Green banking is a term used to refer to sustainability in the economy, society and environment. Its aim is environmental protection alongside ethical banking. This includes encouraging the reduction of banks' and customers' carbon footprints by creating environmentally friendly practices and investing in sustainable activities. By reducing our carbon footprint, we can help to reduce the effects of climate change.
Climate change is the increase in the earth's temperature. This is due to an increase in certain damaging gases in the atmosphere. It is caused by human activities, it is not a natural event. An increase in the earth's temperature may change weather patterns, this can affect industries such as agriculture. Sustainable banking can help to mitigate the negative impacts of this.
How Can Banks Respond to Climate Change?
Central banks generally have three functions: to keep prices stable, to help countries during times of economic difficulty and to not abuse their financial powers. Many banks agree that the negative impacts of climate change will cause financial risks. This encourages them to think seriously about climate change and their role in relation to it. However, some still don't want to invest.
Climate change can impact all financial markets. Central banks are responsible for maintaining market prices and inflation. Energy prices could increase due to a transition to a low-carbon economy. It would be up to central banks to stabilize these prices. Additionally, central banks should be looking for sustainable, low-carbon investments. All whilst maintaining economic growth in their country of origin.
Different Nations Respond In Different Ways
We can compare the actions of developed and developing countries regarding green banking. For example, France introduced policies which measure climate risks. Also, the bank of Japan gives loans to banks that loan to energy and environmental businesses. On the other hand, developing countries such as Indonesia and Brazil receive support from development companies to help in starting their green banking system.
Some developing countries decided to introduce compulsory policies. This means banks had to make policies about the environment and society and send results to central banks. Some countries made some limitations for climate-sensitive industries. But these policies are sometimes difficult to put in practice. It can be unclear which government department is responsible for checking these mandatory policies are followed.
Green Banking Measurement Tools
A way to influence financial groups is with a green micro-prudential policy. This is when policies include social and environmental points. One example is to discuss climate-related financial risks and give advice on how to reduce these risks. In comparison, the macro-prudential policy is about setting the rules for the banks and reducing the economic risks related to climate change or global warming.
The green credit allocation policy encourages giving money to industries which may be at risk from the effects of climate change such as water, energy and farming. Some banks set aside a minimum amount of lending which should go to these types of industries. Finally, the market-making policy is about green investments. Central banks create some guidelines to promote green and ethical banking.
Can We Measure the Success of Sustainability in Green Banking?
Unfortunately, the lack of current research makes it hard to summarize the effectiveness of green banking. It is difficult to compare different policies and their implementation in different countries. China appears to be the first country that started to measure the effectiveness of its own green banking policies and loans. But it is difficult to draw conclusions from these limited results.
What Else Can Banks Do?
Banks are in a special position in that they can influence consumer behaviour. They do this by showing that they believe in low-carbon initiatives. And they often take part in corporate social responsibility or CSR. This is when companies include social and environmental concerns in their businesses. For example by encouraging staff to volunteer for local charities or investing in ethical practices.
What Have Banks Done for Green Banking?
Individual banks now offer various green products to customers who are more environmentally aware. Examples include low insurance rates for electric or hybrid vehicles. Or low rate loans for companies involved in environmental projects such as green energy, forestry or eco-friendly agriculture. Some banks even provide loans to buy electric or hybrid cars which are still out of reach for most customers.
As groups, banks make collectives with the shared aims of observing the same standards and managing risks in the same way. They also share knowledge of best practices in responsible banking. The success of these collectives is questionable. Some say that banks only join them to look good in the eye of the public and as a way to engage more customers.
Summary of Sustainability and Green Banking
The popularity of green banking is increasing and banks are becoming more aware of its appeal. This is especially true when it comes to climate action. Climate change is often in the media. It seems that more banks are becoming greener. For example, by selling green products or looking for green investments. This area is very likely to grow in the future.