Sustainable banking 101: How banks are embracing sustainability

With the push for sustainability in business and the race to net zero intensifying worldwide, many are looking to the financial sector to address climate change and support mitigation action. Banks and financial institutions can support the transition to net zero with loans, finance offers, and investment schemes for green projects. 

This can help businesses on the path to achieving corporate sustainability. Ultimately, banks that demonstrate commitment and act on sustainability will not only help the environment and society but also gain a competitive advantage.

What is sustainable banking?

Sustainable banking entails strategic planning and executing business activities and banking operations while considering the environmental, social, and governance (ESG) impacts.  

For the banking world, this could span initiatives from inclusive lending schemes to customer-centric products that encourage and enable climate action by promoting conscious consumption and promoting transparency. 

The importance of sustainable banking

The business-as-usual approach to banking will no longer meet the mark for being the banking of the future. It has been estimated that unabated climate change of warming over 3 degrees Celsius could cost us a whopping $178 trillion by 2070. 

To put that into perspective, this climate change bill is roughly $70 trillion more than the entire global GDP for 2022. This figure does not even factor in the human cost of living in such a world.

Currently, banks are limiting their investment strategy to profits only. Unfortunately, this could mean they are blindly headed toward not only a climate disaster but an economic crisis as well. 

However, changing course and embracing sustainable banking could open up an estimated $43 trillion in market opportunities by 2070. The business case for sustainable banking couldn’t be stronger as a recent survey found that 49 percent of customers are prepared to leave their banks for greener providers. 

Sustainable banking is more than just a philosophy or idea; it’s an action. There are several ways banks can embrace environmental and social responsibility. For instance, they can offer transparent carbon calculations around spending and support customers in selecting alternatives. 

The principles of sustainable banking

In partnership with founding banks, the UN has designed six principles for responsible banking to accelerate a positive global transition for people and the planet. These principles should be embedded into banks’ strategies and across their portfolio of activities, bringing purpose, vision and ambition on sustainable finance to the core of the organisation. 

• Alignment: Banks should align their business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Paris Climate Agreement, the Sustainable Development Goals, and other relevant regional and national frameworks. 

• Impact and Target Setting: Banks should continuously work to increase their positive impacts while curbing their negative ones. They should manage risks to people and the environment resulting from their products, services, and activities. With this in mind, banks should set and publish targets where they have the most significant impact. 

• Clients and Customers: Banks should work responsibly with their clients and customers to promote sustainable practices and allow for economic activities that establish shared prosperity for current and future generations.

• Stakeholders: Banks must proactively and responsibly consult, partner, and engage with relevant stakeholders to meet society’s objectives. 

• Governance and Culture: Banks must implement their commitment to these principles through a culture of responsible banking and effective governance. 

• Transparency and Accountability: Banks will periodically review their collective and individual implementation of these principles and be transparent and accountable for their negative and positive impacts and contribution to society’s objectives. 

The future of sustainable banking

Sustainable banking represents a new contract between the banking sector and society. Top banks have begun making commitments to sustainability in various areas. However, there is still a long way to go. To become sustainable businesses, banks must reassess and strategise their business models in the long term. 

Additionally, banks need to stop investing in sectors that are harmful to the planet and invest in sectors that help us combat climate change. The transition to sustainable banking is a push in the right direction but it will soon transform from being a nice to have to being a matter of compliance.