Green Banking and Its Role in Combating Global Climate Change

Green Banking and Its Role in Combating Global Climate Change

by February 1, 2023

Climate change and sustainable development efforts are becoming a global movement for financial companies like they have for many businesses. This includes pressure on the banking sector to set carbon goals, and for fintech companies to introduce green features in their offerings.

According to data and analytics firm GlobalData, green banking is becoming established as a concept, and is one of the areas to watch under the broader umbrella of sustainable finance

“With the global transition towards the creation of a low-carbon, climate-resilient, and circular economy, banks are reeling under pressure surrounded by customers demanding transparency and accountability as well as investors equating financial risks with sustainability,” commented Kiran Raj, Practice Head of Disruptive Tech at GlobalData

Organisations are under a microscope in recent times to disclose sustainability aims and make clear net-zero carbon targets, and financial institutions are increasingly being included in these discussions.

North American banks for example, were being derided for promoting their commitments to becoming carbon neutral by 2050, while at the same time nine out of the 12 largest funders to fossil fuel sectors including oil, gas, and coal projects were US and Canadian banks. 

Meanwhile in Asia, an International Monetary Fund (IMF) report is stating that to mitigate adverse climate effects by substantially reducing greenhouse gas emissions, emerging markets and developing economies must invest at least US$1 trillion in energy infrastructure by 2030, and a further US$3 trillion to US$6 trillion across all sectors per year by 2050.

This is as fossil fuels are still the primary energy source in Asia, as energy demand surges here due to rising economic activities, increased industrialisation, and high rates of urbanisation. To meet IMF goals, regulators in Asia are actually making greater strides than financial institutions and businesses in the region. 

This is in stark contrast with other parts of the world. European banks for instance, like Dutch bank ING and La Banque Postale in France, have taken the steps to completely cease financing new fossil fuel projects like oil and gas. Joining them will be HSBC, the largest bank in Europe, which has roots in Asia.

Perhaps in response to the lack of decisive actions from other incumbents, a number of startups are exploring innovation in the green banking sector. “They are increasingly exploring value propositions that not only empower them to meet global goals but also propel revenue growth and offer a competitive advantage,” said Kiran. 

Sustainability focused startups have cropped up to support banks and other major financial institutions across a range of areas as they seek to transform their environmental footprint and meet environmental, social, and governance (ESG) goals. 

“As green banking is a key enabler of the planet-saving decarbonisation journey, financial institutions are betting big to support an entire gamut of priorities right from the development and adoption of climate-friendly banking practices, focus on green and social bonds, greater investments in green projects to transition from traditional energy sources towards renewable energy,” noted Shagun Sachdeva, Project Manager of Disruptive Tech.

Some of these change making startups are ecolytic, which developed a sustainability-as-a-service solution that allows financial institutions like Visa, Tink and Rabobank to offer their customers investments that include environmental footprinting, personalised impact offsetting and ESG. 

Another is fintech startup Doconomy, which created a credit card called DO Black that not only tracks and measures CO2 emissions associated with users’ transactions, but also imposes a limit on the environmental impact of their purchases. Some of Sweden-based Docomy’s partner banks are Standard Chartered, Bank of the West, and the Commercial Bank of Ceylon in Sri Lanka.

There’s also Yayzy, with its mobile-based platform to assist major banks such as Santander, BBVA and Deutsche Bank as well as fintech startups to incorporate sustainability-oriented data into customers’ transaction data. The app will then suggest how carbon footprints can be reduced or offset entirely.

Not to be left out in the Southeast Asian region, startup CO2 Connect offers a solution that enables small and medium-sized businesses (SMEs) to access environmentally-conscious financial services by automating carbon emission estimates and the reporting of that data. In Singapore, CO2 Connect works with banks like OCBC and United Overseas Bank.

Despite these efforts, there are still insufficient green banking projects to make a big enough difference. “Albeit the demand for green banking products far exceeds supply, the key for the financial institutions will be to remain consistent in building a solid sustainable banking value proposition that enables them to defend existing relationships, expand their market share, and create differentiation in the offerings,” Shagun explained.

She concludes that financial institutions will need to “scale up” their levels of cooperation and collaboration with green financial services in various ways. “Financial institutions, for now, seem to be confident of the success rate of green banking products. However, achieving it depends on implementing a comprehensive and coherent strategy,” said Shagun. 

“If the potential of green and sustainable finance is to be maximised, what we need is require [sic] a mix of policy interventions defining a consistent set of global disclosure standards, a globally accepted core taxonomy, development and transparent use of well-defined metrics, and certification labels.”


Featured image credit: Edited from Freepik here and here