Banks' shifting environment

6th March 2024 by Pratik Mitra | IT & Telecom

Banks' shifting environment

Banking on Sustainability: Navigating the Evolving Landscape, In the ever-evolving landscape of sustainability, the banking sector finds itself at a crossroads, facing challenges and opportunities that demand a strategic reassessment of long-term business decisions. The sustainability paradigm, intertwined with the availability of natural resources and adaptability, poses an existential question for many companies. How the banking sector responds to these challenges is a critical aspect, and, thus far, it has lagged behind other sectors in adapting to the demands of sustainability.

Despite considering themselves relatively environmentally friendly in terms of emissions and pollution, bankers have been notably slow in scrutinizing the environmental performance of their clients, often citing concerns about interference in client activities. However, a shift is underway. The financial sector is awakening to the risks and opportunities embedded in environmental considerations. The United States, in particular, experienced a surge in concern since the late 1980s, with banks facing potential responsibility under CERCLA for clients' environmental pollution.

This awakening has prompted a change in the banking sector's approach. Environmental risks and opportunities are now integral elements in banking policies. A survey by the United Nations Environment Programme (UNEP) in 1995 revealed that 80% of respondents assessed environmental risks. Banks globally are establishing environmental departments, developing environmentally friendly products, and adapting policies to align with sustainable practices.

The launch of the 'Dow Jones Sustainability Group Index' in 1999 marked a significant milestone, underscoring the mainstream financial community's recognition of sustainability-driven companies. The banking sector, with its intermediary role in the economy, holds immense potential to contribute to sustainable development. Governments, the European Union (EU), and UNEP recognize the transformative impact banks can have on economic growth, prompting initiatives like the 'UNEP Financial Initiative on the Environment and Sustainable Development.

This chapter explores the multifaceted role of banks in the journey toward sustainable development. From mapping out their macroeconomic role to analyzing environmental impacts and the driving forces for environmental action, the discussion delves into the typology of actions taken by banks. The role of governments, with a focus on the Dutch experience, is examined in establishing a framework for banks to contribute to sustainable development. In conclusion, the chapter reflects on the current dynamics and anticipates the evolving role of banks in shaping a sustainable future.

Unraveling the Complexity: Oil Prices and Carbon Emissions Dynamics,The intricate relationship between oil prices and carbon emissions has been a subject of empirical exploration, revealing two contrasting impacts in the existing literature: a positive correlation suggesting that oil price increases elevate carbon emissions, and a negative correlation indicating a reduction in emissions with rising oil prices.

In a study by Iqbal et al. (2019) employing the environmental Kuznets curve paradigm to analyze Spain's carbon emissions and oil price dynamics, the findings underscored a noteworthy impact. A mere 1% increase in oil prices was associated with a substantial 0.4 percentage point reduction in emissions. Shah et al. (2019) delved into the dual impacts of oil price shocks on ecological quality, considering their influence on energy usage, manufacturing, and the broader macroeconomy. Liu et al. (2022c) and Zhang et al. (2021b) extended this exploration to India, modeling the effects of fluctuating oil prices on the country's carbon emission development rate. The results indicated a positive net effect on the rising rate of carbon emissions, exerting a lasting influence. Moving to the African context, Xia et al. (2020) investigated the relationship between oil prices and CO2 emissions across 23 African nations. Interestingly, the study revealed a positive and substantial long-term and short-term effect of oil prices on carbon emissions, with non-oil-exporting countries experiencing a more pronounced impact.

Shifting focus to Pakistan, Mohsin et al. (2022) utilized symmetric and asymmetric Data Envelopment Analysis (DEA) techniques spanning 45 years. The study illuminated a nuanced relationship, showcasing that while oil prices exerted a favorable short-term effect on carbon emissions, their long-term impact was adverse. Nonlinear DEA highlighted that increases in oil prices correlated with reduced CO2 emissions, while drops in oil prices were associated with increased emissions. Intriguingly, negative oil price shocks significantly affected carbon emissions, whereas positive oil price shocks exhibited no short-term effects.

In navigating the complex terrain of oil prices and carbon emissions, these studies collectively contribute valuable insights, emphasizing the multifaceted nature of the relationship and the need for nuanced considerations in understanding their dynamics.

Unmasking the Relationship: COVID-19 Pandemic and Greenhouse Gas Emissions, As the world grapples with the unprecedented challenges posed by the COVID-19 pandemic, a burgeoning body of research examines its intricate impact on greenhouse gas emissions. Notably, Wu et al. (2022) employ a comprehensive approach, utilizing wavelet coherence and multiple wavelet coherence techniques to assess the pandemic's influence on global carbon emissions. Their findings reveal a significant reduction in atmospheric CO2, underscoring the pandemic's impact on emission levels. In a nuanced analysis across 16 European nations, Xiuzhen et al. (2022) delve into the pandemic's effects on energy use and carbon emissions. Employing instrumental variable methodology, the study unveils a substantial decrease in peak power consumption and a remarkable 34% reduction in hourly emissions during the pandemic. The authors anticipate a lasting impact, projecting an 18.4% reduction in power industry emissions by 2020. Wahid et al. (2020) contribute a groundbreaking perspective, forecasting a global decrease in CO2 emissions due to widespread lockdowns and state interventions in response to the pandemic. Their study reveals a notable 17% reduction in CO2 emissions in April 2019 compared to the same month in 2019. However, the authors caution against viewing these shifts as permanent, emphasizing the transient nature of the observed changes. Kalli and Griffin (2015) add to the discourse by highlighting a 7.7% drop in worldwide CO2 emissions in the first half of 2019 compared to the same period in 2018. Yet, they emphasize the pivotal role of economic recovery and behavioral changes in shaping long-term fluctuations in CO2 levels. In a broader context, Emrouznejad and Yang (2018) establish a correlation between COVID-19 and CO2 emissions and corporate output in the USA. Utilizing the Data Envelopment Analysis (DEA) method, they unveil a substantial negative impact of COVID-19-related fatalities and confirmed cases on both CO2 emissions and corporate productivity.

These studies collectively illuminate the multifaceted relationship between the COVID-19 pandemic and greenhouse gas emissions, offering insights into short-term fluctuations and prompting reflections on the lasting environmental implications of global events.

Green Energy Innovation and its Complex Dance with Carbon Emissions, In the realm of sustainability, the intricate relationship between green energy innovation and carbon emissions has become a focal point of research. While the literature on this connection remains somewhat limited, several studies have contributed valuable insights.
One notable investigation by Li and Umair (2023) delves into the impact of green patent volume on CO2 emissions in Italian regions. Despite green technology's contribution to enhanced ecological efficiency, the study's IPAT/STIRPAT analysis stops short of confirming a direct causal link between green technology and reduced CO2 emissions. Similarly, Liu et al. (2023) undertake a landmark study exploring the influence of fossil fuel technological development and carbon-free energy innovation on CO2 emissions across various regions in China. Their first-differenced generalized method of moments test yields inconclusive results regarding the correlation between carbon emissions and fossil fuel energy technologies. Nevertheless, the research highlights the significant and negative impact of renewable energy technologies on CO2 reduction.

Taking a global perspective, Fang et al. (2022) investigate the impact of green technological innovation on total carbon factor efficiency across nations with diverse socio-economic levels. The study reveals that green technological innovation contributes to increased carbon productivity in high-income countries but does not yield similar benefits in low-income nations. Meanwhile, Pan et al. (2023) focus on individual provinces in China to unravel the impact of advances in renewable energy technology on global warming. While the study shows that renewable energy technology advancement correlates with lower carbon emissions, the results for renewable energy generation are less conclusive. The dominance of coal in the Chinese energy landscape is identified as a potential impediment to the development of renewable technology. These studies collectively shed light on the nuanced interplay between green energy innovation and carbon emissions, emphasizing the need for further research to unravel the complexities of this critical relationship.

Banks as Economic Catalysts: Navigating the Cyclical Currents

Banks, as pivotal players in the economic arena, fulfill a multifaceted role as intermediaries between those with capital shortages and surpluses. Their diverse array of products encompasses savings, lending, investment, mediation, advice, payments, guarantees, and the custodianship of real estate. These core activities yield income through interest earnings and provision earnings, the former undertaken on the bank's own behalf and risk, and the latter on behalf of and at the risk of their clients.

Distinguishing between various banking departments such as investment banking, commercial banking, corporate banking, private banking, and others reveals the breadth of their operations. While some banks specialize in specific areas, universal banks typically cover a spectrum of activities, embodying financial universality.

A macroeconomic system's cyclical process illustrates the strategic points where banks wield influence, represented by shaded areas. Money flows in the form of households engaging in consumption, taxation, and savings; companies involved in production, investment, and export; and governments managing taxes, subsidies, and investments. Financial transactions in response to surpluses and shortages traverse the international markets, with banks assuming a prominent role.

In the historical context, banks traditionally bridged savings and investments, yet contemporary dynamics witness a shift towards connecting individuals with capital shortages and surpluses. While interest earnings have historically constituted the bulk of banks' profits, the evolving landscape sees over half of their profits derived from provision earnings. This shift, exemplified by securitization and investment banking, signifies a more direct influence of clients on banks' investment decisions. Understanding the evolving role of banks is crucial in the context of sustainability, particularly as it underscores the increasingly direct impact clients wield over the investments made by financial institutions. This shift prompts a reevaluation of the intricate relationship between banks and economic cycles, emphasizing the need for sustainable practices in financial decision-making.

Banking and the Environment: Navigating Internal and External Impact

Understanding the environmental footprint of banks involves a nuanced examination of both internal and external dimensions.

Internal Impact:

Internally, banks operate as relatively clean entities in terms of energy, water, and paper use. While each bank's individual environmental burden may not be comparable to other sectors, the cumulative impact on a global scale is substantial due to the size of the banking sector. Waste management and energy efficiency are key focus areas for banks, with initiatives aimed at reducing energy use, such as voluntary agreements with governments. Proactive banks have achieved significant energy savings through cost-effective measures, including the adoption of renewables like solar energy.

The Co-operative Bank in the UK and Credit Suisse exemplify leaders in environmentally conscious banking practices, introducing biodegradable credit cards and environmental impact measurement tools. Despite energy being identified as the most significant aspect, standardized measurement and comparison of environmental performance between banks remain challenging.

External Impact:

The environmental impact of banks' products is external and tied to the activities of the users rather than the banks themselves. Banks have historically been hesitant to promote environmental care externally, citing potential interference with clients' activities. Recent developments include banks offering a range of products, allowing clients to make environmentally conscious choices.

Quantifying the environmental impact of banks' external activities is complex. One extreme standpoint holds banks responsible for all pollution caused by companies they finance, equating to almost the aggregate pollution of the entire economy in many countries. The other standpoint places sole responsibility on the users of bank products—the clients—for the pollution they create. The reality lies somewhere in between, challenging the banking sector to strike a balance between financial interests and environmental responsibility.

In conclusion, navigating the environmental impact of banking involves addressing both internal and external dimensions, acknowledging the sector's influence on a global scale and encouraging responsible practices that align with sustainability goals.

Stages of Sustainable Banking: Navigating Towards Environmental Responsibility

Understanding the evolution of banks towards sustainability involves identifying four key stages or attitudes, each representing a distinct phase in the sector's journey towards environmental responsibility. While each bank may progress through all stages, some niche players might skip the initial phases.

Defensive Banking:

Characteristics: Non-active, resistant to new environmental legislation.
Focus: Protection of the bank's interests, potential opposition to environmental regulations.
Examples: Some niche players, particularly in investment banking, may exhibit defensive attitudes.

Preventative Banking:

Characteristics: Actively considers potential environmental cost savings and eco-efficiencies.
Focus: Internal processes like environmental management and credit risk assessment.
Examples: Banks integrate environmental considerations into credit risk assessments and internal processes. (e.g., National Westminster Bank, UBS, Bank of America)

Offensive Banking:

Characteristics: Develops and markets environmentally friendly products, considers external activities.
Focus: Development of environmental investment funds, financing sustainable energy, proactive reporting on environmental activities.
Examples: Creation of environmental investment funds, financing sustainable energy projects, and signing initiatives like the UNEP Banking Charter. Banks actively seek win–win solutions and report on environmental activities. (e.g., UBS, Credit Suisse, ABN AMRO)

Sustainable Banking:

Characteristics: Embraces win–win solutions, fosters projects with a higher risk and lower rate of return.
Focus: Strives for the highest sustainable rate of return, profitability in the long run.
Examples: Niche players like Triodos Bank in the Netherlands or The Co-operative Bank in the UK. Focus on sustainability even if it means lower short-term profitability.

While the model suggests a progression from defensive to sustainable banking, the reality is nuanced. The current societal landscape may not fully support sustainable banking for large institutions due to potential profitability losses. However, smaller-scale initiatives like debt-for-nature swaps, micro-credit, and directed tariff differentiation show elements of sustainable banking. Niche players and specific initiatives by banks, such as The Co-operative Bank's pledge, demonstrate a commitment to environmental and social responsibility beyond immediate financial gains.

In summary, sustainable banking represents an ongoing journey for banks, with the goal of achieving a balance between financial success and long-term environmental sustainability.

Banks' shifting environment


One school of thought posits that industries involved in natural resource products have a greater capacity to generate widespread economic impact. A comprehensive study spanning from 2011 to 2021 in South Asian economies, analyzing a sample of banks, utilized the DEA method to examine the impact of increased exposure to green initiatives on the intermediary financial spread. The results, deemed robust, indicated that banks incorporating environmental considerations in loan decisions experienced a decrease in default risk. The study emphasizes the importance of transparency between the resource sector and the overall economy.

Exploring the apparent association between oil prices and socio-economic activity, experts delve into the aftermath of the 2008 economic crisis and the subsequent COVID-19 outbreak. The study, groundbreaking in nature, investigates how oil volatility affects various socio-economic aspects. The COVID-19 pandemic has notably impacted the oil market, leading to increased volatility, with implications extending to other financial markets. The tight interconnection between oil and other markets exacerbates the spillover effects during the ongoing pandemic, particularly in the Asian region.

To gain insights into the dynamics of oil price shocks and their impact on macroeconomic activity, the study employs a vector DEA model. The research reveals that shocks in oil prices have long-term consequences for commercial development, creating a robust link between GDP and oil prices. In the short run, a preemptive causal relationship between oil and gas prices and economic expansion is observed. The findings underscore the significant impact of policies addressing crude oil prices on economic and financial activities.

In light of the study's results, policymakers are urged to comprehend the causes of oil price fluctuations. Policy implications suggest that state intervention can mitigate the impact of recent drops in oil prices, and administrations may consider lifting restrictions to support the oil market and economic recovery. Additionally, the study underscores the long-term repercussions of the COVID-19 pandemic on oil prices, emphasizing that the oil industry is expected to normalize post-pandemic eradication. Preparedness for natural disasters is also highlighted as a crucial aspect for countries facing such risks.

Pratik Mitra

Research Associate

A dynamic market research specialist with expertise in industry research, market assessment, competitive intelligence, and strategic market intelligence to provide information for business decisions.

Let's Connect

Let's Talk