Sustainability in banking: what it means to go green

Sustainability. To most, the word connotes “going green” by choosing paper over plastic, recycling rather than committing trash to a landfill, or driving fewer miles. In other words, modifying consumption behaviours to reduce the human carbon footprint on our shared earth.

For financial institutions, that notion of sustainability barely scratches the surface. Granted, sustainable business practices have always played a role in banking operations and profitability but, today, those practices are even more vital. Why?

With growing pressure from customers, employees, the government, and a wide range of both federal and provincial regulatory agencies, it has become more critical than ever for banks to have a performance-based strategy in place for addressing what is known as the “Triple Bottom Line” (TBL) — people, planet, and profit.

The concept of the TBL emerged in 1994 and, at the time, consisted of social equity, economic, and environmental factors. Over the years, the TBL concept has expanded to include business frameworks such as CSR (Corporate Social Responsibility), ESG (Environmental, Social, and Governance), and a variety of increasingly specialized concepts, such as environmental P&L, impact investment, and carbon productivity, among others.

What is sustainability in banking?

So, if not a commitment to moving from paper-based processes to digital information management, or keeping the thermostat set to 67 degrees in the winter months, what does sustainability mean in banking? Sustainable banking practices centre on the strategic planning and execution of banking operations and business activities — with a goal, of course, of optimizing profitability — while taking into account their environmental, social, and governance (ESG) impact.

Many bankers, including those at some of the world’s largest institutions, have acknowledged that extreme weather events, a societal transition to cleaner energy, and other consequences of a warming planet pose significant business risks. At the same time, many institutions are concerned that climate regulations could burden them with a number of new disclosure requirements, tie their hands when lending to certain industries, and even increase their capital requirements. Bankers are also concerned about the uncertainty around how ESG standards will be defined, benchmarked, measured, and reported.  Will additional personnel be needed? Will this mean an increase in financial exposure?

The sustainable banking commitment

Despite the concerns, top banks are committing to sustainability practices. For example, investments in sectors that are harmful to the environment, such as mining, are being reduced while the commitment to sectors producing or consuming alternative energy is increasing. The Net-Zero Banking Alliance, created by the United Nations, “has mobilized 43 per cent of banking assets worldwide, which commit to aligning their lending and investment portfolios with net-zero emissions by 2050. In fact, many top banks are committing to net-zero by 2030.”^.1

The numbers show that green finance is seeing a growing commitment, with tremendous increases in investments in renewable energy and sustainable infrastructure. Banks are quickly expanding their menu of investment vehicles to include green bonds, sustainability bonds, transition bonds, and social bonds, as well as green loans and clean-energy project financing. In fact, according to Bloomberg, “momentum in ESG investing is growing. Sustainable debt issuance surged to $1.6 trillion in 2021. $625 billion in green bonds were issued, and debt issued for social and broader sustainable purposes surpassed $400 billion.”²

Sustainable banking is here to stay

Regulations are not the only motivators in banking’s move to sustainability. Banking leaders understand that customers are vocal about ESG and that they must address the expectations of those consumers, and employees, who prefer to do business with institutions that commit to sustainable practices. Bankers understand that, in the long-term, sustainable banking will help create the perception of a responsible business and perpetuate new business opportunities. They also understand that green regulations will soon be the norm and that the movement to sustainable banking is well on its way —transitioning from a “nice to have” to an “absolute must.”

In fact, in Canada, ESG reporting, and climate disclosures will be made mandatory for federally regulated financial institutions starting in 2024. This is in line with the new guideline introduced by the Office of the Superintendent of Financial Institutions (OSFI) that requires federally regulated banks and insurers to account for climate change in their governance practices and financial disclosures.³

How sustainability in banking affects reputation

Those banks that fail to value their ESG commitment may find themselves at a reputational disadvantage. And with it, a challenge to their goal of attracting and retaining top talent. Studies have shown that employees want companies to look beyond their traditional metrics of success to account for environmental and social concerns. According to PwC Global Workforce Hopes and Fears Survey 2022, “employees — especially younger workers — want their employers to look beyond financial performance and consider ESG factors. Specifically, Canadian employees are most likely to say they want employers to transparently disclose their record on protecting worker health and safety. That’s followed by the organization’s economic impact, workplace inclusion and diversity, and impact on the natural environment, including climate change.”⁴

Sustainable business practices are a competitive advantage

Banks can, and should — and in fact, must —  incorporate sustainable banking practices into their lending practices, operations, human resources, and management of physical assets. Those that demonstrate the commitment to sustainability, and act on internal and external sustainability initiatives, will ultimately have a competitive advantage.

We’ve been committed to sustainable business practices since 1976

Recognized in the Dow Jones Sustainability World Index (DJSI World), one of the world’s most renowned indices for ESG (environmental, social, and governance), and the Global 100 of the World’s Most Sustainable Corporations, The Ricoh Group is driving sustainability for our future. We are determined to help materialize a sustainable society through business and are committed to help reach the United Nation’s Sustainable Development Goals (SDGs) by 2030.