What is Sustainable Banking?
Conventional banking and traditional investment practices prioritize, above all, profit. “Money makes the world go round” goes the age-old adage. Yet, as the world continues to grapple with the harsh realities of climate change, so too are banks and their customers. In the process, many are realizing profit isn’t everything.
Sustainable banking is a strategy that refers to banking and investment practices that pursue profit, while prioritizing social responsibility and/or environmental sustainability. A new “triple bottom line” approach to banking contextualizes the relationships between profit, social equity and environmental accountability.
This type of banking focuses on responsible and inclusive lending, promoting projects and programs in line with Environmental, Social and Governance (ESG) investing. An ESG framework guides investment decisions to factor in the impact on the environment, social issues and overall governance instead of just potential returns.
“The transparency that sustainable banking brings empowers customers to change the world around them.”
This relatively new form of banking has changed vastly 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 no longer holds true.
Why is Sustainable Banking Important?
A business as usual approach to banking, that ignores the far-reaching implications of investments, will end up costing global markets an estimated $30 trillion. By limiting an investment strategy to profit only, banks are headed into the direction of not only environmental disaster but economic ruin as well. Changing course will open up an estimated $12 trillion in market opportunities. Simply put, sustainable banking just makes good financial sense.
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 needs. Sustainable banking is an integral piece to achieving these goals.
“Sustainable banking isn’t just a philosophy – it’s about action.”
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 the world over, there is little hope in realizing the SDGs.
Beyond the purely profit-oriented benefits of sustainable banking, there are moral obligations, too. As climate change and social justice issues increase in popularity the world over, banking customers are beginning to look for banks, offering services that align with these shifting norms. In giving customers the chance to become stakeholders in these issues, banks provide value-added services to their customers. 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.
Putting it into Action: Compensation by Donation or ESG Investment
Sustainable banking isn’t just a philosophy – it’s about action. There are a number of ways banks can put their money where their mouth is. By honing in on ESG investing, financial institutions can offer customers transparent information about sustainable investments. The more information a bank can empower their customers with, the more robust the services they offer will become.
In that vein, ecolytiq GmbH has developed a market-leading transaction-to-carbon calculating Software-as-a-Service solution that integrates publicly available carbon emissions data into customers’ banking statements. By adding this level of transparency, a bank imbues customers with individualized snapshots of their impact on the environment. ecolytiq also offers banks and their customers a curated marketplace of certified partners to compensate their actions by a donation or alternatively by an micro-investment into ESG funds and products.
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 very vital piece in this vast mosaic to ensure that future generations can enjoy health, equality, and prosperity.
This is by no means a comprehensive overview of sustainable banking; we are just scratching the surface. If you find sustainable banking as interesting as we do, be sure to check back frequently for more articles on this and other topics!
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