Investing in, protecting environment should be core responsibility of banks

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Sugam Upadhayay

A single penny that gets deposited in a bank is a trust the bank has earned. At the same time, the trust the society has vested in it unequivocally demands a degree of responsibility that goes beyond managing and making safe margins on interest spread. In fact, any bank's investment without incorporating an environmental impact assessment is a corruption of money deposited and a crime against humanity. Therefore, it is time to rethink those key performance indicators (KPIs) like ROI, ROA, and EPS that the banks, the bankers, and the investors are fond of, and question ourselves; Are we heading towards a sustainable future or a dystopian tomorrow where we may have material wealth but without any value for our lives or living left at all?

A bank is a reflection of the economy. It is a legal institution that society has entrusted for ages. Likewise, it is a throttle to the government in implementing its monetary and fiscal policies. However, its significance is not limited to economic, monetary, and socio-cultural dimensions. Banks have a direct impact on the ecological frontiers of our community too. While multiple banks in developed and developing countries have started to assess their impact on nature, this has not been a talk for the banks in Nepal.

Issues like resource scarcity, global warming, increasing material and ecological footprints, and global supply chain disruption are not only a point of concern for a single country; instead, these are global issues. And banks could play a prominent role across the value chain to countervail these at the local, regional, national, and international levels. In general, business needs investments, and banks lend them through the funds entrusted to them by society. When the bank issues a loan, it is not only the safety of the funds that need to be backed by sound collateral; the bank should equally examine the project it is lending in terms of long-term ecological implications and its impact on the natural system.

The point is, rather than lending alone with a focus on the traditional regulatory factors like credit-deposit (CD) ratio, capital adequacy ratio (CAR), and other financial KPIs, banks should unequivocally monitor the project’s long-term implication on the environment and should refrain from investing or demotivate those sectors that risk harming the natural harmony and degrade the environment.

Here is a strong argument for initiating a responsible banking approach through sustainable banking practices. We incorporate environmental, social, and governance (ESG) criteria into traditional banking practices in sustainable banking. Banks' activities directly impact climate, and certain banks have started aligning partially or fully to sustainable banking approaches by limiting their investment in those projects that could negatively affect the environment. For example, French cooperative bank Crédit Mutuel decreased its funding in fossil fuels from $19 million in 2016 to zero in 2020; and likewise, American banks; Bank of America (BoA), JP Morgan Chase (JPC), Wells Fargo (WFC) decided not to finance fossil fuels in the Arctic region. Here is the point to ponder: How aware are Nepalese banks of this core responsibility?

Banks could act responsibly either by reframing their investments in existing projects that could have long-term negative environmental consequences or by designing sustainable banking products and motivating sustainable businesses to come forward. Though sustainable banking practices have become a must, it is equally essential that they be implemented with caution. Making it mandatory or voluntary depends on the state of the economy of that respective country. While making sustainable banking regulations mandatory could be handled by developed and emerging markets, it could be a challenge for the least developed countries (LDC) since increasing poverty and spiking unemployment rates have always been a concern for LDC. Therefore, vesting regulatory restrictions for sustainable banking practices in LDC may create a net negative impact in the short run, whereas benefits, in the long run, could not be denied.

Hence in Nepal, a policy-level debate for sustainable banking practices has become imminent. There ought to be a table where we bring stakeholders from transdisciplinary domains/institutions like sustainable financing specialists, circular economy business modeling experts, commercial banks experts, Nepal Rastra Bank (NRB), Ministry of Environment, Ministry of Commerce and Supplies, Federation of Nepalese Chamber of Commerce & Industries (FNCCI), and supporting agencies for the attainment of Sustainable Development Goal (SDG) like United Nations (UN), World Bank, Asian Development Bank is necessary.

Simultaneously, the market should also enhance its awareness and start asking for sustainable banking practices and products. Investors like us have always referred to economic parameters for measuring the return on investment, but onwards, consumers should increase their levels of awareness and start looking for sustainability indicators and sustainability measures adopted by the banks.

(Upadhayay is pursuing a Doctor of Business Administration degree at Westcliff University in California, US, focusing on Circular Economy and Sustainability)

 

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