Sustainable banking is taking over the banking and finance industry. But what exactly is it and what does it mean for banks?
Sustainable banking is taking over the banking and finance industry. But what exactly is it and what does it mean for banks?
Banking customers are looking for sustainable banking more than ever. Conventional banking and traditional investment practices prioritize, above all, profit. Yet, as wildfires choke the air and all-time heat records shatter, banks and their customers are acknowledging they have an important role to play. In the process, many are realizing profit isn’t everything.
Defining sustainable banking
Sustainable banking is a strategy that refers to banking and investment practices that pursue profit not at the expense of environmental sustainability, social responsibility, or trustworthy corporate governance. These three factors are known as ESG.
An ESG framework guides investment and business decisions that factor in environmental impact, social issues, and corporate governance as intrinsically linked to the success and performance of a company.
For the banking world this could include initiatives that range from responsible and inclusive lending programs to customer-centric products that enable and inspire climate action by promoting transparency and conscious consumption.
“The transparency that sustainable banking brings empowers customers to change the world around them.”
This new form of banking has changed in recent years. Old notions of sustainable banking conjured sentiments of trade-offs and charity – doing the right thing used to mean doing the less profitable thing. This is no longer true.
Why is sustainable banking important?
A business-as-usual approach to banking cannot be the banking of the future. The global banking and finance machinery is at risk of an economy in a climate crisis. It is estimated that unbated climate change of warming over 3 degrees Celsius could cost us an eye-watering 178$ trillion by 2070. For scale, that climate change bill is about 70$ trillion more than the entire global GDP for 2022. This does not even factor in the human cost of living in such a world.
By limiting an investment strategy to profit only, banks are blindly headed into the direction of not only environmental disaster but economic ruin as well. Changing course through action, however, will open up an estimated $43 trillion in market opportunities by 2070. Simply put, sustainable banking just makes good financial sense.
“Sustainable banking isn’t just a philosophy –
it’s about action.”
And the world agrees. In 2015, the world recognized the urgent need to act. Setting a path for prosperity, sustainability, and equity, the Sustainable Development Goals (SDGs) aim to meet the needs of today’s people without compromising the ability for future generations to meet their own needs. Sustainable banking is an integral piece to achieving these goals.
Of the $7 trillion dollars per year are needed to achieve these goals, more than 85% of it needs to come from the private sector. Without sustainable investments from private financial institutions, there is little hope in realizing the SDGs.
Banking on a better future
The business case for sustainable banking is strong. As climate change and social justice issues increase in popularity the world over, customers are beginning to look for banks that offer services that generate more than just financial impact. 49% of customers are ready to leave their banks for more sustainable providers, according to a recent survey.
Banks can avoid churn and attract new customers through sustainable banking offerings that are genuine in their intention, robust in their impact, and transparent in their methodology.
The transparency that sustainable banking brings empowers customers to change the world around them. The desire to make meaningful, sustainable decisions is only expected to increase in the future. Banks, who work to proactively capture customer demand, will be the ones who see the most benefit from customer engagement on climate action.
Sustainable banking isn’t just a philosophy – it’s about action. There are a number of ways banks can put their money where their mouths are. For example, financial institutions can offer customers transparent carbon calculations around their spending and support them in choosing alternatives. The more information a bank can empower their customers with, the more robust the services they offer will become.
The project of securing a cleaner, more just world is well underway. But the road is long and the obstacles numerous. Sustainable banking is one vital piece in this vast mosaic to ensure that future generations can enjoy health, equality, and prosperity.
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