, methodologies and leading practices around areas such as data.
- identification of gaps and working with others to overcome them. This may include, but is not limited to international organisations, peers, customers, investors, governments and other alliances,
- a voice for banks to communicate on the topic of transitioning to Net Zero by 2050 in line with a 1.5°C outcome.
These globally recognised and accepted standards are great in that it provides coherent and unified support to direct the industry as a whole towards net zero. There are expectations around target setting, which ensures the industry as a whole is on the same path. And the expectations around reporting ensure a level of accountability.
Banks are then clear on what they need to do and supported in how to put it into action.
But of course, there are some issues with this. Many, like BankTrack who closely monitor the financing activities of banks around the world, claim the goals set by NZBA are not good enough.
The main issue is the fact that net zero is not zero.
Organisations can claim to be net zero by using carbon offsets to counter any emissions associated with lending or investment activity.
It is noted in the NZBA commitments that “a robust approach” is taken to the role of offsets in transition plans – despite some searching, I have no idea what this means.
It is generally understood that offsets would only be applied to emissions from “hard to abate” sectors, but even this can be a problem.
For more on the problems associated with carbon offsets, have a read of the following articles and reports:
- https://www.foei.org/wp-content/uploads/2021/11/Net-Zero-COP26.pdf
- https://www.carbonbrief.org/guest-post-the-problem-with-net-zero-emissions-targets/
- https://theconversation.com/climate-scientists-concept-of-net-zero-is-a-dangerous-trap-157368
- https://www.nrdc.org/stories/promise-and-pitfalls-net-zero-pledges
It’s argued offsetting does not ensure “net zero” emissions – there is always a risk that the actions taken to offset emissions can not be maintained, so the resulting emissions are not fully absorbed by nature. And offsets do encourage a level of complacency, where emissions that can be reduced are not reduced because of the availability of carbon offsets.
And there is the those that have an issue with the 2050 target because this too encourages complacency.
BankTracknotes that the bulk of the action to bring down emissions must be taken right now. Setting targets for 2050 and even the interim target of 2030 is too far, giving space for banks to fund additional fossil fuel projects in the next couple of years and lock in emissions for decades to come.
The International Energy Agency (IEA) report on net zero by 2050 notes that there is no need for investment in new fossil fuel supply if we are committed to a net zero pathway:
Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required. The unwavering policy focus on climate change in the net zero pathway results in a sharp decline in fossil fuel demand, meaning that the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets.
Yet those that have signed up to NZBA continue to approve new finance for fossil fuel projects, particularly oil and gas projects. Check out Greenwashing? The Big Four Banks and Climate Change for more information on this.
According to the IEA, this is contrary to a net zero goal.
So it makes you wonder what being a signatory to NZBA really signifies and if it is enough.
Banks can play an important role in shaping our future – they play a vital role in deciding which industries get funding and which don’t.
While the decisions are in the hands of those sitting on the board of these banks, it does not mean we are completely powerless as consumers. Consumer sentiment demonstrated through the choices we make can send a powerful message to institutions – provided there are enough of us making that choice.
And even if your actions seem to make very little difference in the whole scheme of things, aligning your banking practice with your values is meaningful in itself. If you make the right choice, you can rest easy knowing your money is not being used to cause further damage to the planet.
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
What is Green Banking and What to Look Out For – for a definition of green, sustainable, ethical and eco-friendly banking, giving you clues into what to look out for
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
