According to the most recent IPCC (Intergovernmental Panel on Climate Change) report, human activity is the primary cause of global warming and will probably accelerate it further, rising by 1.5°C above pre-industrial levels between 2030 and 2052 based on a business-as-usual scenario.
The IPCC report set extremely aggressive goals to meet 1.5°C of global warming, including a reduction of global net anthropogenic CO2 emissions by roughly 45% from 2010 levels by 2030 and a net zero emission level by 2050.
It is undeniable that social and corporate changes as well as emissions reductions in all sectors are necessary to keep global warming to 1.5°C. The National Climate Assessment arrived at similar conclusions and recommended steps to lower risks through emissions mitigation and adaptation, albeit with a more constrained scope because it concentrated its findings on the United States. Despite the negative effects of climate change and global warming, these findings demonstrate that much work remains to be done.
Experts say, an enormous amount of money must be invested in order to accomplish such a structural transformation.
According to the IPCC report, $2.4 trillion in clean energy will be required annually through 2035, and $1.6–$3.8 trillion in supply-side energy system investments will be required annually through 2050. This amounts to $51.2 and $122 trillion in energy-related investments alone.
The financial sector, which is the foundation of the actual economy, is anticipated to play a crucial role in supplying the required financial resources in light of the substantial investment needs. Also, in order to provide credit to households and individuals and to meet the financial needs of the private sector, the banking industry plays a crucial role.
Additionally, the banking industry is essential to a nation’s efforts to adapt to climate change and strengthen its financial defences against related hazards. By redistributing funding to sectors that are sensitive to climate change, banks can lessen the risks related to sustainability and climate change, lessen their effects, help businesses adapt to the changing environment, and promote recovery.
The financial system is being impacted by climate change due to its extensive effects on all industries and regions, as well as the high degree of certainty that risks will materialise and have unavoidable repercussions if action is not taken now. Nonetheless, the current asset valuation does not fully evaluate and account for the risks associated with climate change. In order to finance the shift to a green economy, banks must unlock private investment, balance supply and demand while taking into account all potential risks, and assess projects from both an economic and environmental standpoint. The majority of banks still have very small green portfolios, despite the fact that some have shown leadership in financing climate or green projects.
According to estimates from the International Finance Corporation (IFC), in 2016 the total amount of green loans and credits extended by developing country banks to the private sector was roughly $1.5 trillion, or roughly 7% of all claims made by emerging market banks against the private sector. The failure of banks to incorporate environmental and climate change risks into their risk management systems and strategies, as well as the absence of the required regulatory and supervisory framework, led to this result.
Additionally, obstacles at the sectoral and institutional levels make it frequently difficult to meet the necessary investment under the current financial framework. As a result of the absence of a regulatory and supervisory framework, more central banks and regulators globally are realising their responsibility to address climate change and environmental risks that the banking and financial industry faces and are taking appropriate action.
For instance, in order to support the shift toward a sustainable economy and to aid in the analysis and management of climate and environmental risks within the financial sector, a consortium of central banks and supervisors established the Networking for Greening the Financial System (NGFS) in 2017. Simultaneously, an increasing number of banks, particularly private sector commercial banks, have begun to go green with their operations. This has involved incorporating risks related to the environment and climate change into their risk management systems and strategies, as well as introducing green financial products to broaden their business reach.
Overview of green banking
The definition of ‘green banking’ is not agreed upon by all parties, and it differs greatly between nations. Some organisations and researchers, however, made an effort to define it differently. Green banking is an umbrella term for policies and procedures that make banks sustainable in terms of the economy, the environment, and society, according to the Indian Institute for Development and Research in Banking Technology (IDRBT), which was founded by the Reserve Bank of India.
Green banking combines social and environmental responsibility with first-rate banking services; it is comparable to ethical banking, which is centred on environmental protection. Green banking, as defined by the State Bank of Pakistan, is the promotion of eco-friendly practices that help banks and customers lower their carbon footprints.
Since green banking addresses banks’ social responsibility for environmental protection, it can also be referred to as social or responsible banking. This shows how social and environmental issues frequently intersect. In general, social banking is defined as using banking to address some of the most important issues of the day and to try and improve people’s lives, the environment, and culture. In a similar vein, responsible banking involves banks making a firm commitment to sustainable development and incorporating corporate social responsibility into all aspects of their business operations.
Lastly, green banking can be thought of as a subset of sustainable banking, which focuses more on social and environmental aspects. A network of independent banks and banking cooperatives, the Global Alliance for Banking on Values (GABV) has as its common goal the use of finance to promote sustainable social, economic, and environmental development.
GABV has supported sustainable banking principles, which include a triple-bottom-line approach (focusing on social, environmental, and financial aspects) at the core of the business model, a community-based foundation, and open and inclusive governance. There are a lot of definitional and conceptual overlaps, which can be somewhat confusing. To make the scope and definitions a little clearer, UNEP provided a good comparison of respective definitions of green vs. sustainable vs. socio-environmental. Green finance includes climate and other environmental finance but leaves out social and economic aspects; in contrast, sustainable finance is the most inclusive concept, according to UNEP, and includes social, environmental, and economic aspects.
The IPCC correctly stated in 2001 that there is insufficient scientific data to determine how climate change will impact the banking industry. Despite the lack of conclusive scientific data, regulators, central banks, and academic institutions have been examining the financial risk and stability implications of climate change.
The Bank of England’s Prudential Regulation Authority (PRA) has identified physical and transitional risk factors as the two main financial risk factors linked to climate change. First-order risks resulting from climate and weather-related events, including heatwaves, droughts, floods, and sea level rise, put human and natural systems at risk. Experts say, physical risks can lead to higher credit risks and financial losses by impairing asset values.