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Study On The Importance Of Green Banking Finance Essay

Paper Type: Free Essay Subject: Finance
Wordcount: 5430 words Published: 1st Jan 2015

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In our life money has always play an important and crucial role in almost in every aspect. And in this, bank is an institution which mainly deals with money. According to Freixas and Rocher bank is an institution whose current operations consists in granting loans and receiving deposits from the publics (1999, p1). Till date, the banking industry has improvised his products and facilities to provide it to their customer. No one has imagined that 100 yrs ago, that bank will play a crucial role in 21th century. Now banks are influencing the development and the growth of the economy in the way of both quality and quantity. The major source of financing investment of banking sector is from commercial projects which are important for economic growth. Hence, for promoting socially responsible investment and environmentally sustainability banks play a vital role in it. As we know banks themselves is not a polluters but it’s having relationships with some companies and institution which are polluter or could be in future.

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Banks are environmental friendly as in term of pollution and emission in its sector. In banking sector the internal environment impact is very low and clean as in the usage of water, energy and paper. The impact is not related with banks activities but with it customers activities. Therefore, the impact of external activity is enormous which is difficult to estimate. And environmental management is like a risk management it increases the value of an institution and lowers down the loss ratio. Thus banks should encourage prudent lending and environmentally responsible investment to the institution. Further those industries which are become green and those which are on its way to get green they have to fulfil the priority to lending by the banks. This process of finance can be called as “Green Banking” to restore the natural environment banks makes the industries to grow green. The concept of green banking will be equally beneficial to the industries institution banks and economy.

Internationally, banks and institutional investor for environmentally responsible/ socially responsible investment projects having their growing concern about it rate (Earth submit, 1992). Financial institution and bank can effectively achieve this goal because they have played an intermediary role in an economy and to the number of investors. Now-a-day environmental issue is not only a concern of the government and direct polluters, it also a concern of those institutions which are stake holders and partners of their business. So the bank and other financial institution can provide a vital support in maintain the environmental protection and sustaining the economic development.

The bank operate on long term return on their investment and credit, due to the environmental liability there is risk of non -payment and in the reduction of value in credit extension and investment. So it will get more important for the banking sector to follow certain safe procedure for the environment evaluation of the projects before providing them funds. There are some studies has been shown in the positive correlation between financial performance and environmental performance (Hamilton, 1995; Hart, 1995). Thus it will get more important for the banks and other financial institution in the context of environment performance whether to invest in companies or advise client to do so. The environmental management has to follow different rule formation for conservation of the resources like clean water act, toxic substance control act, clean air act. All these are environmental liability for banking institution in a recent (Bindhu.N.Nayak, 2008). Adopting all these principle will be beneficial for the banking sector and to the financial institution as to consumers and also their stake holder.

On international scale various strategies has been adopt to sustain development. The multilateral financial and development institution and international consortium has been building up the standard of environment and strategies to estimate the investment projects. The main aim of this paper is to discuss the issue of the banking sustainability and how it can play a role for the sustainable development and growth for the economy, particularly in the India aspect.


The most important and difficult part of the project is methodology. As in this project the research method which is been use to examine the importance of the green banking in economy to sustain the environment with the help of it. There are certain sources to collect a data for the project such as working papers, academic journals, and relevant books. The research has been done by getting secondary data from genuine source such as articles, journals which are issued by genuine newspaper agencies of a specific country. The project is based on the secondary data analysis as getting primary data is difficult because whatever the policies is taking consideration in bank is taken by the top management authorities and it is hard to have interaction with them in personally.

Research Methodology

Research is to be done to figure out the proper knowledge of the subject in a systematic way. It is analytical and hard working process to figure out the about the fact and theory. The term methodology refers “the theory of how research should be done” (Saunders, 2009). According to Welman and Kruger (2001) there are various techniques and methods in order to get effectively and scientifically correct information of the subject by applying objective method.

Systematically Review

The research of this subject is done on the basis of systematic way. And there is already material has been published by a genuine source on this particular subject. As it is said by Gronhaugh and Ghauri (2005) that “the word systematic suggest research is based on logical relationship and not just belief”. As method of research is consist of explanation of the data collection and the outcome of the facts from the study and finding the limitation of the subject. As Tranfield (2003) stated that traditional reviews are generally lack of information and some time the source of information was not authentic. Therefore, traditional review should be done very carefully and selective which include the evidence which is supported by the genuine author’s summaries (Critical Appraisal Skill Programme, 2005).

Quantitative and Qualitative Investigation of Methods: It is necessary, first to understand the difference between qualitative and quantitative investigation methods.

Generating or using numerical data is called Quantitative data technique and generating of non numerical data is called qualitative technique. If both techniques are using to approach the data then it’s called mixed method (Saunders, 2009). According to Smith (1981) every method has its own weakness and strength. And as result may be differ as the use if the different technique and approaches by the researcher. Usually researcher goes for the qualitative approaches which consist of analysation of words through illustration and non- standardised frame work and comparison.

As the project is an illustrative research and the objective is to understand the importance of the Green Banking in the India. Corbun and Strass (1990) has explained that the use of qualitative method is to understand the aspect of the subject. And it can be useful in understanding more about the subject which is already known. Quantitative methods can be use to gain insights approach to the issue which is sometime not possible to get the results from the quantitative method. Therefore, to describe key issues researcher prefer to use the quantitative methods especially in the case of transfusion service management which is not possible to get through from the quantitative method.

The classical structure of literature reviewing according to the researcher is like;

Study of basic level of banks and its importance in the economy.

And research has been done on the Green Banking at international level.

Then at what level Green banks are taking initiative in the Indian economy.

Accumulation of the Green banking policy and more narrows down to the work to get the objective of research.

“To get the transparent literature review, researcher have to describe all the approaches which make to search the selected literature, key words, outline of the choice and data base” (Tranfield, 2003). To analysis the literature several journals, books, articles and electronic base data were use.

Source of Tool:

To get the relevant material Ministry of Commerce and Industry, India site have been re-examine which is an official website of India. There are other search engine has been used such as Google scholar and University Library site has been used to gather the resources but university Library site is come to notice that there are very less journal are available regarding Green Banking.

Analysis of Secondary Data:

According to Haakim (2000) “secondary data from different sources can also be combined if they have the same geographical basis, to form area based data sets” to get the answer of the research question secondary data can be use as in getting the objectives which is aimed for the ample assembly.

Genuineness of the facts is tested by the reputed database which is publicised by the authentic resource. The aim of this study is to analysis the secondary data methods while investigating the facts and do the international comparisons and to understand the potential outcome that why Green Banking is very important in the developing countries and how they are playing a crucial role in sustaining the development of the economy like India.

Aim and objectives of research:

The purpose is to learn what strategies leaders in emerging market growth have adopted to attract FDI and how financial services play major role. The purpose is to develop a model for both categories and test the model empirically to substantiate the hypotheses. What are the lessons that laggards can learn from these leaders? The study intends to show a path to the PIN countries and other markets that will emerge in next two decades.

Therefore the objectives of this research are as follows:

To illustrate the benefits and shortcomings of Foreign Direct Investments in developing countries like India and China.

To understand the impact of FDI on gross domestic product of these emerging countries.

To examine current situation these economies and analyse the future possibilities of growth.

Limitations of the study:

This is systematic review based study of the available literature in the area of ‘Green Banking’. ‘Genuiness’ is the touchstone of Analysising the literature. Whereas, there are general and accurately presented material is available about ‘Green Banking in European countries but very few literature was found related to the ‘Green Banking in India’. And even thought their not much significant data or literature has been get from the Google scholar and University Library or any other search engine regarding Green Banking in India. Whereas, sincere efforts has been done by the researchers to get the authentic data from the genuine source and the judgement has been done on the secondary the data.

Research of the Credibility:

There is certain research tool to examine the credibility like Generalisability, Reliability, and validity. Dochartaigh (2002) described it as,”assessing the authority or reputation of the source”.


In the case of qualitative research the degree of validity is to be tested. To get the correct result, test of validity is important. “Validity is concerned with whether the findings are really about what they appear to be about, is the relationship between two variables a causal relationship”.(Saunders, 2009). This is a valid research because it is based on systematic data analysis from the genuine resource and on the basis of this research the question has been answered.


Reliability define by Joppe (2000) it is a consistent of a result which represent the accurate number of data is presented over the time and the study of result reproduced the same methodology then it can be said that research is reliable. If the research contains the systematic review of the available secondary data of same objective with a same topic and same results then the research of study is reliable (Golafshani, 2003).


The term triangulation means that “the collection of different data technique, which ensure about what you are thinking that they are telling you” (Saunders, 2009). According to Mathison (1998) it is crucial for the methodological issue in quantitative and naturalistic approaches to establish valid proposition and get control on bias because alternative epistemology is incompatible with the scientific traditional techniques. But this research is based on the secondary data analysis not from the primary sources. So, this method is not applicable for this research.

Consideration of Ethical:

This research is completely based on the secondary data review and not on the primary collection method like interviewing or questionnaires etc. So, the approval of ethical and confidentiality is no use in the research. The collection of data is based on books, articles, journals and reports. The research material which has been used is properly referenced and checking the authenticity of the resource to avoid the plagiarism.

Importance of green banking

Until now, the business operation of financial and banking institution were not acknowledged towards the environmental concern. Generally, the environmentally degrading activities of banking sector’s is like obstructing or getting in the way of business affair of their client. Nevertheless, it will be risk to their business if they were dealing with the environment. Although, there are indirect cost to the banks as they are not directly affected the by the environmental degradation. It is due to the firm environmental regulation which is enforced by the other countries authorities. In the case of failure, the industries have to face the consequence which leads banks to its closure. For example, in 1980 comprehensive environmental Response, Compensation and Liability Act (CERCLA). There was a huge loss for the bank in 1980’s in U.S. The bank was directly responsible for the environmental pollution of their client’s activities and made them to pay the remediation cost. That’s why banks in U.S are more concern about the environment while lending the fund to their clients. In European countries banks held directly responsible for any misdeed has been done by their clients. Therefore banks and other financial institution have to engage with their stakeholder on social and environmental policy. So that their client’s investment can be evaluate. This would make clients to build up a proper management for social and environmental policy issue regarding investment. The green banking is important for both economy and the bank, by escaping from the risk which is involved in the financial sector.

Legal Risk: – there is a relevant environmental legislation risk for banks if they do not comply with it. More particularly, there is more lender liability risk for paying up the claims and the cost of damages for pollution causing to the asset or depraved. Banks can be helped by the environmental management by enhancing it image and reduce the cost and risk and taking advantage of revenue opportunity.

Reputation Risk: As now there is more awareness about the safety of environment and banks may loosen up their reputation if they involve with the big project, which are indulging in the environmental destruction. Environmental management system have a few cases as in good result in cost saving and increase in the value of the bond (Heim, G et al, 2005). Sometimes it has lower risk, great environmental stewardship and increase in profit. Reputation risk is involved in both ethically and economically.

By adopting the green banking strategies bank can deal with these risks. There are two components are involved in green banking strategies (1) innovative environmentally oriented financial products (2) managing risk environment (IFC, 2007). Banks have to make a proper arrangement for environmental management system. So that risk can be evaluate which involved in the investment project. The risk can be adopted by recommending the distinctive techniques and rates of interest. From high risk project banks can withdraw fund from it. Creating services and financial products is a second component of green bank which support the environmental benefit with commercial benefit. All these comes in bio-diversity conservation, investment in renewable projects energy, investment in technologies, energy efficiency, environmental investments in mutual funds and bonds (WBCSD, 1997).

There should be protective polices for the liability guideline on development and environmental risk. The financial and banking institution should prepare a report of every project they invest and finance (Jeucken, 2001). For projects seeking finance they can have an environmental assessment. For each project bank can outcome with an environmental hazard management procedure and follow it. The big financial institution like Japan bank for international cooperation (JBIC) and International financial corporation (IFC) have consolidated with environmental management in their business strategies. All projects are taking consideration into terms of environmental impact in an account factors like, the substance scale and sector of the project, uncertainty and the degree of environmental impact proposed project site. Even World Banks are lending loan to the beneficiary country on the certain level of commitment that they adopt the environmental protection measures.

Over time there is a change in the environmental norms to follow the agreement. And it is considerably bit costly to follow up the standard and environmental norms. If the economic benefits can be consider in the terms of productivity health care and insurance then the cost is not much higher than the benefit. In the study its confirms that 14 billion pound had been caused in the medical expenses and 200 million working days had been loss due to air pollution which resulting in losses in productivity to the European union (Stavros Dimas, 2005).

Technologies which are environmental friendly practically decrease the financial burden and also building up the economic sense for the industries. Due to the more environmental awareness among the consumer in all over the world the pollutant industries were facing resistance by the consumer which often cause them massive boycott and close down of the industries and the cost is adding enormously.

The concerns about environment are articulated into the international policy trade and act as a blockade for ESGs (Environmentally Sensitive Goods). So affirming modes of production and sustainable technologies are now not taking as a financial burden. Although, it providing high profits and new opportunities for the business. Green banking has neutralized the risk, save the cost and up brings the reputation of banks. So it serves both the commercial objective of the bank as well as its social responsibility. Green banking solves the problem faced by the environmental regulation and enforcements authorities related to size and location of the polluting unit. The authorities have practical limitations on enforcing environment standard on small-scale industries and also industries located in far off places.

International initiative of green banking

At international level there are many banks who have taken initiative to get their branch green. There is one bank name PNC Financial Group Inc which is based in Pittsburgh has certified as a green bank. PNC green bank does not stop with getting eco-friendly construction. They include there parent company business model in developing their products, marketing and giving training to their employee.

PNC is one of the banks who have taken the green concept so seriously that it evolved the idea into the brand of the company. PNC has started its construction of getting green bank in 1998. They had selected 17 different sites for their location and make sure that it is easily accessible through transportation. Then they had planned to build their building accordingly to U.S Green Building Council (USGBC) and Leader in Energy and Environmental Design certification process. In 2000 the building was completed and it was the largest LEED green certified building in the world. Some of the new features have been included into the building structure like the lobby of the building is “eco” with a green roof. It was stated by Gary Saulson the director of the corporate real estate “that you can walk into the building lobby on 90-degree humid day without any problem because there is a three- story water wall in the space which work as coolant radiant which maintain the inner temperature of the building. Because of this innovative method PNC has set a new standard of development. And it has been appreciated by the mayor of the city for setting up the standard of eco-friendly responsibility and quality development in the city. And in 2007 PNC Bank has secure 20th rank among the Best Green Company for America Award (Deb Stewart, 2008).

Now PNC has more than 58 eco-friendly branches all across the state. And 41 branches has also obtained the Benchmark of ‘Green Bank’ most of the branches has granted the LEED certification. As all of these branches has follow the eco-friendly process such as;

Recycling: Near about 15 percent of furniture fabric and carpet is made of green material or recycle material for example Door and cabinetry are made of wheat board which process by the wheat product.

Water and Energy Efficiency :- the usage of energy has been reduce by 50 percent because of the high-tech system installation in the building and maximum usage of the natural light and water usage was also reduce by 6200 gallon in year.

Reduction in land waste: – Wastage of construction material like steel, wood and cardboard is to be recycled. By doing this 150 ton per branch wastage has been reduce. Using of the pre-made panel for exterior has reduced the waste, while constructing the panels. To protect the ozone layer non- chlorofluorocarbon refrigerant are use for cooling the system (Deb Stewart, 2008).

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In 90’s the United Nations environment programme has launched a program which is known as UNEP finance initiative (UNEPFI). Under this, near about 200 financial institutions of all around the world has taken the participation and signed the initiative statement to promote the environmental development (Jeucken, 2001). The main purpose is to merge the social and environmental dimension to the financial performance. According to the UNEPFI, the sustainable development is a basic thing for the business management. It supports for the elementary advance to the environmental management and offers reconciling environmental discussion into the asset management business operations and other decision of the banks (Earth Submit, 2002). In 1991 the IFCs environmental panel was established for receiving the environmental assessment project. ABN-Amro banks which is Netherlands based banks who has developed certain polices like reputation risk management (RRM) to recognise, manage the non- financial and asses within their business strategies. Likely, the big international banks like Deutsche, HSBC, Standard Chartered and ABN-Amro banks has look and discuss at environmental problem under Kyoto protocol. Moreover, the government of Dutch has requested formally from the banks to achieve sustainable development. This agreement has been establish between banks and government in 1999. This environmental policy will improve the development of services and new financial products.

The Rain Forest Action Network (RAN) and Earth (FOE) had challenged the industry with their campaign which highlighted the case in which commercial banks were “bankrolling Disaster” in 2000 in U.S. ‘Bank Tract’ is a network which formed by the NGO’s to promote the sustainable finance in the commercial sector in 2002. This coalition up comes with 6 principles which assisting in the protection of environment and justice by the bank. This is known as Collevecchio Declaration (Bibhu Prasad Nayak, 2008). These 6 principles are no- harm, commitments to sustainability, responsible sustainable market and transparency, accountability and governance. There are more than 200 institutions that signed up the declaration and asked the banks to integrate with these commitments into their business operation. The declaration states that “Finance and Commerce has been at the centre of a historic detachment between the world’s natural resource base, production and consumption. As we reach the boundaries of ecological boundaries of the ecological limit upon which all commerce relies, the financial sector should take its share of responsibility for reversing the effects this detachment has produced”. To guideline the project banking institution have been constraint into common set of social and environmental policy for sustain the green finance. In Oct 2002 the group of small banks along with IFC had come with the proper general guideline and later in July 2003 they came up with a policy is known as Equator Principle. And other big commercial were also adopting this set of principles in their structure. And in July 2006 equator principle has been revised and updated. The used of the revised set of principle, the project coverage has been lowered by 10 million from 50 million dollar. Now 16 countries with 46 financial institutions were managing their business in more than 100 countries and they all have adopted the equator principle. The adoption of this principle in the business operation has become common standard for the project which integrated with social and environmental issue in business. (Bibhu Nayak, 2008; p10)

The NGO’s has received the activities of equator bank in a worldwide and it being proclaimed, when they came to know that it not commit to the equator principle. “Sustainable Banking Award” has been initiated by the Financial Times along with IFC in 2006. There are 151 financial institutions in which 104 institutions has made through to the final list of award in 2007. The ratio of bank apply was more than the previous year, it was about 100 percent more.

The international initiative of banks operations are voluntary in nature and the basic thing is to up come of the common good for the enhancement of the ecosystem. In competitive market there is a short coming of a voluntary commitment. As an increase of the green money in the market, lender will stimulant to delay the social commitment and the commercial interest which will programme in the short run. If the green money is voluntary than it will be precondition demand for the green bank. According to the government policy the bank which is responsible for the breach of law of their clients will have to help in promoting green banking.

Green Banking In India

From last two decade, the growth rate of Indian development is very high. And this is because of the industrial sector that plays a curial role in the development of the India. However, controlling the environmental challenge has been occurred in the way of Indian industry which makes impact in their business i.e. emission of pollution by their clients. Although government of India is trying to solve this problem by adopting the environmental policies and comforting the industries to adopt this environmental technology.

Fortuitously, India is a second fastest growing nation in the world in producing green house gases. India’s three main metropolitan cities like Chennai, Delhi and Mumbai are the world’s most busy and polluted cities. In India major polluted industries are paper and pulp, zinc steel and copper metallurgical industries, refine, tanneries, sugar, pesticides and insecticides, textile, fertilizers etc. The environmental management have to be taken care by the financial institution and banks, who are investing in the industries project. This can be done by improving the level of efficiency, quality of products and services. In this case banks and financial institution play an important role because these institutions are major source of finance to the industries.

In India there are broadly two main categories for the environmental policies and regulation which is liability, law control and command regulation. The control and command regulation are ex an-te regulation which are assigned to prevent from the environmental polluting businesses. With the help of this policy lending institution will set up a specific standard for the industries, so that they have to follow the regulation and project will examine closely by the ministry of environment and forest authority and it’s up to these authority whether they give the permission or not. The liability law is like based on the analysis of past performance (ex post). In this impose will be made by the authorities on the industries by closing down or imposing fine on them etc. Although there is no such law in India which impose any fine on the bank; which are providing financial help to those client whose are responsible for creating damages to the environment. Once the legal regulation comes in the frame work then the environmental standard will raise in India. And the industries which are responsible for polluting the environment will either have to shut down or have to invest money in the development equipment to meet the standards. And at international market industries will lose their competitiveness, which will directly affect the bank sector and economy of India.

Thus it is crucial for the bank to protect them from getting into non- performing assets in coming days. Analysisation of these facts make banks to accept the concept of Green Banking. The institutions which are not capable to control the pollution now may be future polluters. And one day, the legislation will taken a strict decision against the polluter’s who are responsible for damaging the environment and may have to shut down their units. For e.g. in Delhi and Agra, almost 150 SSI units had to be shut down because of not following the standard. Now banks and financial institutions are taking consideration about these perspectives, if the industries were not performing the environmental standard. According to the pollution control status there are 17 different categories of institution where they are equal number of institution which are shut down or defaulted. When there is a shut down or a default of a project, bank has to face financial losses it is because of increase of the liability and bad asset.





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Note: ^Competent to agree with the Standards, ^^ Not able to agree Standards. Source: * Annual Report 2005-2006 LOk Sabha ; Govt. Of India, Ministry of Forest and Environment; (sourced from www.indiastat.com)

Now-a-days, awareness is spreading among the public regarding environmental pollution. And people are taking strict action against those industri


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