How are Financial Services “Going Green”?
While there is no clear and agreed upon definition for “green” investments, investments linked to sustainability like green bonds and loans have been increasing exponentially over the past few years (Landberg, Massa, and Pogkas 2019). As the current federal administration tries to cut back environmental regulations, the private sector has been increasingly seeing the long-term benefit of sustainable assets and have been increasing green investments by trillions each year which represents a 34% increase between 2016 and 2019 alone (Landberg, Massa, and Pogkas 2019). To be able to have stable and predictable cash flows, businesses are utilizing financial services to invest in green bonds and green loans primarily. Even with vague definitions of what constitutes as “green”, financial institutes are moving towards sustainable investments by excluding any assets that are clearly not “green” as an initial strategy like divesting from oil. Taking advantage of the shift in investment focus allows businesses to increase their share values and improve their brand reputation.
What is Social or Ethical Banking?
Social or ethical banking institutions share a common focus in aiming to advance environmental and social sustainability. An excellent example of the underlying principles is contained in the “Collevecchio Declaration” for financial institutions released by BankTrack in 2003. In the Collevecchio Declaration, BankTrack outlines six principles to guide financial institutions to be more ethical, as well as listing out immediate actions that can be taken. These principles are framed in commitments to sustainability, “do no harm”, responsibility, accountability, transparency, and sustainable markets and governance (BankTrack 2003). This framework provides the basis for how financial institutions can plan and execute upon their dedication to being ethical. Since the release of this declaration, ethical banking has continued to grow globally utilizing this framework for delivering ethical products and services.
What are the products and services associated with social or ethical banking?
Social and ethical banking products are primarily focused on how the finances will be utilized and whether they are unethical or not. Many ethical banks provide green bond financing that helps finance environmental projects, like wastewater treatment plant upgrades, by creating a fixed-income financial instrument to ensure stable returns to investors in addition to tax incentives (Segal 2020). Many social and ethical banks also have green loan programs that can be used at a consumer or business level to get project financing for energy efficiency or other sustainable projects. In some cases, green loans can be utilized in a way that adds the loan payments into a customer’s electricity bill so it is easier to pay for carbon emission reduction projects in a more user-friendly way (Zee 2020). Another mechanism ethical financial institutions are using is environmental, social, and governance (ESG) funds that ensure that investments are put into more social and ethical sustainable businesses that help drive corporate boards to making more sustainable decisions for their businesses to be a part of those funds (Landberg, Massa, and Pogkas 2019). By utilizing different financial products and services, banks can direct money to more sustainable and ethical actions. Money is power, and social and ethical banks understand that they play a key role in ensuring sustainable practices are undertaken by ensuring funds are utilized appropriately to those goals.
Author: Logan Callen
BankTrack. 2003. “Collevecchio Declaration: The Role and Responsibility of Financial Institutions.” Accessed August 4, 2020. https://www.banktrack.org/download/collevecchio_declaration_with_signatories/030401_collevecchio_declaration_with_signatories.pdf
Landerberg, Reed, Annie Mass, Demetrios Pogkas. 2019. “Green Finance Is Now $31 Trillion and Growing.” Bloomberg. Accessed August 4, 2020. https://www.bloomberg.com/graphics/2019-green-finance/
Ross, Stephen A., Randolph W. Westerfield, and Bradford D. Jordan. 2015. Fundamentals of Corporate Finance: Standard Edition. 11th ed. New York: McGraw Hill/Irwin.
Segal, Troy. 2019. “Green Bond.” Investopedia. Accessed August 4, 2020. https://www.investopedia.com/terms/g/green-bond.asp
Zee, Bella. 2020. “Green Loan Options.” Financer.com. Accessed August 4, 2020. https://financer.com/us/loans/green-loans/