FINANCIAL INSTITUTIONS AND SUSTAINABILITY

-PRATEEK TAORI, B15097

Primarily there are two major reasons why todays economic system and financial institution system are
causing unsustainable development: first, they methodically transfer money and resources from poor to
rich; second, the money-must-grow paradigm drives production to even higher levels (Pinter Eva,
Deutsch Nikolett , Ottmar Zoltan(2014))

Very often when we talk about sustainability we discuss manufacturing plants, their role in pollution,
greenhouse gases and new technology which can help in creating a sustainable environment. Often in
these discussions, role of Financial Institutions is conveniently neglected. The market capitalization of
banking assets in India has reached US$ 1.4 trillion as on August 21, 2015 and is expected to reach
US$ 28.5 trillion by FY 2025[10]. This clearly talks about how big this industry is and the impact it can
have on our system.
In the last 2-3 decades, lot of publications have come up which discuss social and natural obligation of
firms. Moderately, ecological mindfulness has grown less in financial institutions than manufacturing
firms in light of the fact that these establishments view themselves as environment benevolent generally.
Through this article, an endeavor has been made to see how financial institutions can assume a part in
supportable advancement.

How Financial Institutions contribute towards unsustainable development

Our present economy bolsters a framework where individuals get credit for utilization for which they will
make monetary cover later on. At the point when a gigantic extent of the populace over-devour ecosystem
goods ahead of time for which the recovery has not yet been finished by the planet it prompts imbalance
in the nature. Sustainable development means we utilize assets as indicated by the recovery limit of the
planet. In this manner, development in light of utilizing more than our offer is unsustainable. Furthermore,
our financial organizations and financial strategies are the primary drivers behind this utilization driven
framework.
The credit-based system of our financial institutions provides the financial support for overconsumption.
The current financial crisis is a very good model to predict the ecosystem failure. If we take too many
loans and our consumption is credit-driven, sooner or later we will not be able to pay all of it back. This
leads to collapse of the financial system. Sub-prime crisis and world recession of 2009 is a very perfect
example of this kind of system. A similar kind of situation can occur within our ecosystem as well. If we
use resources faster than the regeneration capacity of the planet, our ecosystem wont survive. Today,
financial system has collapsed. Tomorrow, the whole ecosystem will collapse. And the major price of this
collapse will be paid by developing and under-developed countries, especially by middle and lower classes
from such countries who never really participated in this credit-based consumption. Thus, the current
financial system is not only unsustainable but also unethical and goes very much against the core human
principle.

Financial Institutions and our economy

There are two major ways by which banking system influences participants in our economy:
1.
Banks assume the part of mediators. They accumulate the funds from families and firms and utilize
this cash for further ventures. Along these lines, banks lie in a position where they can impact part of
undertakings since interest meets supply in this business sector.
2.
Risk administration is one of the prime part in saving money framework. Subsequently, they have
mastery in minimizing the likelihood of dangers.
Thus, financial institutions lie in a perfect position where they have expertise on risk management and
have resources to influence decisions and projects which have impact on environment. Not only the impact
financial institutions can have on other firms, they can play a great role in developing sustainable
environment inside their own firm as well.
The environmental influences of financial institutions can be categorized majorly into internal and external
issues. [Peeters, H. (2003)]

Internal
Direct impact on environment
Utilization of water, energy,
paper and amount of waste
generated during operations

External
Indirect impact on environment
Investments in manufacturing
firms, lending and risk
management activities.

Although, internal issues have direct impact on environment they have less impact compared to external
issues.
Internal issues are internal to the institution and governed by employees, shareholders, directors of
institutions, environmental awareness, individual goals, reputation of financial institution, etc.
External issues are governed by environmental awareness of customers, behavior of competitors, rules
and regulations from government and pressure from society.
Financial resources turn into a key element in coming to economic improvement. Financial Institutions
can choose around a great deal of undertakings in which they are going to contribute, they can impact
green ventures in light of the fact that their budgetary influence and position permits them to bolster
organizations which show socially and environmentally responsible behavior.
Financial Institutions can adopt two strategies while making decisions to integrate environment in their
business:
1. Core Strategies
They can see environment as a potential business avenue. With growing concern towards
environment, many firms want to become environment friendly. Financial institutions can help
them in realizing their goals by following means:

i.

Help companies in financing environmental friendly projects such as renewable energy,

waste management and environmental technology at lower interest rates
ii.
Developing financial products which support use of environmental services. Banks can
promote products like Green-credit cards (which encourages customers to buy ecofriendly
products by giving them incentives), energy efficient home-loans which give incentives to
cut energy intake in buildings and green securitization products (such as climate bonds)
which has one of the environmental component as its underlier.[ Jeucken, M (2001)]
There are many organizations which are coming up with ways to promote green products.
For example, Walmart is working with an academic association to develop a sustainability
index for rating products, a never-seen-before level of transparency seems headed for their
stores. The sustainability scores will be posted so shoppers can brands in store aisles. Thus,
it should not be an alien-thing for financial institutions to come up with their own green
products.
2. General Strategies
Alternatively, they can see environment as an opportunity to improve the overall quality of their
business. For example:
i.
Improving the quality of their loan book by managing risks such as environmental liability
ii.
Improving the quality of their investment decisions by including environmental factors
iii.
Improving the quality of advice offered to clients by considering investment factors
3. Carbon Footprint Reduction
Apart from the above mentioned strategies, banks can also contribute by adopting green methods
in their day- to-day operations.
This can include Paper-less banking. Banks traditionally use lot of paper for office correspondence,
audit reporting, and managing transactions. With increasing penetration of internet and
smartphones, banks can do away with papers.
Banks and ATMs consume lot of energy on a day to day basis. They can reduce their carbon
footprint by adopting renewable energy sources and green buildings.
Risk Optimization
Green banking not only opens new business ventures but also saves institution from various type of risks.
1.
Credit Risk: Global warming frequently prompts extreme atmosphere circumstances. This
consequently can possibly influence the benefits financed by banks prompting high occurrence of credit
default. Credit danger can likewise happen when banks loan cash to organizations whose operations are
influenced by adverse atmosphere circumstances.
2.
Legal Risk: If banks take ownership of pollution bringing agents, they may confront the danger of
direct moneylender obligation for cleanup expenses of harms.
3.
Reputation Risk: Bank is exposed to risk specifically and also by implication if its activities lead
to any social or ecological danger. Financing any venture which has a negative natural or social impact
can prompt awful notoriety for the bank which thusly can influence its business prospects.

Indian Banks and Sustainability

SBI has stepped by turning into the first bank in the nation to put resources into renewable energy. As a
piece of its economical advancement and green activity, it has introduced 10 windmills with a total limit
of 15MW in Tamilnadu, Gujarat and Maharashtra [Mridul Dharwal , Ankur Agarwal(2012)]. SBI plans

to build the ability to 100 MW in next 5 years with the point of decreasing the reliance on thermal power
plants which cause contamination. The bank likewise plans to offer advances on need and at lower loan
costs to bolster green activities of customers. It has likewise launched a loan item called 'Carbon Credit
Plus' to bolster money related needs of SUZLON CMD [Dr. Nishikant Jha and Shraddha Bhome (2013)]
Initiatives taken in International Market

Standard & Poors has recently incorporated sustainability factors while giving ratings to
sovereign bonds. In this process, they have identified climate change as one of the key factor
affecting bond prices. [14]
Dow Jones Sustainability Index has been launched by RobecoSAM in collaboration with S&P
Dow Jones Indices. Index comprises of companies which have a sustainable business model and a
yearly review
Brazils banking regulations mandate socio-environment risk management along with other credit
risk and operations risk management.
Dutch bankers have pledged to incorporate sustainability factors while making investments to take
care of all the stakeholders ( not just the investors)
In US, tax exemptions are given to bonds which are made for renewable energy investments.
United Nations Environment Programme (UNEP) Inquiry into the Design of a Sustainable
Financial system was established in 2014 to align the financial system with sustainable
development by incorporating social and environmental factors.[14]

Conclusion
With growing concern regarding sustainability of planet and Indias recent Carbon emission pledge to
reduce carbon emissions by 33-35% by 2030 from 2005 levels needs cooperation from all fields of the
society. Financial Institutions can no more shrug off their role in sustainable development. Financial
institutions need to come up with innovative products and methods to support sustainable development of
society and environment. This will not only keep our environment and society healthy but also help in
survival of banking industry as environmental hazards possess one of the highest risk to banks assets.
Therefore, Indian Banks should focus towards Green banking as a business model without any delay.

I declare that this written submission represents my ideas in my own words and where others ideas or
words have been included, I have adequately cited and referenced the original sources. I also declare that
I have adhered to all principles of academic honesty and integrity and have not misrepresented or
fabricated or falsified any idea/data/fact/source in my submission. I understand that any violation of the
above will be cause for disciplinary action by the institute.

REFERENCES

1. Daniel Goleman (2013).Why Investors Should Consider Sustainability Risk Management

Harvard Business Review Article
2. Dr. Nishikant Jha and Shraddha Bhome (2013). A Study of Green Banking Trends in India
3. Jeucken, M (2001) .Sustainable Finance and Banking, The finance Sector and The Future of the
Planet-London, Earthscan.
4. Leslie D Monte (2010). Its Times for Green Banking, Business Standard
5. Mridul Dharwal , Ankur Agarwal(2012).Green Banking : An Innovative Initiative for Sustainable
Development
6. Peeters, H. (2003).Sustainable Development and the Role of Financial World , Environment ,
Development and Sustainability
7. Pinter Eva, Deutsch Nikolett , Ottmar Zoltan(2014).New Direction Line of Sustainable
Development and marketing in Green Banking
8. Robert G . Eccles(2010).Its Time to Standardize Integrated Reporting of Financial and
Sustainability Performance Harvard Business Review Article
9. Robert G. Eccles and George Serafim (2013).Sustainability in Financial Services is not About
Being Green Harvard Business Review Article
10. http://www.ibef.org/industry/financial-services-india.aspx
11. http://time.com/4059051/india-indc-climate-change-carbon-emissions/
12. IFC(2003) : Sustainability and Financial Institutions
13. The Role of Financial Institutions in Achieving Sustainable Development Report to the European
Commission By Delphi International Ltd. In Association with Global GMBH (1997)
14. The Financial System We Need The UNEP Inquiry Report (2015)