Webinar – Sustainability Disclosure Updates from Emerging Markets – Wednesday, 13 July 2022

Sustainable Banking is the ‘New Normal’

H.M. Queen Máxima of the Netherlands, the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA), and IFC’s Managing Director, Makhtar Diop, during the opening of the 7th SBFN Global Meeting

Sustainable banking goes beyond profitability.

‘Sustainable Banking’ is an integral component of ‘Sustainable development’, which is about banking for profitability, and also its quality aspects in economic, social and environmental fronts. Historically, it has not been easy to incentivise commercial banks to go beyond profitability, thus, policy makers of developed and developing countries have been engaged in promoting different approaches to inspire banks for undertaking sustainable banking activities that are crucial for sustainable development of an economy. Over the years, the expansion of corporate social responsibility (CSR) activities of banks has been contributory to the advancement of the ‘Sustainable Banking’. ‘CSR’ is not only about philanthropy today, it is directly allied with the concept of ‘sustainable banking’, and sometimes these two terms indicate the same bunch of banking actions. Of the determinants, adoption of technology has been supporting the sustainable banking movements in a big way. However, in recent times, the Covid-19 havoc pulled back the motion of banking activities of all types, and thus sustainable banking is confronting halts and disruptions. Probably, sustainable banking movement will take a new shape in the new normal banking environment.

‘Financial Inclusion’ one of the major goals of the sustainable banking activities has notable beneficial impacts. As expected, a very recently published IMF report found that financial inclusion benefits economies and societies as a whole in the form of increasing economic growth and reducing income inequality. Practically, all the major categories of the sustainable banking activities in developing and low income countries like agricultural and rural financing, micro and small enterprise financing, and women empowerment financing have remarkable implications for financial inclusion. Technology has brought momentum of the financial inclusion drives and is contributing to the growth efforts of the policymakers and market players. Technology driven financial inclusion movements and digital financial services received renewed attention in the context of the Covid-19 situation, and several global economies adopted newer technology-based approaches to provide quick and secure support to the vulnerable sections.

Use of technology and remitting money by all classes of people increased significantly during last few months following the Covid-19 spread. In this digital movement, Africa and Asia have been very active that received momentum in the context of Covid-19. If the movement goes on, extensive use is expected to contribute in lowering the fees, and thus low-income and vulnerable section of the society would benefit greatly. Benefits on financial inclusion are obvious, however, sudden shift to digital financial services need to be accompanied by the required digital infrastructure, policy and regulatory support. Market players need to invest in certain areas for adoption and expansion, and global key market players are already on the move. There is recognition that sustainable banking activities might contribute remarkably in handling the Covid-19 challenges through greater inclusion.

Cross-border remittance transactions have been crucial factors to improve financial inclusion among remitters and their families. The consistently increasing remittance flows is projected to fall by 20 per cent in the calendar year 2020. For South Asia, the projected decline is 22 per cent where remittances play even more important roles. The estimated fall of workers’ remittance would affect not only the economic competences of many low-income families in the recipient countries, but also affect financial inclusion drives. However, it is good that after initial drastic fall, there are indications of recovery in South Asian countries like Bangladesh, Nepal, and Pakistan.

Cottage, micro and small enterprises are affected severely during Covid-19 situation throughout the globe. Published data and studies indicate that most MSMEs of the developing World that were performing reasonably well have been struggling and coping with Covid-19 challenges, and the policymakers of these countries have been supporting these enterprises to turn around. Developing and South Asian governments initiated monetary and macro financial measures and incentivise banks to expand their lending to small and medium enterprises and vulnerable sectors like agriculture and farming. In several instances, central banks declared stimulus packages and refinancing schemes to boost MSME and agricultural lending, and in some Asian countries, policymakers introduced or strengthened guarantee schemes to support banks to enhance lending activities to the MSMEs and other core sectors like agriculture.

Green financing and environmental risk management in banking activities received fresher impetus in the context of the Covid-19 situation. It is good to observe that some low income countries including Bangladesh have been doing well in promoting and supporting green banking and sustainable financing activities in their respective countries, and very importantly these countries continue to go on with their movements even in this on-going crisis. According to a recent study by IFC, out of 11 countries, six are from Asia– Bangladesh, Cambodia, Lao People’s Democratic Republic, Mongolia, Nepal, and Pakistan. The study shows Bangladesh, Nepal, and Mongolia are showing a strong momentum for green finance, keeping pace with more mature markets. In addition to green finance; these countries are also exploring ways to expand sustainable finance to other areas such as finance for small and medium sized enterprises, SMEs, and agriculture. Contrary to common perceptions, the study shows these countries are resolute in their commitment to promoting sustainable finance amid Covid-19. However, challenges like ‘capacity building’ and ‘creating enabling environment’ need to be addressed to optimize benefits.

Sustainable Banking Network (SNB) identified several recommendations to promote sustainable banking activities based on its observations during 2019 and during the period of Covid-19 covering key areas of sustainable banking: environmental and social risk management by banks and financial institutions, green finance, financial inclusion, and agriculture and SME finance. Communication, and education efforts should be coupled with efforts to increase financial literacy and awareness. Setting minimum investment targets or targeted credit schemes to promote green activities within the agricultural and SME sectors are also essential. It also identifies three key lessons for promoting green finance. They include planning broad stakeholder engagement to help create well-tailored policies, definitions, and standards, supporting banks with additional guidance to build capacity, and drawing on international support and resources where possible.

It is expected that the sustainable banking activities will have crucial roles in attaining SDG goals by 2030. Based on case studies of selected member countries, Alliance on Financial Inclusion (AFI) suggested for ‘channelising more funds to the sustainable businesses by the central bank and market players’, ‘supporting modernisation and innovation with adequate policy intervention and infrastructure’, and ‘improving capacity and coordination of the financial sector with the government agencies’ to ensure the required contributions of the sustainable banking activities for attaining SDG goals.

In the context of Covid-19, sustainable banking should be expected to be part of economic recovery initiatives of the policy makers. Some recent studies offer crucial direction on the way to choose appropriate areas/projects for sustainable banking ventures. For example, ‘COP26 Universities Network’ suggested for reshaping the national and global recovery by investing in renewable energy, reducing industrial emissions through carbon capture and storage, investment in broadband internet to increase coverage, and electric vehicles and nature-based solutions. Another joint assessment (by the renowned economist Joseph Stiglitz and climate economist Nicholas Stern) conclude that green projects create more jobs, higher short term return per currency unit spent and lead to long term cost savings, and recommends policy interventions in building efficiency retrofit spending, clean research and development spending, natural capital investment for ecosystem resilience and regeneration, and for developing countries, rural support scheme, such as investment in sustainable agriculture.

Dr. Shah Md Ahsan Habib is Professor, Bangladesh Institute of Bank Management (BIBM).