Decarbonise the Loan Portfolios of Banks

Decarbonising the loan portfolio is the primary concern for banks presently as they plan the ensuing year's loan budget for sustainable growth. Delivering financial products and services per the people's needs and safeguarding the environment while generating profit alone can sustain the viability of banks. Sustainable banks create differentiation and attract customers and borrowers who are socially and ecologically aligned. Sustainable banking caters to a broader variety of stakeholders and reduces the risk of sub-standard assets. Major aspects are:

1. Sustainable banking enables banks to think from the perspective of Environment, Social and Governance (ESG) norms and how the actions impact people, the planet and profit.?

2. Sustainable banking is focused on transparency on how the depositors’ money is utilised.?

3. Sustainable banking incorporates the social impact of banking through Green loans.

The 21st century has seen the problems of sustainability and climate crisis take centre stage. People face the side effects of biodiversity loss, climate change, and environmental pollution. Social issues like poverty and unequal economic development have been pervasive.?

The incessant unsustainable business practices of producers’ and consumers’ consumption practices have led to the climate crisis. Banks interact with producers and consumers simultaneously. As such, sustainable lending practices of banks can equipoise to save this planet.

Mitigating the impact of the climate crisis requires two tools – technology and finance. Banking is a significant funding source for companies to transition to green businesses. Developing technology is costly. While the government is the primary funding source for technology development, banks use sustainable strategies to create a better world.?

While managing environmental risk, banks utilise ecological and social issues to create products and services to promote sustainable development. Sustainable banking has received another boost from IPCC's work highlighting the climate crisis and the Paris Accord requiring governments to act on the climate crisis. Banks now find it increasingly critical to integrate ESG ratings into their decision-making.

Banks generate both social and financial returns. There is now greater consciousness regarding the environment and soil, water and air pollution. Banks are now wary of companies' contaminated sites and credit default risks. Banks have started integrating environmental issues into credit risk management to improve default risk predictions.?

Sustainable banking incorporates environmental, social, and governance (ESG) criteria into financial decision-making. When sustainable banking is applied to lending practices, it can contribute significantly to decarbonisation for the following reasons:

Alignment with Environmental Goals: Sustainable banks integrate environmental considerations into their lending practices. By prioritising projects and companies committed to reducing carbon emissions, they contribute to overall decarbonisation efforts.

Risk Mitigation: As the world transitions towards a low-carbon economy, investments in carbon-intensive industries face increasing regulatory and market risks. Sustainable banks recognise these risks and lend to proactive companies to reduce their carbon footprint. This creates a more resilient and sustainable portfolio.

Support for Renewable Energy and Clean Technologies: Sustainable banks prioritise financing for renewable energy projects and clean technologies. By implementing these technologies, banks contribute directly to reducing greenhouse gas emissions and transitioning to a more sustainable energy system.

Encouraging Sustainable Practices: Banks encourage borrowers to adopt sustainable and environmentally friendly business practices. Lending institutions provide financial incentives, such as lower interest rates or preferential terms, to businesses that commit to reducing their environmental impact and promoting sustainability.

Meeting Customer Demand: Sustainable banks that align their lending with decarbonisation goals attract customers who are environmentally conscious and concerned about the long-term impact of their financial decisions.

Regulatory Compliance: Governments and regulatory bodies increasingly focus on policies and regulations that promote sustainability and combat climate change. By lending to projects that align with these regulatory requirements, sustainable banks comply with current standards and position themselves well for future regulatory changes.

Long-Term Financial Stability: Sustainable banking practices are associated with a focus on long-term financial stability. By considering decarbonisation goals in lending decisions, banks contribute to the financial system's stability by avoiding investments that may become stranded or devaluated due to environmental risks.

Sustainable banking supports decarbonisation by integrating environmental considerations into lending decisions, promoting sustainable practices, aligning with customer preferences, complying with regulations, and contributing to developing a low-carbon economy. This approach recognises the interconnectedness of financial, environmental, and social factors in achieving long-term prosperity.

Sustainability is increasingly getting integrated with business processes and strategies. Banking needs to align with the new reality. Banks must see where the potential for becoming sustainable exists.?

Banks have long looked at simple solutions like using less paper or electricity. They should ensure that each aspect of their business contributes to sustainability.?

Banking needs to be sustainable, and sustainable banking alone can be a catalyst for decarbonisation as most of the funding evolves around banks. Banks must harness technology and data to offer their retail and corporate customers the tools to measure their carbon impact. This insight and awareness of their ESG impact are vital if companies and customers are to mitigate and reach their net-zero targets.

Rightly said, “Sustainable finance is necessary to?finance both what is already environment-friendly today (Green Finance) and what is transitioning to environment-friendly performance over time (Transition Finance).”