For a sustainable banking practice, the environmental, social, and governance perspectives have attracted special consideration amongst the banking industry around the world.
One of the most challenging behaviors of nature is the sustainability of anything, living or nonliving. It means nothing lasts forever. According to the laws of Physics, mass can neither be created nor destroyed, and that, matter only changes its forms. With this, it can be easily conjectured how tough it is for an organization to achieve longevity in its business journey. When the top 100 global organizations on the basis of balance sheet, profitability, excellence, and impacts are considered, most of the top brands today were nowhere about 100 or 150 years ago as the top companies of the last century do not stand in the same degree of relative excellence today as they used to be in their heydays.
All business leaders aspire their organizations to be the front-runner competitively in terms of business size, excellence, investor returns, and the overall impact of their business on society. Such competition is rewarding overall or may become collaborative if it is healthy and contributive to all the stakeholders. When in the name of competition and beating others at all costs, an institution or a business leader starts to compromise on their values, the very core of the ethical foundation of the institution or individual shakes up thereby affecting not the surrounding environment and society only but also the very sustainability of the company or performances of the businesses. This way the importance of Sustainability arises for an institution of any gamut.
In the last few decades, many countries and societies have been concerned with achieving a number of purposes like working ethically and protecting the environment alongside accomplishing desired economic growth goals. An economic system comprises three main units – individuals, firms, and government. In this system, the financial institutions or banking sector has a fundamental role to play by being a bridge between the financially surplus and deficit economic units. Hence, the banking sector being the backbone of any economic system is no exception for being prudent, and therefore sustainable banking practices have become paramount for achieving the very purpose of any economy.
Another reason for rising interest in the sustainable banking model has also been due to the 2008 Global Financial Crisis which has directly or indirectly cost billions of dollars in terms of capital erosion and massive job cuts during the crisis. Further, unabated population growth, climate change, and growing income disparities amongst the populace have contributed to the consideration of some kind of sustainability in overall banking management. Thus, for a sustainable banking practice, the environmental, social, and governance perspectives have attracted special consideration amongst the banking industry around the world. With this realization, there are many organizations that work unilaterally or multilaterally in conjunction with other local/global agencies including banks. An example in this regard is the Sustainable Banking and Finance Network (SBFN) where the central banks or bankers’ associations become the members for necessary policy formulation and measures in the direction of pursuing prudent sustainable banking practices globally.
Green banking is also used interchangeably with sustainable banking when all three dimensions of environment, society, and governance are taken into consideration in the overall banking strategies and action plans. However, green banking primarily refers to banking practices that are mainly aimed at protecting the environment while carrying out financial intermediation activities. Generally, banks, being financial institutions, are considered for not having very adverse impacts on the environment & social fronts from their business practices. However, when the activities of the banks are analyzed deeply, there are broadly two impacts on these areas (i.e., environment & social): one internal i.e., from the bank’s internal operations, and a second external i.e., from the lending to the borrowers. To do away with these adverse impacts, the banks need to replace their traditional business models with an environmentally/socially augmented business model where both the ecological & social aspects are included in the due analysis and considerations in the financial intermediation decision-making process under the ethical governance system.
A study has been conducted to understand how someone gets influenced. According to the study, there are mainly three major influencing forces. Firstly, a person generally gets influenced or conditioned by the nearest dear person. Second, the influencing element can be the ideas propounded by most of the people and the third one is the thoughts of the powerful ones. Hence, similarly, when the practice of ESG is considered in developed economies like the United States, United Kingdom, and European countries, there have been practices of measuring such environmental, social, and governance initiations of major corporates and business firms. Such measurement is usually carried out on the basis of composite matrixes of the three elements (i.e., environmental, social & governance). There are several global financial information service providers like Thompson Reuters that have developed matrix-based measurement tools to assess the sustainability and ethical standing of a business in developed economies. Individual, as well as composite ESG performances/ratings of the companies, are usually included in the annual reports, sustainability reports, and other public reports published by the respective companies.
Concerning the ESG status in Nepal, Nepal Rastra Bank (NRB) became a member of SBFN in 2014. Established in 2012, SBFN has 63 members from 43 countries partaking in USD 43 trillion (86 percent) of total banking assets in the emerging markets as of October 2021. As per the Country Progress Report of SBFN published in April 2022, Nepal falls under the Implementation category in the SBFN Progression Matrix comprising broadly three stages- Preparation, Implementation, and Maturing. With the introduction of the Environment and Social Risk Management (ESRM) Guideline by NRB for banks and financial institutions, the Nepali banking system has gradually started adopting the very essence of EGS practices in all three gamuts i.e., in policy, procedural, and monitoring levels of their overall banking operation.
Pokharel is the CEO of Muktinath Development Bank Limited.
