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Commercial or corporate banking has undergone a sea of change in the recent past. All these changes have not been related to technology. Some of the changes have also been related to ideology.
The rise of the concept of sustainable corporate banking signifies an ideological shift in the commercial banking industry. Earlier, corporate banking was largely driven by the profit motive. Sustainability had very little impact on the way decisions were made at any major commercial bank.
However, in the past couple of decades, the situation has changed completely. The consideration of sustainability factors while funding a project is no longer the exception. Instead, such analyses are now the norm.
In this article, we will have a closer look at the four major market realities which have acted as driving factors when it comes to sustainable corporate banking.
It is important to understand that there has been a fundamental power shift in the field of commercial banking. Earlier, commercial banks had too many customers and too few funds. Hence, they had the option of choosing which customers they want to fund. With the increase in globalization and the rise of fintech companies, this situation has changed. The customers now have options regarding who they want to obtain funds.
Also, corporates who are the customers of commercial banks have been under tremendous pressure themselves. This pressure has been related to environmental concerns. Many companies have faced heat from environmental organizations. As a result, all businesses, be they small or large want to project themselves as being environmentally friendly. Many of these businesses engage third-party companies to certify that their business engages in green business practices. As a part of this initiative, businesses want to partner with banks that pay similar attention to the environment. As a result of the massive demand from customers, a large number of commercial banks have started paying more attention to their green initiatives.
The push for sustainable corporate banking is not coming from the customers alone. Banking regulators who are another important stakeholder in the process are also laying a lot of emphasis on sustainable banking. For instance, it is being proposed that in many parts of the world, the regulators will distinguish between green loans and regular loans when it comes to calculating capital requirements.
This means that if a commercial bank is lending out more money to green projects, then such a bank will have to keep fewer funds in reserves against such loans. Hence, regulators are trying to create a scenario where there will be an explicit financial advantage to making sustainable loans.
Regulators are further classifying loans are dark green, light green, and brown depending upon the degree of sustainability. For instance, brown financing is related to transformational lending i.e. when environmentally unsustainable businesses want to convert to environmentally sustainable ones.
It can be said that over the period of the next few years, the emphasis laid by regulators on sustainability is likely to increase by leaps and bounds.
As mentioned above, businesses all over the world are being forced by regulators to adopt more environmentally friendly standards. In many cases, this means that the business has to be significantly revamped. As a result, additional financing is often required in order to enable such transformation.
For instance, when regulators mandate that the emission norms for newer cars be more environmentally friendly, they create a need for a new kind of manufacturing line. This ultimately creates opportunities for banks to provide funds to car companies for transforming their business into green ones.
Brown financing i.e. financing which helps unsustainable businesses become more sustainable today accounts for almost two-thirds of financing provided by commercial banks. The sector is so big and so lucrative that no competitive commercial bank can afford to ignore it.
The decision regarding whether or not commercial banks should provide sustainable financing is no longer the individual choice of a single corporate bank. Instead, corporate banks find themselves driven toward this financing due to their competition.
For instance, 94% of all European banks have voluntarily signed on to the Paris accord. Also, more than 50% of all banks across the world have signed a pledge that they will reduce their carbon footprint to zero in the forthcoming years.
Hence, there is an industrywide rush amongst commercial banks to be viewed as being more environmentally friendly. In such a situation, if an individual bank decides not to go on the path of sustainable commercial banking, then they will witness a drop in their brand image as all other stakeholders will believe that the bank is not abreast with the current issues facing corporations and the world as a whole.
Hence, it can be said that for now, the foray into sustainable commercial banking is the choice of an individual bank. However, this may not be the case in the near future. With the speed at which all stakeholders are mandating the rise of sustainable banking, it is likely to become a part of the standard services offered by commercial banks in the future.
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