Financial and Monetary Systems

Banking on sustainability - what’s next?

Banking is starting to see sustainability as a priority. Here's how the industry can overcome the barriers to more sustainable practices. Image: Erol Ahmed/Unsplash

Derek Baraldi
Head of Sustainable Finance, World Economic Forum LLC
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Financial and Monetary Systems

This article is part of: Sustainable Development Impact Summit

In recent years, leaders of public and private organizations, regardless of sector, have started to prioritize sustainability. And now, banking is starting to see sustainability as a priority, as well.

Leaders in the financial services industry are considering how to transition the global economy to promote more energy efficient practices, acknowledging the social impact of the industry in relation to automation and machine learning - and creating appropriate governance structures to appease shareholders and consumers.

In addition to company-specific sustainability efforts, thought leaders, industry organizations and international organizations have developed sustainability initiatives, too.

The links between ESG and financial performance.
Banks are prioritizing ESG. It's good for business, too. Image: S&P Global Ratings

For example, the United Nations Environment Programme Finance Initiative (UNEP FI) has championed the Principles for Responsible Banking, which approximately 80 banks across the globe will endorse during Climate Week. “The Principles for Responsible Banking align the banking industry with the Paris Agreement and with the Sustainable Development Goals, and they demonstrate a clear commitment from the banking industry to assume its defining role in creating a sustainable future,” according to Christiana Figueres, Mission 2020 convener and former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

Banks endorsing the Principles will commit to improving their governance structures and measuring the societal impact of their activities, striving to make continuous improvements in their practices where necessary.

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What is the World Economic Forum’s Sustainable Development Impact summit?

Despite these efforts, there are still barriers to achieving sustainable practices:

1. Certain regions are more conducive to sustainability efforts than others.

In Europe, particularly France and the United Kingdom, governments are focused on priortizing sustainability, encouraging banks and insurers to align accordingly. In other regions, there is noticeably less engagement.

In order to achieve a greener world and make sustainable banking truly effective, all regions must be aligned.

2. Many places rely on practices that are dangerous to the environment to fuel their economies.

Sustainabilty is not a priority in emerging markets in the way it is in other regions, as many economies rely on less climate-friendly industries.

Unlike more developed economies, many emerging markets do not have the means to shift their supply chains to make environmentally conscious decisions, nor do they have robust political support for sustainable practices.

3. No common metrics exist for measuring sustainabiltiy in financial services.

Currently, there is a lack of consensus on the metrics that should be used to measure sustainability practices in financial services. Across the industry, institutions are faced with different “starting points”, with portfolios exposed to different risks, making it difficult to determine a baseline for success.

All financial services organizations will have to adapt their production, usage of energy and distribution networks. Many struggle, however, with determining where to aim their efforts. Furthermore, specialists are facing difficulties in gleaning consistent sectorial and industrial data, heightening the lack of consensus on what should be measured.

The most recurring criticism coming from specialists working on the topic is the difficulties encountered when wanting to gather sectorial and industrial data, specifically in certain geographical areas – emerging markets being one where the data is most lacking.

4. Taxonomies and definitions of sustainabilty vary greatly across industries and geographies.

There is widespread disagreement among experts on the definitions of “sustainable banking” and “environmental, social and governance (ESG)” imperatives - and whether or not the two issues are the same. The controversy has not only contributed to the lack of common metrics for measuring sustainability, but also has created confusion in aligning best practices across the globe.

Global ESG regulations are increasing. Banks need to get ahead of them. Image: S&P Global/UN Principles for Responsible Investment

Breaking Banking Barriers

Despite the very real barriers to making sustainable banking an effective effort globally, that has been progress.

For example, Second Degree Investing Initiative (2dii), a think tank based in Paris, France, has taken a different approach to sustainability in financial services. The group has worked with select European banks to develop methodologies to measure and assess climate change with a focus on the banks’ loan books.

Fortunately, banks are also beginning to understand sustainability as strategic, focusing on risk measurement, assessing new business opportunities and addressing stakeholders’ concerns. Most recently, the Bank of England announced they want to look into categorizing climate change as a new financial risk; it would have to be stress-tested, but would represent considerable progress. The Network for Greening the Financial System represents most world central banks, aiming “to better understand and manage the financial risk and opportunity of climate change.” The Task Force on Climate-related Financial Disclosures has also contributed to efforts, developing voluntary reporting standards for institutions and corporates.

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Financing Sustainable Development

To address these challenges, the World Economic Forum aims to serve as a neutral platform to promote an open dialogue between commercial banks, central banks and development banks. With depleting natural resources, the impending threat of climate change and an influx of natural disasters, sustainable practices must be accepted by the financial services sector. Today, the sector has a unique position to contribute to these efforts.

If the financial services community does not prioritize and immediately address these issues, they will face increased scrutiny from governments responding to societal pressure. The goal should be to define objectives for the community and create guidance on how to achieve it. This is a unique opportunity to contribute to shaping the industry’s fate – before it’s too late.

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