Sustainable Banking 2018: Global Efforts

April 25, 2020

Sustainable Banking 2018: Global Efforts

(Published in the Financial Express)

Dr. Shah Md Ahsan Habib[1]

The benefits of sustainable action or approach go beyond growth, and for banks it should go beyond profitability. Alongside targeting profitability, sustainable finance goals of a bank aim at addressing developmental goals covering economic, social and environmental requirements. These requirements are expected to vary from country to country and should always be considered in accordance with the level of development. ‘Sustainable Finance’ as an approach of a bank may also be characterized as the arrangements of taking care of the interests of all stakeholders. Thus, ‘Sustainable Finance’ cannot be desegregated from the key concerns of corporate governance and corporate social responsibility practices by banks.

Sustainable development is an integrated concept with three aspects: economic, social and environmental. ‘Sustainable Finance’ is for ‘better development’ through ‘better finance’ which is sustainable in each of its economic, social and environmental dimensions. Traditional finance focuses solely on financial return and risk, whereas sustainable finance considers financial, social and environmental returns in combination of highlighting the move from the narrow shareholder model to the broader stakeholder framework, aimed at long-term value creation for the wider community. However, in the context of different countries and perspectives, the concept may be interpreted narrowly and broadly. In spite of differences in perceptions and scopes, the available recent literature perceive the concept broadly as compared to the earlier age, and it is most commonly now tagged with long term goals associated with economic, environmental and social aspects.

The facets associated with sustainable finance can be tagged or linked with sustainable growth targets or the key issues associated with sustainable development goals of UN (previous Millennium Development Goals or MDGs and the current Sustainable Development Goals or SDGs) and that of most developing countries of the Globe. In regard to efficient allocation of banking resources, efficient financing of business and economic activities in a sound prudential environment may ensure greater investment and economic growth with financial stability.   As part of green banking, banks handle environmental risks in financing decisions and their in-house operations.  Green financing has also been contributing in energy sustainability and green growth in several instances and thus can easily be linked with some sustainability indicators. CSR interventions are contributing to ensure greater access to finance and other basic services, and to improve better livelihood of the low income people. In the context of most developing countries, the association of agricultural financing and access to finance and rural development can be clearly visible. Micro and small enterprise financing (including women entrepreneurship financing) can contribute in rural development, gender equality and poverty reduction.

The key policy concerns related to sustainable finance include financial exclusion and environmental degradation by the main stakeholders of the financial sector. The finance to be sustainable must address financial exclusion challenge at the individual and macro level. It is recognized that access to finance can economically and socially empower individuals, in particular poor people, allowing them to better integrate themselves into the economy, to contribute to their development and to protect themselves against economic shocks. Financial inclusion could perform as a major force for the reduction of poverty by reducing inequalities. There are proven evidences that a small loan, a savings account or a micro insurance policy can make great difference to a low-income individual or a family. In addition, access to financial services is often viewed as essential factors like access to safe water, health services and primary education, in order to ensure participation of common people in the activities of the economy. Considering the socio-economic benefits, agriculture and small or micro enterprise financing cannot be delinked from the scope of the sustainable finance in the context of most developing countries. In most instances, the progression of agriculture and micro enterprise sectors is associated with the socio-economic advancement of the vulnerable and low-come sections of the society.

On the way to attain the goals allied with sustainable finance, policymakers of several developed and developing countries have undertaken different actions by introducing different innovative financing products and pioneered many smartest approaches. These approaches, policy supports and products to address sustainable finance goals vary from country to country, and their outcomes also varied significantly. In the context of developing countries, sustainable financing models and actions commonly satisfy certain generic criteria such as: wider outreach or coverage; addressing the needs of the vulnerable sections of the society; energy sustainability; cost effectiveness; and financial viability. In recent time, technology based platform has come up in a big way by offering tremendous benefits in terms of smooth and quick transaction and processing, efficient use of renewable resources, gender neutrality, youth friendliness, higher coverage, and lower cost. Increasingly favorable policy and regulatory support are helping in a great way in harnessing the potential benefits of such development in most global economies. Though, some of these models, policy supports, products and innovations are replicable, however, required customization to address the true needs and circumstances in the context of a country is the most crucial prerequisite to draw benefits out of these ventures. 

Globally, different policies and strategies have been implemented to sustainable finance goals considering the uniqueness of economy, need and nature of priorities. Several global initiatives have been supporting sustainable finance drives of the policy makers. Through the Agenda for Sustainable Development, the world has set for itself an ambitious set of objectives to end poverty, hunger and to overcome inequality in a sustainable manner by 2030. G-20 recognized financial inclusion as a key enabler of growth and inclusive financial sector is considered key to attaining the goals contained in the UN Declaration. A number of standard-setting bodies have accepted that the issues relating to financial inclusion need to be incorporated in the international regulatory framework and the creation of the Alliance for Financial Inclusion (AFI) as a global platform for sharing financial inclusion insights is a clear sign of this new vision. These initiatives have offered common grounds for international cooperation on the issue of financial inclusion. UNEP has been constantly working for designing and developing sustainable finance by promoting environmental risk management in financing and investment activities in developed and developing countries.

There is no doubt that extensive drive is required to attain sustainable finance goals in a developing country like Bangladesh where a lot to be achieved to reach to the desired level of soundness, transparency and corporate governance practices in banking; a big section of population remained excluded from the formal sector financing; financing requirements of a large vulnerable groups are not adequately addressed; a big chunk of small and micro enterprises do not get access to the formal sector finance; environmental risks are yet to receive due attention in bank financing; and rural economy demands greater attention of banks for its socio-economic advancement. Alongside supporting and guiding the banking sector to achieve greater soundness and efficiency, Bangaldesh Bank has brought in a paradigm shift with multiple approaches of inclusive financing, green banking, women empowerment financing, corporate social responsibility, poverty alleviation, and consumer protection measures  to attain the marks associated with sustainable finance in the country through banking channel. This developmental approach of Bangladesh Bank can be linked with ‘financial and macroeconomic stability of the country’- one of the key goals of the Central Bank. However, transforming the policy targets into realization through banking channel by addressing the barriers and streamlining the policy supports is the key challenge. 

[1] Professor and Director (Training), BIBM ([email protected]).

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