Principles of Green Banking

Managing Environmental Risk and Sustainability

Suborna Barua

• Publisher: De Gruyter
• Year: 2020
• ISBN:
  9783110661293
• Edition: 1
• Topic: Business
• Subtopic: Assicurazioni
• Index: Business

Environmental sustainability is perhaps the key societal challenge of our times. Achieving it will require a significant level of financing and investment, and here the role of the banking industry is fundamental. Banks can play a broader and far-reaching role by adopting environmental concerns in their internal and external business operations. Principles of Green Banking is a comprehensive account of the different aspects of green banking and offers theories and principles as well as practical how-to guidelines to adopt green banking practices.

This book discusses why green banking is central to achieving sustainable development. It illustrates the evolution of green banking around the world, different types of environmental risks created by firms and how these risks offer threats to sustain ability, and ongoing trends and patterns of green banking practice. Critically, it also presents an outline of the regulatory framework necessary to help the entire banking sector adapt to the change towards green banking. It is a valuable resource for financial sector professionals and scholars in the fields of sustainable finance and banking.

Chapter 1 Introduction

The world today is faced with severe environmental complications such as pollution, climate change, and the depletion of resources. The most unfortunate aspect is that much of these environmental stresses are primarily contributed to and driven by human activities. With the aim of faster economic growth and greater economic well-being, over the last centuries, human activities have substantially sacrificed environmental quality and resources, most of which is irrecoverable. This means, most of the environmental damage that human civilization has done to fulfill the objectives of economic prosperity cannot be restored into the original condition and many of the environmental resources consumed can never be renewed. Following the natural living cycle governing our ecosystem, the long-run outcomes of this damage have now begun to worsen the quality of our lives. We are now faced with an increasing level of different environmental threats, for example, climate change and global warming, natural disasters, lack of natural resources like gas to feed industrialization, and scarcity of resources like drinking water that are necessary for living, etc. Unfortunately, the environmental damage and depletion of resources today have reached a stage that might eventually threaten the existence of future generations. How do we respond to this catastrophe? Perhaps, the best way is for everyone to play their part not only to protect the environment but also enrich its quality.

1.1 Economic Agents and Environmental Actions

An economic system in a society is comprised of three main economic agents – individuals, firms, and the government. Whether an economic system embraces environmental actions into its functionalities or it prioritizes maximization of economic benefits and wealth over the environmental protection largely depends on how the system is designed and how the agents behave. Generally, the government’s policies and regulations govern the economic system’s functioning; in other words, individuals and firms behave as they are allowed or induced to do under a certain policy and regulatory environment created by the government. However, sometimes the economic agents can also act themselves out of voluntary efforts to aid the economic system in achieving social goals and objectives such as environmental protection. Of course, the impacts that an economic agent can make by its actions would greatly depend on how large it is and how much impactful “power” it holds in relation to the society and economy. In the contemporary social and economic system, the biggest power perhaps originates from the power of “finance.” Because, in a market-based economic system, money can be used to exchange almost everything, firms and individuals that have greater financial wealth can hold larger power to influence the market, the economy, and the society as a whole. In this context, financial institutions, being the storehouse and mobilizer of funds throughout the society and economic system, perhaps are the most influential of all economic agents.

1.2 Financial Institutions and Environmental Actions

The fundamental role of a financial institution is to provide a bridge between the financially surplus and deficit economic units or agents and mobilize funds from the former to the latter. Figure 1.1 shows the fundamental role of financial institutions in an economy. By storing and mobilizing funds in an economy, financial institutions keep consumption and investment activities going and thus allow the economy to grow. Any disturbance in this process would result in a reduced consumption or investments in the economy, which in turn would hamper economic development and prosperity. Therefore, to ensure smooth and proper functioning of this process, the government provides and enforces policies, guidelines, and frameworks either directly or through central banks. Apart from being the main storehouse and mobilizer of public funds as shown in Figure 1.1, financial institutions like banks today have even more power as they provide a range of services without which life would become impossible, for example, transaction services, international and domestic trade facilitation, investment and asset management services, corporate fundraising, and life, health, and property insurances, etc. These powerful functions allow financial institutions to have a significant impact on how the society and economy utilize resources for economic growth and prosperity. As such, financial institutions can play a central role in achieving social goals or objectives such as environmental protection, alongside driving economic development. With respect to environmental protection particularly, financial institutions are yet to play their desired role, as much of the efforts made are found to be on the part of governments and international donor agencies. Recent discussions in the global community on the role of financial institutions particularly point to “banks,” as they can undertake actions more powerful than many others to minimize environmental impacts of economic activities and protect the environment for the future.

Source: Author

Figure 1.1: The role of financial institutions in an economy and their environmental actions.

1.3 Green Banking and Environmental Causes

Since the banking sector is crucial for the economic growth of a country, it can be more effective than others in mitigating environmental degradations. Such banking actions prioritizing environmental goals alongside financial objectives can be broadly termed as “green banking.” Although the term “green” can broadly refer to a wide range of social, ethical, and environmental dimensions, green banking primarily refers to banks’ activities and their impacts in relation to environment. Green banking in fact can be the fundamental method through which banks can substantially contribute to save the environment. As banks are a major source of finance to firms and individuals and have an outreach at all levels of society, they can exercise immense power in controlling environmental damage. Generally, being a financial institution, banks are viewed as firms not having a significant environmental impact. However, a deeper understanding of banks’ activities would necessarily suggest that their environmental impacts through internal (e.g., in-house operations and administrations) and external activities (e.g., lending, investments) are huge, albeit difficult to estimate. Green banking involves pursuing financial and business policies internally and externally that are not hazardous to the environment, and instead help to protect it. Considering the significant level of power banks hold, it is imperative to induce or force them to play a proactive role to save the environment from further damage and degradation and protect it for future generations. To do this, they need to replace their traditional business models with an environment-augmented business model where ecological aspects are integrated, for example, including environmental assessments in lending processes, preferring financing and investment in environment-friendly projects, including energy efficiency requirements in lending contracts, and reducing in-house energy consumption, etc. However, the greening efforts are not something that can be done on an ad-hoc basis; rather they should be evaluated, formalized, and implemented in a systematic manner with a long-term focus to reap the desired benefits in the quickest possible time. It should be noted that, while undertaking greening efforts, banks must conduct cost-benefit analyses of every effort they undertake to have a clear picture about the likely cost to be borne and benefits to be received in the future.

1.4 Objective of the Book

This book is aimed at providing a groundwork for understanding the operational concepts of green banking. Although there has been a lot of discussion regarding green banking recently around the world, there is a lack of useful resources that provide a concrete operational understanding of green banking. As such, this book can be used for understanding the concepts from theoretical and practical aspects. Furthermore, the discussions in each chapter are presented in plain language so that readers across the board can easily grasp the contents. For many of the discussions, application-oriented cases and examples have been included to give readers directions on practically applying different aspects of green banking in real-life banking operations.

1.5 Organization of the Book

The book is organized into ten chapters, in a sequence that would help readers gather a comprehensive understanding. Following this introductory chapter, Chapter 2 focuses on the links and interactions between environmental risks, sustainability, and banking; Chapter 3 presents the global trends and patterns on environment-friendly banking practices at the country and cross-country levels; Chapter 4 provides a brief conceptualization of the definition and meaning of green banking from theoretical and operational perspectives; Chapter 5 highlights the needs and impacts of green banking practices in the current state of the world; Chapter 6 discusses in detail the ten principles of green banking and offers suggestions on how to integrate them in a bank; Chapter 7 elaborates on the operational process of green banking adoption at the bank level and across departments within a bank; Chapter 8 focuses on how green banking can interact with banks’ traditional risks and regular risk management practices; Chapter 9 outlines how regulatory and policy frameworks on green banking can be designed and developed; and finally, Chapter 10 discusses the potential challenges in the green banking adoption process and presents some measures to mitigate them. Each chapter of this book, except Chapter 1, provides thought-provoking discussion questions for readers at the end of the chapter, alongside examples and cases on the application of green banking.

Chapter 2 Environmental Risk, Sustainability, and Banking

2.1 Introduction

Environmental risk and its assessment have emerged as critical for mitigating environmental concerns in the recent decades. The world has traditionally stressed the need for economic growth, with environmental protection considered a lower priority topic. In recent decades, economies and societies are seen to be increasingly concerned about achieving a dual objective – protecting the environment alongside achieving desired “economic growth.” Environmental concerns are considered to have a greater significance particularly for developing countries, since they often tend to sacrifice environmental quality to attain higher economic development, and they are generally constrained by necessary resources. However, environmental risk in general is considered one of the global risks the world is currently experiencing. Corporations, being a vital stakeholder to both economic development and environment protection, play a key role in mitigating environmental risk. Sustainability of corporations may be exposed to a significant level of threat, if environmental factors are not brought into the equation alongside financial objectives. In this context, corporations need to have a clear understanding of the types and nature of environmental risk that could arise from their business practices, the processes of their identification and measurement, and effective strategies needed to achieve the dual objective.

2.2 Environmental Risk and Sustainability

The concepts of sustainability and sustainable development have become widespread phenomena and are often used interchangeably. The fundamental sense of these two terms remains the same though practical meaning of them may differ. Sustainability denotes a system property referred to as “quality,” yet it is important to note that the definition of sustainability is broad and lacks consensus (Bell & Morse, 2008).

Some general definitions of sustainability include:

The capacity of a system to maintain output at a level approximately equal

to or greater than its historical average, with the approximation determined by

the historical level of variability.

(Lynam & Herdt, 1989, p. 384)

Maximizing the net benefits of economic development, subject to maintaining

the services and quality of natural resources over time.

(Turner, 1988, p. 352)

Environmental risk can be defined as the actual or potential threat of adverse effects on living organisms and the environment by effluents, emissions, wastes, resource depletion, etc., arising out of an organization’s activities. Environmental exposures, whether physical, chemical, or biological, can induce a harmful response and may affect soil, water, air, natural resources or entire ecosystems, as well as plants and animals – including humans – and the surroundings where they live (Crawford-GTS – Environmental Risk Defined, 2019). On the other hand, environmen...