How will green banking affect businesses soon?

Green banking is a term that refers to the raising of the level of financial flows in environmentally sustainable investments. At its core, green banking emphasizes a harmonious balance between investment risk and ethical responsibility, aiming to foster cash flows that prioritize environmental responsibility for the benefit of both businesses and citizens.

The demand for green banking arises amid a backdrop where banks are increasingly obligated to adhere to various mandatory and voluntary regulations leading to a continuous rise in disclosure requirements (i.e. Directive 2014/95/EU on non-financial information disclosure, the European Banking Authority’s disclosure requirements, Task force on Climate-related Financial Disclosures (TCFD), the European Central Bank’s supervisory expectations relating to risk management and disclosure, the EU Taxonomy, etc.). Therefore, banks are in the process of identifying trends and regulatory frameworks related to environmentally sustainable finance and investment.

The EU Taxonomy sets specific guidelines and technical criteria for the identification of eligible and aligned businesses and investments. At the same time, it encourages the provision of more favorable funding terms for environmentally sustainable investments.

Increasing funding considerations intensify global competition among banks, challenging their adaptability and capacity to finance eco-friendly and sustainable investments. In their effort to align with market trends, banks seek to endorse such investments by offering improved funding terms to environmentally sustainable companies and investments. Consequently, banking product management policies are revised to ensure the availability of products with sustainable or green features.

The European Central Bank (ECB) is also expected to play a key role in promoting environmentally sustainable finance and green banking. In 2022, banks are submitting the first key performance indicators for their engagement with eligible and non-eligible economic activities in accordance with the EU Taxonomy Regulation. After scrutinizing banks’ quantitative and qualitative disclosures, the ECB is expected to push for improved indicators through a comprehensive supervisory review as well as implement specific corrective actions as necessary.

Banks can enhance their indicators by evaluating businesses and investments based on environmental, social and governance (ESG) criteria. Businesses demonstrating a robust dedication to ESG priorities may receive higher scores on these criteria. In this way, they might secure more favorable financing terms.

Hence, the answer to whether green banking poses a challenge or an opportunity for sustainable development is clear: it is the only way forward. Banks must proactively align themselves with green banking and adhere to well-defined environmentally sustainable funding criteria. 

Leveraging its extensive experience in Environmental and Social Management along with Corporate Governance across various economic sectors, PRIORITY is adept at serving as your consultant for the implementation of green banking strategies, particularly within the Banking sector.