Why Green Banking Matters - Creating a Sustainable Future
This post was last updated in 2023
If you have an interest in green banking, I imagine you already have an inkling that this is something important to look into.
Of course, there is the general notion that engaging with companies that do less harm to the environment is a good thing. But beyond that, how important are green banks?
Engaging with green banks can be one of the most important actions you could do as an individual. Green banks play an important role in ensuring funds are directed towards new technologies and green solutions which address some of the most challenging environmental concerns of this time.
And while the money that you hold as an individual won’t move the whole market, it is still important to align your banking and financial activities with your values – and if you value the protection of our environment and action on climate change, you need to align yourself with a green bank.
There are a couple of studies that looked into the importance and benefits of green banking in detail. Few studies have even measured the benefits to society and us as consumers.
If you want to know more, further details can be found below where I answer the following questions:
It’s good to understand more about green banks and why they are so important – to strengthen your understanding and perhaps help you convince others to make the switch.
What are the benefits of green banking?
The key benefits of green banking are that it leads to further investment in green solutions that address current environmental challenges, reduces investment in activities that harm the environment and leads to economic benefits like reduced energy costs and increased job creation in growth sectors.
As covered in Green Banking – Essential Characteristics To Look Out For, green banks integrate environmental considerations into their operations 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
It is through these activities several economic, social – and obviously environmental benefits – are realised. Benefits for us as consumers, for society as a whole, as well as for the banks themselves.
Direct measurable benefits are realised when a bank operates in a way that minimises its own negative impacts on the environment. These benefits are seemingly minor but are still important and include:
- Less virgin forests are being consumed with the move to online/ digital services
- Less carbon is produced when banks shift to using energy-efficient office equipment
- Less landfill waste produced in offices that encourage recycling and reuse
- Reduction in operational costs for banks that use less office stationery, energy and water
- Direct economic support is given to smaller “green” businesses when they are favoured in procurement processes
However, the real benefits of green banking lie in the less direct and less tangible benefits, which affect us as individuals and society as a whole.
The research is limited when it comes to measuring these benefits, but many researchers have reviewed the potential benefits. These include:
- Investment in green solutions: Green banks tend to invest in clean energy projects, industries, and products that matter. Electric vehicles, smart power grids, and renewable energy systems are some of the seemingly risky innovations that green banks usually invest in.
- Ability to up-scale new technologies: By focusing funding on environmentally friendly technologies, the private sector has the assurance that funding will be provided and this encourages further development in this sector. This allows for these activities to be upscaled and developed at a rapid pace.
- Reduced investment in environmentally damaging activities: Green banks, in general, do not finance damaging sectors of our economy like the fossil fuel industry, thereby limiting their activities
- Key environmental issues are addressed: By increasing the amount of investment in green solutions and decreasing the financing of environmentally damaging companies, green banks are indirectly addressing key environmental issues.
- Lower Energy Costs: Green bank financing helps implement clean energy solutions that can lower energy bills for consumers and businesses with no upfront cost
- Economic Development and Job Creation: Environmental-friendly projects supported by green banks are generally local projects. This provides a boost to the local economy and local job creation
- Increased customer awareness: Green banking activities assist in developing customers’ environmental consciousness
- Increased awareness in the banking sector: Through their practices, green banks create awareness in the banking sector around environmentally and socially responsible business practices
- Stronger governance structures: Several green banks publish their financial reports annually to inform investors and customers about investments they’ve made and the carbon emissions they’ve produced. This culture of climate accountability encourages other banks to establish strong governance structures that are responsive to climate trends.
- Setting new standards: Green banks adopt environmental standards that lead the way for other institutions, benefiting future generations.
As mentioned, the benefits mentioned are anecdotal, rather than something that has been measured and examined in detail by researchers. While this does not make them any less valid, it is something to keep in mind.
However in a paper titled Do Green Banking Activities Improve the Banks’ Environmental Performance?, the authors examined the green banking sector in Bangladesh and modelled several factors to assess the link between banking performance and green banking practices. They confirmed the following benefits for banks:
- reduction in long-term costs and expenses,
- tax advantages
- higher profits for banks in the long term
- improvement in customer goodwill
- promotion of banks’ reputation
In a paper titled Transition towards green banking: role of financial regulators and financial institutions, the authors point out there are specifically three risks that green banks avoid by adopting green banking practices:
- Physical risk – which arises from climate and weather-related events, such as floods, storms, heatwaves, droughts and sea-level rise and its impacts on humans and natural systems. Physical risks can lead to higher credit risks and financial losses by impairing asset values.
- Transition risks – are those that can arise while adjusting, frequently in a disorderly fashion, towards a low-carbon economy. The paper notes “Given that climate change mitigation actions often require radical changes and adjustments by the public and private sector and households, a large range of assets are at risk of becoming stranded. This is especially prevalent for fossil-fuel related sectors and assets, which as a result of a revaluation, can in turn lead to higher credit exposure for banking and non-banking financial institutions.”
- Liability risks – this can arise if parties suffering losses from the damages of climate change seek compensation from those they hold accountable.
These three types of financial risk factors constitute a major threat to the stability of the financial system, however, green banking practices seek to avoid these risks by divesting away from environmentally damaging activities.
The benefits for banks are well documented!
But what about you as a consumer? Besides the societal benefits that we all benefit from, what are the benefits for us at an individual level?
There are very few studies that examine this question. Some potential benefits include higher long-term returns since green banks are investing in technologies that are set to grow in the future. Also, lower costs since green banking products are often priced less than traditional products, to be more attractive to this new market.
But really, it comes down to a matter of values.
What are the disadvantages of green banking?
The disadvantages associated with green banking include diversification issues, high start operating costs, and lack of support and awareness in the public and within the banking sector. Green banks face higher standards than traditional banks, which can also be a burden.
There are two papers that delve into these issues.
In the paper Do Green Banking Activities Improve the Banks’ Environmental Performance? The Mediating Effect of Green Financing the authors looked at the development of green banking in Bangladesh and identified the following disadvantages and barriers to going green:
- high costs and long payback periods with eco-friendly projects
- customers’ insufficient knowledge regarding green banking
- technical obstacles
- lack of capable and well-trained staff in appraising green credits
- difficulties and complexity in assessing eco-friendly projects
- diversification issues and credit risks
- reduction in banks’ competitiveness in the short term
- operational self-insufficiency
- low demand for eco-friendly projects.
Similarly, in a paper titled Green Banking: Benefits, Challenges and Opportunities in Indian Context, the following challenges were identified:
- Reputational Risk: If green banks are involved in projects which are damaging the environment, it is more damaging to their reputation compared to traditional banks that do not promote themselves as being green
- Diversification Problem: Since business transactions are restricted by a more stringent screening process, green banks have a limited number of customers and therefore a smaller base to support their operations
- Start-up phase: Many green banks are new institutions and it generally takes 3 to 4 years for a bank to start making money.
- High operating cost: Green banks require talented and experienced staff, experienced in green banking practices
- Lack of government support
- Less enthusiasm from the bank sector
The lack of diversification is an issue for us as consumers – green banks often have a limited product range when compared to traditional banks. Depending on what you want, you may have only a handful of options to choose from.
This was an issue I faced when selling our home. We were after bridging finance, which is not a product most banks offer. Bank Australia, a popular green bank in Australia, did offer bridging finance but we could not meet their strict lending criteria. So we had to go with one of the major four banks for our financing. Of course, once we no longer need bridging finance we will be switching back to a green bank!
Not much can be done about this point. Hopefully, over time, green banking practices will become the norm and the range of products on offer will increase as a result.
Why is green banking important?
So given all the challenges banks face and the limited tangible benefits to consumers, is green banking worth it? Is it important?
Green banking is important because of the long-term benefits it offers.
Green banks drive development in areas that matter – clean energy projects, responsible land management practices, and sustainable manufacturing. They are more likely to invest in new technologies and seemingly risky ventures at a lower cost, helping to upscale development in areas that may not have short-term economic returns but are ultimately industries of the future.
Green banking is important because of how it shapes economic markets and future development and how it leads us towards a more sustainable, environmentally friendly future.
Since those benefits haven’t been fully studied and are difficult to measure, I think the “is green banking important” question can’t be objectively answered – it depends on your values.
If you value a future focused on clean energy, responsible land and water management practices and sustainable manufacturing, then green banking is necessary to help push us towards that future. If these are aspects you do not value in your life, then green banking would not be important to you.
Banks naturally play an important role in our economic system, as intermediaries that collect money and distribute it to others. The majority of the benefits mentioned earlier come from the fact that banks steer money away from harmful activities and towards projects that benefit society as a whole.
By doing so, it has been argued that green banks are key to helping us achieve a number of the UNs sustainable development goals:
- Goal No. 7 affordable and clean energy;
- Goal No. 9 industry, innovation, and infrastructure
- Goal No. 11 sustainable cities and communities
- Goal No. 12 responsible consumption and production; and
- Goal No. 13 climate actions.
All these require banks to play their part.
By switching to a green bank you can be assured the money you give to the bank is going towards a more sustainable future. And while you may not be contributing much to the bank yourself and think your contribution is inconsequential, the fact is, if enough people are shifting their money away from traditional banks that persistently invest in companies that do more harm than good, then that will cause a shift in the market.
Already there are more and more signs that banks realise that sustainability is important to consumers and it is changing the kind of products these banks are offering.
A real shift away from traditional banking is what is needed so we can move away from greenwashed products that rely on carbon offsetting, towards banks that actively participate in activities that drive us towards meeting the sustainable development goals just mentioned.
What is the importance of green banking in addressing global warming?
The importance of green banking in addressing global warming lies in the influence and impact banks can have through their investment and lending decisions. By choosing to divest in fossil fuel companies and investing in green energy solutions, green banks can have a real impact on climate change.
While there is no universally accepted definition or set standard on what makes a “green” bank, the general expectation is that green banks do not invest any of their funds in fossil fuel entities. And since fossil fuels like – coal, oil and gas – are by far the largest contributor to climate change, accounting for over 75 per cent of global greenhouse gas emissions and nearly 90 per cent of all carbon dioxide emissions – the withdrawal of funds away from these harmful activities is an important step in helping us address global warming.
Annual reporting by Banktrack through their Banking on Climate Caos report shows that $742 billion was invested in fossil fuel companies in 2022 by 60 of the world’s largest banks. The levels have remained virtually unchanged since 2016 when Banktrack first started reporting on this.
Their graph shows that more than 4.5 trillion dollars have gone to fossil fuel companies thanks to the banking sector.
Their graph shows that more than 4.5 trillion dollars have gone to fossil fuel companies thanks to the banking sector.
Restricting the flow of funds towards this industry is one way to influence – or perhaps force – change in this industry. And this change is needed since the phasing out of fossil fuel production is necessary to address climate change.
Furthermore, to create a low-carbon future, we need increased financing of renewable energy systems. The flow of funds towards climate mitigation strategies and technologies is an essential element to ensure the market shifts and has a holistic approach to addressing climate change.
And as mentioned earlier, green banks operate in a way that addresses some key sustainable development goals set by the UN – in particular goal No. 13 taking urgent action to address climate change and its impacts. Banks can do this by redirecting capital flows to environmentally responsible projects.
And it is argued that banks that have done this to date, already helping to establish climate-resilient infrastructure that reduces carbon emissions. As noted by Aspiration “Because of green banks, we’re seeing an increase in community adoption of low-carbon technologies such as home geothermal power systems, which, if expanded, can help drive the world towards net-zero emissions.”
Green banks also play an important role by being a positive influence in the market. As mentioned earlier, green banks are generally more accountable, often reporting on the carbon emissions they have produced and the impact on the environment. This creates new standards and expectations in the banking sector which can urge other banks to create responsive governance systems that are focused on reporting on actions taken to address or mitigate the effects of climate change.
And as noted in the previous section, these shifts are happening. And we can do our part by actively supporting institutions that encourage this behaviour.
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
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
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
