Green Banks are known as mission-driven institutions that use innovative financing to accelerate the transition to clean energy and fight climate change. These institutions are supposed to care more about deploying clean energy than maximising profit. It actively develops a pipeline of clean projects and seeks out opportunities in the market.
All Green Banks have the mission to address climate change, though many also have additional objectives, such as improving resiliency or addressing underserved markets.
With the mission of combating the impacts of climate change becoming the new normal in the 21st-century socio-economic setup, the financial sector has become a pivotal force in driving sustainability. Banks, too, are aligning their lending, investment strategies, and product offerings with environmental, social, and governance (ESG) objectives.
While ESG has become integral to achieving global net-zero carbon emissions, green banking, on the other hand, has transformed itself from a niche concept to a central strategy for financial institutions aiming to support the green transition and safeguard the planet.
The new normal: Challenges ahead
Becoming “Green Banks” has become the policy imperative for 21st-century financial institutions. Take HSBC, for example, which has made a bold commitment to align its portfolio with the Paris Agreement’s goal of net-zero financed emissions by 2050. The London-headquartered bank in 2024 made significant strides on the ESG front.
Prominent among them was the collaboration with Google Cloud, as part of which new initiatives were launched to support the burgeoning climate tech sector. This partnership, particularly through the Google Cloud Ready-Sustainability (GCRS) programme, will offer tailored financial products and services in the United States and the United Kingdom, designed to propel the growth of innovative startups.
In 2024, HSBC also partnered with Dun & Bradstreet (D&B), a global provider of business decision data and analytics, to support Hong Kong businesses in enhancing their resilience and competitive edge through environmental, social, and governance (ESG) reporting.
Last but not least, HSBC’s Hong Kong division partnered with Cathay Pacific and biofuels platform EcoCeres started a new initiative aimed at helping to decarbonise air travel by supporting the use of sustainable aviation fuel (SAF) in the Chinese administrative region.
HSBC will now purchase 3,400 tonnes of SAF produced by EcoCeres for use by Cathay Pacific on flights departing from Hong Kong International Airport. The transaction marks HSBC’s largest SAF purchase to date, and the initiative will support Cathay Pacific’s goal to scale the use of SAF to 10% of its fuel consumption by 2030.
In 2024, German giant Deutsche Bank announced a series of finance and due diligence commitments aimed at strengthening its ocean protection policies, including the implementation of a freeze on direct financing of deep-sea mining projects.
The new announcement forms were part of Deutsche Bank’s commitment to the #BackBlue initiative. Backed by the United Nations (UN) and led by the blue economy-focused organisation the Ocean Risk and Resilience Action Alliance (ORRAA), the Blue Finance Commitment (#BackBlue) initiative was launched in 2021 to incorporate ocean considerations in finance and insurance decisions.
In Asia, too, ESG is rapidly capturing the attention of financial institutions and governments. Across the continent, a number of new regulations were introduced recently, increasing scrutiny of corporate operations. China announced in 2024 that listed companies would be required to publish sustainability reports by 2026. A similar rule for reporting is already in place for companies on the Hong Kong Stock Exchange.
Singapore, too, took steps with the creation of the Green Finance Industry Taskforce (GFIT). The GFIT is divided into workstreams, with focuses on developing a taxonomy with clear sustainability objectives, improving environmental risk management, and supporting green financing solutions.
In response, banks operating in Asia are now becoming innovative in their way of supporting their clients in their environmental, social, and governance goals, tying the products and services they offer to environmental targets. Standard Chartered launched an ESG-linked cash account for their corporate banking clients, tying the interest rates and fee pricing to the company’s performance.
According to Elizabeth Girling, head of sustainable finance products and frameworks at Standard Chartered, the accounts will incentivise clients at the organisational level to work sustainability into their treasury management arrangements.
As companies began to focus on their Scope 3 emissions (which track the indirect carbon emissions throughout the length of a company’s value chain), banks are developing products to support their decarbonisation goals.
Uzayr Jeenah, partner at McKinsey, noted that DBS has supported fashion retailer H&M in developing financing tools to assist with the decarbonisation of their supply chains. H&M’s suppliers are now able to access financing via DBS and technical support from sustainability consultant Guidehouse to reduce their climate impact through initiatives like upgrades to factories.
Jeenah termed these initiatives, which are focused on value creation, as ones that go beyond the trend of “green lending for the sake of green lending” and are driven by the corporate customer base, which has become increasingly demanding evidence of their net-zero progress.
The Banker reported that the “banks are being further assisted in gaining greater oversight of the companies across a value chain by the integration of data-rich messaging systems, which increase transparency and accountability.”
Jeenah also pointed to the move from MT standards to ISO 20022 standards used in transaction messaging, saying it will “unlock use cases,” such as decarbonising the supply chain. Through these messages, greater detail is given on the recipient of funds, allowing for further traceability along a supply chain and across borders.
ESG expands in MENA too
As per June 2024 research titled “Sustainability Reporting for Banks: The Climb Starts Here,” The London Institute of Banking & Finance (LIBF) noted that sustainability is becoming a key focus area in the financial sector of the MENA (Middle East and North Africa) region, driven by regulatory frameworks, market demand, and technological advancements.
Initiatives like the “Unified ESG Metrics for GCC Listed Companies” and national sustainability agendas in the UAE and Saudi Arabia are setting standards for transparency and comparability.
“Consumer and investor pressure for sustainable financial products is pushing banks to integrate ESG principles into their strategies. The rise of green bonds, sustainable loans, and FinTech solutions is further advancing the sector’s commitment to environmentally and socially beneficial projects.
Moreover, partnerships with educational institutions like the London Institute of Banking & Finance (LIBF) are enhancing the knowledge and capacity of financial professionals in ESG practices,” the study noted.
Financial institutions are strengthening corporate governance and ethical leadership to support sustainability goals. Leadership commitment and enhanced governance structures have become crucial for driving the sustainability agenda. Regional partnerships and the adoption of global benchmarks are promoting best practices and improving local sustainability efforts.
Additionally, there is a growing emphasis on comprehensive and transparent ESG reporting, financial inclusion, and social impact investments. By diversifying investment portfolios towards sustainable assets and regularly assessing their environmental and social impacts, the financial sector in MENA aims to achieve long-term risk management and positive social outcomes.
ESG has become even more important in MENA, considering it is a region vulnerable to environmental challenges. According to a report by the World Economic Forum, temperatures here rise twice as fast as the global average.
This harsh reality calls for an urgent pivot to sustainable practices, which extend well into the finance space. In early 2023, PwC identified green financing as a key economic theme to watch. Green finance focuses on raising funds to tackle environmental problems, such as reducing emissions, climate change, and restoring biodiversity. It is part of sustainable finance, a broader approach that involves considering ESG factors in investment decisions.
In the MENA model of green finance, we have green bonds, which, issued by governments or private companies, are a kind of loan created to fund projects that help the environment. Green sukuk is similar to a green bond, while remaining compliant with Islamic law. According to OECD (The Organisation for Economic Co-operation and Development) data from 2020, the region has consistently received between $2 and $3 billion each year in climate finance since 2012.
“While the inflow of climate finance has been steady, it falls short of meeting the region’s demands, prompting several MENA countries to innovate and expand their green finance mechanisms. After all, green finance offers vital opportunities for the region, especially those belonging to the Gulf Cooperation Council (GCC). An analysis by Strategy& revealed that by 2030, green investments in six major GCC industries could significantly boost the economy. These investments could contribute up to $2 trillion to the cumulative GDP, generate over 1 million jobs, and attract foreign direct investment (FDI),” reported The Middle East Economy.
Closing the financial gap in MENA’s transition toward a more sustainable economy, governments in this part of the world have begun enacting laws and regulations driven by sustainability goals. Take the UAE, for example, where the Securities and Commodities Authority mandates that public joint-stock companies on the Abu Dhabi Exchange or Dubai Financial Markets issue an annual sustainability report. Such an initiative aims to boost investor confidence and ensure companies disclose and manage important ESG factors effectively.
The year 2023 marked a significant surge in green social, sustainable, and sustainability-linked bonds (GSSB) issuances in the MENA region. Total sales reached a new high of $24 billion, equivalent to a 155% increase from the previous year. Leading the way were the UAE and Saudi Arabia. Together, these two powerhouses accounted for 77% of the total issuances in MENA. Egypt also made a mark with the Green Panda Bond, the first from the region to be issued in China. It raised RMB 3.5 billion ($479 million) to fund public transit projects and received a partial guarantee from the Asian Infrastructure Investment Bank (AIIB).
The same year also turned out to be an important one for green sukuk in the region, as Islamic issuances made up more than a quarter of the total regional output for the first time. MENA also dominated the global market in green sukuk, achieving sales of around $6.5 billion.
In 2024, MENA further solidified its position in the global green finance market. While Oman introduced a sustainable finance framework, this allowed for the issuance of various financial instruments, including green bonds and sukuk, to fund renewable energy projects.
The Saudi Ministry of Finance also unveiled its Green Financing Framework, a detailed plan supporting projects across clean transportation, renewable energy, and climate change adaptation. Fitch Ratings projected that ESG sukuk would exceed $50 billion globally within two years.
The end of Q1 2024 marked a significant milestone, with ESG sukuk reaching $40 billion, demonstrating a year-on-year growth of 60.3%. Saudi Arabia and the UAE further consolidated their positions at the forefront of this growth, holding the largest shares of Fitch-rated ESG sukuk — 45% and 33%, respectively.
The rise of green financial products
Businesses are now realising that integrating sustainability into core operations is not just about fulfilling social responsibility, but is also critical to long-term business viability. However, these commitments come with significant risks, particularly for banks with substantial exposure to high-emission sectors like energy and mining.
“Reducing exposure to carbon-intensive industries can weigh on short-term profitability, but financing the shift to a low-carbon economy presents enormous long-term opportunities,” said Peter Panayi, Head of Global Go-To-Market at BuildingMinds, while explaining, “Banks are finding that while reducing exposure to carbon-intensive sectors may affect short-term profits, financing green transitions opens new growth avenues and positions them as leaders in the future of green finance.”
For banks, the green transition requires a fundamental rethinking of traditional business models, where profitability and sustainability are no longer mutually exclusive. Instead, they are interdependent. As demand grows for sustainable products and investments, financial institutions that successfully integrate ESG factors into their business strategies will outperform their competitors, both in terms of market share and profitability.
This shift, however, comes with its challenges. Banks must address risks associated with greenwashing and navigate complex regulatory frameworks, which pose significant obstacles in balancing profitability with sustainability commitments. To tackle this multifaceted landscape, financial institutions are creating new financial products, utilising innovative technologies, and investing in transparency and data verification to achieve their financial and sustainability objectives.
When it comes to developing and deploying green financial products, banks are employing strategies like green bonds, sustainability-linked loans (SLLs), and ESG-focused instruments, which are at the forefront of this financial innovation. These products enable banks to fund projects that support sustainability objectives while maintaining strong financial performance.
The global green bond market, for example, has seen exponential growth in recent years, reaching hundreds of billions of dollars in annual issuances. Richard Bartlett, co-founder and CEO of GreenHearth, a fintech focused on financing renewable energy projects, shared his thoughts about the increasing importance of these products.
He said, “Sustainability-linked loans and green bonds are essential in meeting the growing demand for sustainable investments. They offer performance-based financing that encourages companies to meet their ESG targets while maintaining financial viability.”
However, despite green financial products holding some potential, challenges remain. Banks must manage the reputational risks associated with accusations of greenwashing (companies falsely claiming to meet ESG standards) and navigate an evolving regulatory environment. Frameworks like the “EU Green Taxonomy” and the UK’s “Sustainability Disclosure Requirements” (SDR) demand that banks provide detailed ESG data and ensure that their products align with sustainable finance principles.
Banks now require robust systems for collecting and verifying ESG data. Without transparent and measurable outcomes, these financial institutions also risk losing credibility and investor confidence.
Rajul Sood, Managing Director and Head of Banking at Acuity Knowledge Partners, highlighted the importance of data in this process, as he said, “Banks monitor green loans through impact reports and key metrics, such as renewable energy projects financed, energy efficiency improvements, and carbon emissions reductions. This data is essential for ensuring that investments are both financially sound and aligned with sustainability goals.”
The issue of greenwashing has become a significant concern for banks and their stakeholders. Greenwashing is a phenomenon where companies/financial institutions exaggerate or falsely claim their environmental credentials to attract capital. Regulatory bodies are tightening the rules around sustainable finance to ensure transparency and prevent misleading claims. The EU’s Green Taxonomy, for instance, now provides a clear framework for what constitutes a ‘green’ investment, making it more difficult for institutions to claim green credentials without substantiating them.
In the United Kingdom, the Sustainability Disclosure Requirements (SDR) aim to increase transparency around ESG reporting. However, Bartlett notes that the UK lags behind the EU in implementing comprehensive regulatory frameworks.
Driving sustainability with innovation
Fintech solutions like digital twin software are enabling banks to monitor the financial and environmental performance of green projects in real time, apart from helping these businesses provide stakeholders with clear, measurable outcomes, enhancing both transparency and accountability. The same technology is also helping banks streamline compliance with regulatory frameworks.
Automating the reporting process allows banks to efficiently meet regulatory requirements, thereby reducing the risk of non-compliance and the penalties that may follow. The rapid growth of sustainable finance offers numerous opportunities for banks, especially in creating innovative financial products. Among the most promising options for banks aiming to support the green transition while remaining profitable are sustainability-linked loans and green bonds.
By availing of sustainability-linked loans, companies are receiving financial incentives to meet specific ESG targets, such as reducing carbon emissions or improving energy efficiency. If the company meets these targets, it benefits from lower interest rates, making the loan more affordable. This performance-based financing model has become increasingly popular as companies strive to align their operations with global sustainability goals.
Green bonds have become another powerful tool, allowing banks to raise capital for projects that have a positive environmental impact, such as renewable energy or sustainable infrastructure. The success of these products demonstrates the strong demand for ESG-aligned investments, delivering financial returns and contributing to a more sustainable future.
Stakeholders are increasingly demanding that banks not only talk about sustainability but also demonstrate genuine commitments to ESG principles through their actions.
Beyorch CEO Dre Villeroy, a wealth management firm specialising in ESG investments, emphasised the importance of authenticity in green finance. He said, “You can talk about improving society or the environment, but unless you make a real difference, it’s just talk.”
Villeroy further highlighted that at Beyorch, investments are evaluated not only on their financial returns but also on their impact on society and the environment. This focus on authenticity shows that there is a broader shift in the financial industry, where ESG investments are increasingly judged by their real-world impact, rather than just their token financial performance. Banks that balance profitability with meaningful sustainability contributions will be well-positioned to thrive in the green finance landscape.