Sustainable Banking means a bank’s decision to offer its products and services only to those clients who value their societal and environmental impacts (Jeucken and Bouma, 1999). Earhart et al. (2009) included that sustainable banks are focused on providing real growth to the economy and financing those organizations which offer environmentally and socially sound products and services. Bouma et al. (2017) portrayed sustainable banking as the (perpetual/inexhaustible/continuous) sustainable finance which gives financial capital and manages the risk from several small products to large projects and organizations which promotes social justice, economic prosperity, and environmental protection. In addition, Stankeviciene and Nikonorova (2014) mentioned that sustainable banking is such a value system which guarantees several benefits to one and every individual associated with that bank and finally also benefits the economy as a whole. This kind of system also saves or minimizes any kind of harmful impact on society or the environment.
Moreover, Sustainable Banking also presents an opportunity to make such products and services that have their special social and environmental advantage. They should be comprised of renewable energy, microfinance, energy efficiency, cleaner production processes and technologies, biodiversity conservation, agency banking, low-income housing, and financial services for marginalized youth and women. With the help of these kinds of products and services, banks will create their new customer base by entering in new markets which subsequently create goodwill and bring new capital by providing support to the stakeholders (Polonskaya & Babenko, 2012).
There are three conditions supported by Boda & Fekete (2009) in elaborating the approach of sustainable banking. The main condition is to understand and acknowledge the obligation of dealing with money streams. The second part is setting up inner guidelines and frameworks that can adapt to moral criteria which actively correlate with the procedures inside the bank. The third condition determines the idea of restoring the socio ecological added value of the banking activities. These three conditions address the connection between retaining the bank’s services, its business customers and the employees engaged in the day-to-day operations.
Jeucken (2001) and Kaeufer (2010) also proposed some models of sustainable banking to classify the banking organizations on the basis of their assimilation as regards to corporate sustainability. Jeucken’s (2001) model comprised of “Defensive Banking”, “Preventive Banking”, “Offensive Banking” and “Sustainable Banking”, on the other hand, Kaeufer’s (2010) model focused on the unfocused corporate activities which includes, isolated business practices and projects, systemic business practices, strategic and international ecosystem innovation.
Principles of Sustainable Banking
The Global Alliance for Banking on Values (GABV) has described the six principles of value-based banking. GABV is a huge network of banks from around the world working for a positive change in the banking industry. Their objective is to make such a banking system which is more transparent, supports sustainability (Social, Economic, and Environmental) and serves the real economy. These are the following six principles:
Principle 1. “Triple bottom line approach at the heart of the business model”.
Banking based on values consolidates this approach by focusing on the triple bottom line of people, planet, and prosperity. In such a banking system, products and services are developed as per the requirement of society and environment. To generate a reasonable amount of profit is considered as an important requirement of such banking but it is not the sole objective. Sustainable banks intentionally work on people, planet and prosperity. They are using finance actively for the betterment of the society and the environment.
Principle 2. “Grounded in communities, serving the real economy and enabling new business models to meet the needs of both”.
Sustainable banks serve the societies in which they work. They meet out the financial requirements of these societies by financing the organizations and individuals in a constructive and sustainable manner.
Principle 3. “Long-term relationships with clients and a direct understanding of their economic activities and the risks involved”.
Sustainable banks set up strong associations with their customers and are directly engaged in understanding and evaluating their economic actions and helping them to become more sustainable by themselves. The risk is properly evaluated at the very primary stage of product origination so as to avoid using the indirect risk management tools neither as substitutes nor for their own sake.
Principle 4. “Long-term, self-sustaining, and resilient to outside disruptions”.
Sustainable banks endorse a long-term viewpoint to make sure that they can manage their activities and should remain volatile in case of external disturbances. Simultaneously they also take into account that all their clients or banks should face such disruptions in a positive and sustainable manner
Principle 5. “Transparent and inclusive governance”.
Sustainable banks keep up a high level of clarity and inclusiveness in their administration and reporting. Here, inclusiveness implies an active association with a bank’s extended community of shareholders. Principle
6. “All of these principles embedded in the culture of the bank”.
Sustainable banks follow these principles in their way of life and use them to make crucial decisions at all the stages. These banks develop such human resource policies that show their sustainable approach (including new methods of incentives and assessment systems for the staff) and also develops stakeholder’s oriented policies to develop business models based on values. Implementing all these values it requires a number of deliberate efforts of these so-called sustainable banks. They also have their specific reporting scheme to check their monetary and non-monetary impacts.
Four phases of sustainable banking
Sustainable banking has four phases, namely, defensive banking, preventive banking, offensive banking, and sustainable banking (Jeucken, 2001).
These are interpreted as follows: In the case of defensive banking, a bank is not engaged in such actions that support environmental regulation. In this phase, Environmental management is considered an unnecessary expense, and there is a lack of understanding about sustainability issues to most of the bank employees.
This phase of preventive banking comes after defensive banking, in which a bank slowly starts incorporating the environmental responsibility as regards to its daily operations. The bank manages the environmental risk by adopting several new measures. Banks also try to influence the government and NGOs to bring about regulations, social pressure, or jurisprudence. The possible environmental cost-cutting strategies are established to take care of the internal environment of the bank. It mainly includes less use of energy, paper, water, and business travel. Simultaneously, banks also try to avoid social risks associated with their products, particularly savings, and investments.
In this phase of offensive banking, a bank starts to grab the new opportunities related to sustainable development. These new opportunities are those financial products and services which are socially, economically and environmentally viable. Banks also integrates sustainability to their internal and external banking operations. In this stage, banks will officially declare their sustainable attitude to the public.
In the fourth phase of sustainable banking, a bank integrates all the major elements required in last two phases. This phase necessitates that the internal operations of a bank must meet all the necessary requirements for sustainable business. Here, the bank’s external operations of lending and investments also focus on promoting sustainability.
After this fourth phase of sustainable banking, all the banking operations are regarded as being sustainable as they have accomplished the social, economic and environmental aspects of sustainability for all the stakeholders.
Five levels of sustainable banking
In sustainable banking, there exist five levels (Kaeufer, 2010). These five levels are as follows:
1. “Unfocused corporate activities”: Numerous environmental events and public relations drives are sponsored by banks at this stage.
2. “Isolated business projects or business practices”: At this level, banks develop variety in their products by adding unique products and services to their portfolio of conventional banking.
3. “Systemic business practices”: This stage aims at moulding the products and services of a bank as per the social and environmental principles.
4. “Strategic ecosystem innovation stage”: At this stage banks have to think far ahead of making their transactions economic, social and environment-friendly.
5. “Intentional (purpose-driven) eco-system innovation stage”: At this level, the bank’s strategy towards sustainability is checked against the degree of importance attributed to social and environmental plans that would be implemented at various levels of the entire system.
For citing this article, use:
- Shamshad, M. (2018). Sustainable Banking in India Issues and Challenges.