Banks’ concerns about green banking are not without merit, yet those that are not proactive may soon find themselves at odds with shareholders and regulators. Subsidiary finance or public incentives are likely to drive significant demand for sustainable lending in years to come. In addition, banking customers are becoming subject to increasingly strict industry-specific regulation such as the EU’s Corporate Sustainability Reporting Directive (CSRD).
Also consider the recent resolution by the European Banking Authority3 that banks in the EU should publish a “green asset ratio” (GAR) from next year. It will let investors easily compare banks by the amount of climate-friendly loans, advances and debt securities on their balance sheet as a proportion of total assets.
Institutions that are unable to cope with these ESG-related regulatory developments will face increased pressure to change. They may see higher credit risks, unfavorable lending terms and weaker profitability as ESG risks become concentrated in their loan books.
But on the flipside, banks that forge a bold sustainable finance agenda will develop the knowledge and skills in their lending practices to thrive in the sustainable lending market of the future. This, in turn, could help them to outperform the sustainability laggards as investors, regulators and customers scrutinize their ESG behavior and credentials more closely in years to come.