Green Banking

This post is a very brief introduction to green banking in the contexts of China and Europe. Links for further information on other areas of potential interest in this field are included at the end.

The World Wide Fund for Nature (WWF) actively monitors financial institutions’ efforts to incorporate sustainability-related criteria and policies into their lending practices. During the European Development Days 2015 (EDD), Sun Yiting, Sustainable Finance Program Director at WWF China, provided Capacity4Dev with an overview of the situation in China. WWF International also supported a recently-published report that highlights the weaknesses of sustainability integration efforts in the European banking sector.

China

Yiting outlined the progress that has been made in the last decade in China’s banking sector towards environmentally-responsible banking.  According to Yiting, green lending has three aspects:

1. Fending off environmental and social risks in banks’ lending
2. Increasing support to  green, low-carbon and recycling economies
3. Improving their own environmental and social performance

The China Banking Regulatory Commission (CBRC) has also introduced a series of mechanisms and incentives for recurring polluters to clean up their act by decreasing - and even cutting off - access to loans and financing for companies that consistently violate environmental regulations.

Europe

In parallel, a report published by KPMG and WWF International in June of this year covered the results of a KPMG Sustainability-led project to assess how banks in Europe are doing in terms of sustainability integration. ‘Ready or not? An assessment of sustainability integration in the European banking sector’ reviews 12 major European banks, and also shares examples of measures banks are taking to behave responsibly and proactively.

“Through [banks’] own operations, they contribute taxes to the economy and create employment. Yet this positive contribution to society comes at a price. In the course of doing business, banks have both directly and indirectly financed activities that draw on the natural resources of the planet and can have negative effects on people and communities. […] We need nothing less than a radically different approach for directing capital toward environmentally and socially sustainable economic activities.” 

- Barend van Bergen, KPMG

HSBC, for example, has established a Climate Business division that focuses on “seeking long-term commercial business opportunities arising from the transition to a low-carbon economy.” This represents a successful evolution from reactive, risk-aversion approaches towards proactive and strategic approaches.

However, the report highlights the need for quantitative targets to be implemented in order to take the sector to the next level. 

“Despite the fact that the banks surveyed have somewhat aligned their sustainability strategy with the business strategies, most banks have formulated only qualitative sustainability targets for managing the sustainability activities and programs within their CIB divisions.” 

Maria Boulous, Director of Corporate Engagement at WWF International, commented on the report, saying that, “The study shows that the banking sector at large does not yet have an adequate strategic response to manage material business risks linked to environmental and social realities.” Essentially, most banks are ignoring or only superficially addressing the opportunities that are arising out of sustainable economies. Their strategies are largely still focused on avoiding reputational risks – thereby missing out on huge sources of earning potential from scenarios like the transition to a low-carbon economy.

*For more information on sustainable banking, please see the Equator Principles - an important component of the banking industry’s efforts to revamp their approaches to sustainability. Despite criticism in the past due to questionable projects financed under the principles, they provide banks with a bare minimum of standards to follow when evaluating project financing.

*There are also several interesting reports on UNEP’s Knowledge Repository that identify measures being taken to align the finance sector with sustainability principles around the world, including one on Tanzania’s forestry sector and its role in developing a green economy and another on the outcome of the High Level Symposium on Reshaping Finance for Sustainability.

*This article by the German Development Institute discusses the role of central banks in the context of the post-2015 agenda.

This collaborative piece was drafted by Emma Brown with input from the WWF and with support from the capacity4dev.eu Coordination Team.