Conventionally, investment banks have solely focused on making financial gains and neglected their social and environmental obligations. However, the Paris Climate Protection Agreement signed in 2015 saw as many as 195 countries committing themselves to growing the economy in a sustainable, climate-friendly manner. Consequently, sustainable finance investment banking assumed significance and Environmental, Social, and Governance (ESG) issues gained relevance for investment banks.
Investing in sectors such as energy generation is a standard method that companies adopt to meet the goals of sustainable finance. These include solar photovoltaics, hydropower, wind power and alternative energy services. Here is a rundown of how investment banks play a vital role in sustainable finance.
Sustainability in the banking sector
Alexander Hamilton, the founding father of the US banking system, was of the opinion that banks must aim at increasing industry, multiplying commodities and supporting manufacturers and agriculture. However, growth-oriented banks have always measured success in terms of profits. Now, they have reached a point where doing good to support others has become imperative.
Since investment banks provide a robust infrastructure for commercial development, it naturally becomes their responsibility to promote sustainable practices that benefit not just businesses but the entire community. As the world becomes more concerned about climate change, responsible utilisation of resources becomes a primary measure to evaluate modern corporations. Therefore, sustainable investment banking is a crucial factor pushing corporate policies to achieve sustainability and social responsibility.
How do investment banks perceive sustainability?
When we talk about sustainability, the first things that come to mind include avoiding plastic packaging, changing consumption patterns and adopting recycling measures to reduce the carbon footprint on the planet. However, it has a much broader sense when associated with investment banking.
Previously, the primary focus of banks was to make money, regardless of the environmental and social impact of their actions. However, now they have started designing their financial products and policies in compliance with their environmental and social obligations. The environment, community involvement and ethical values are the three key considerations influencing sustainable finance investment banking. Transparency in banking operations and policies is the hallmark of sustainable banking. They support community banks by promoting sustainability and responsibility in their banking operations.
Ways investment banks promote sustainable finance
Making profits is not the sole aim of investment banks driven towards sustainability. They consider various other objectives encompassing social and environmental criteria while formulating their policies and selecting investments. They adopt the following strategies to achieve the sustainability objective.
- Promote green energy: These banks actively promote and pursue investments in alternative energy sources instead of coal, oil and gas. They encourage investments in popularising and developing vehicles running on natural gas and electricity. Concurrently, they promote investments in businesses that lower emissions and improve gasoline vehicles’ mileage.
- Consider life’s quality: They directly promote investments that help improve people’s living standards. These include access to affordable housing, education, low-cost healthcare, public transportation, etc.
- Sustainable agriculture: They support sustainable banking policies to promote investments in toxin-free and pollution-free agricultural practices. Since human society’s well-being and health primarily rely on food production, distribution and processing, sustainable investment banks include sustainable agricultural investments in their operations.
- Financial inclusivity: They encourage responsible banking by providing services such as microloans to small businesses, family-owned businesses and economically weaker communities. While the returns may not be as high as big business investments, these loans are indeed lucrative investments. The community’s well-being must be at the forefront of sustainable banking.
The changing landscape of sustainable banking
To achieve their sustainability objectives, investment banks have started developing affordable housing, promoting small and home-based businesses, and investing in eco-friendly agriculture and food distribution. Banking operations have turned more ethical and transparent as banks want to demonstrate their commitment to creating a sustainable society. Banks have modified their operations to gain a high ESG rating and meet the sustainable investment banking obligation.
Considering the increasing awareness of a sustainable society, it is high time investment banks pivoted their policies to prioritise preservation and sustainability. Investment banks have to lead the way as they handle cash flow regulation to support business operations. They need motivation to formulate sustainability policies. Rather than hindering businesses, they must encourage the maintenance of a healthy infrastructure, while generating profits in the distant future. Investment banks that adopt sustainable practices and policies help communities grow, paving the way for long-term growth and benefits.