The Transition Towards Green Banking

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The Transition Towards Green Banking

Banking & Blog

We live in a day and age where climate change is expected to accelerate and is no longer considered just a mere environmental threat, it is considered an enemy of the life we know as humans and it affects all economic sectors. The environmental changes affecting our planet are mostly driven by human activities and are the direct result of burning fossil fuels.

In order to mitigate the negative impacts of climate change, central banks, policymakers, and supervisors started to implement various green banking initiatives. Thus, environmental sustainability has become a key principle in the banking sector, especially as protecting the environment implies major financial investments and resources involved.

The Issue at Hand

According to the latest IPCC report (IPCC 2018), human activities were the culprit behind global warming. Based on a standard scenario, if nothing changes, these are likely to further accelerate the temperature growth by a terrifying 1.5 degrees Celsius by 2050. In order to prevent this from happening, governments need to invest massively, up to $2.4 trillion in clean energy every year. Considering this extensive cost, the financial sector is expected to play a pivotal role in providing necessary financial resources.

There is no doubt that the role of the banking sector is central in supporting a country’s adaptation to climate change and enhancing its financial resilience to climate risks. Sustainable banks can help mitigate climate change by investing in renewable energy and socially beneficial projects rather than businesses such as traditional fuel companies. Without the help of financial institutions, it will be nearly impossible to finance the yearly $2.4 billion needed to transition from a brown economy with high carbon dependency to a green economy

Green Banking 101

Green banking was initially introduced in 2009 in Florida, USA and since then more and more banks have started to integrate green principles into their activities. The banking sector has been developing continuously by implementing technologies, processes, and products to result in a substantial reduction of their carbon footprint as well as develop a sustainable business. 

Banks that are proactive in implementing green banking measures can enjoy a boost in reputation and can leverage certain competitive advantages. All of these can allow them to find themselves with immense growth opportunities they would have never imagined.

Some of the areas where green banking could make an important contribution are:

  • Energy: financing renewable energy is a key medium and long-term strategy. Its goal is to meet the energy demands of future generations.
  • Green buildings: green banking can make an important contribution to financing investment opportunities in the market by working with developers and lenders to boost energy-saving and water-saving technologies and also the use of renewable energy.
  • Smart Agriculture: it involves investing in technologies that allow using high-tech farming for increased production output and at the same time preserving the resources.
  • Knowledge sharing about green principles: Developing learning platforms for banks, organizing conferences and webinars.
  • Minimize waste of resources: Defining the value propositions for companies, and individual consumers to go green, avoiding the waste of paper and energy in their activities implementing sustainability measures, and increasing profitability by going green.

The Bottom Line

In a fast-changing market economy where globalization of markets has increased competition, banks should play an important role to promote environmental aspects as part of their lending principle. Doing that would encourage further industries to invest in environmental management, and use green technologies and management systems.

The banking and financial sector is responsible for driving the work for sustainable development. Of course, the road ahead is long and involves a unique learning curve, especially for banks that haven’t started the process. Nevertheless, financial institutions that are already in the transition zone have become aware of the new reality and have started to embrace the change for a better and more sustainable environment.