Green banking and its role in combating global climate change

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

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

“With the global shift towards creating a low-carbon, climate-resilient and circular economy, banks are under pressure surrounded by customers who demand transparency and accountability, as well as investors who equate financial risk with sustainability,” commented Kiran Raj, Practice Leader of Disruptive Tech at GlobalData.

Organizations are under the microscope in recent times to disclose sustainability goals and create clear targets for net zero carbon, and financial institutions are increasingly being included in these discussions.

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

Meanwhile in Asia, an International Monetary Fund (IMF) report states that to mitigate negative climate impacts by significantly reducing greenhouse gas emissions, emerging markets and developing economies must invest at least US$1 trillion in energy infrastructure by 2030, and an additional US$3 to 6 trillion across all sectors per year by 2050.

This is because fossil fuels remain the primary energy source in Asia, as energy demand rises here due to increasing economic activities, increased industrialization and high urbanization. To meet IMF targets, regulators in Asia are actually making more progress than financial institutions and businesses in the region.

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

Perhaps in response to the lack of decisive action by other established companies, a number of startups are exploring innovation in the green banking sector. “They are increasingly exploring value propositions that not only enable them to achieve global goals, but also drive revenue growth and provide a competitive advantage,” so Kiran.

Sustainability-focused startups have emerged to support banks and other large 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 factor for the planet-saving decarbonisation journey, financial institutions are investing heavily in supporting a whole range of priorities right from the development and introduction of climate-friendly banking practices, focus on green and social bonds, greater investment in green projects to the transition from traditional energy sources to renewable energy,” noted Shagun Sachdeva, Project Manager for Disruptive Tech.

Some of these change-making startups are Ecolytic, which developed a sustainability-as-a-service solution that allows financial institutions such as Visa, Tink and Rabobank to offer their clients investments that include environmental footprints, personalized impact compensation and ESG.

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

There is also Yayzy, with its mobile-based platform to help major banks such as Santander, BBVA and Deutsche Bank as well as fintech startups incorporate sustainability-oriented data into their customers’ transaction data. The app will then suggest how the carbon footprint can be reduced or compensated completely.

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

Despite these efforts, there are still not enough green banking projects to make a big enough difference. “While demand for green banking products far exceeds supply, the key for financial institutions will be to remain consistent in building a solid sustainable banking offering that will enable them to defend existing relationships, expand their market share and create differentiation in their offerings,” explained Shagun. .

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

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

Featured image credit: Edited from Freepik here and here