Why financial institutions should prioritise sustainable banking

Financial institutions are key players in any country’s long-term sustainable development goals. Sustainable development as a concept may be strange to banks because they provide intangible services.

Financial institutions are key players in any country’s long-term sustainable development goals. Sustainable development as a concept may be strange to banks because they provide intangible services.

However, there are only two ways through which banks can have an influence on society directly or indirect. These are the environment and the economy, through which sector players can have an impact because of their daily operations, while indirect influence is about bank products and services rendered to customers.

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Herbert Rwakiseta.

Although banks make small margins from reducing direct footprints, the actual control is through the asset side and client’s projects the banks intend to finance. Gone are the days when banks preferred defensive banking as a way of avoiding additional costs through social and environmental impact. Currently, banks are encouraged to move toward sustainable banking as a means of enabling opportunity for growth and development.

Sustainable banking can be understood to mean the decision by banks to deliver products and services to customers, who take into concern the environmental and social impacts of their activities.

As the heartbeat of the economy, banks should prioritise and promote values that ensure a more robust environment-conscious operations that also foster sustainable use of resources and development .

The challenge is, however, on how to make this change possible to address environmental and social issues associated with the short-term incentives and the long-term vision of sustainable banking operations. These include issues like management of physical assets, cost of branch location, opportunity risk exposure and human capital, along with their external interactions with clients and projects they support.

Rwanda has 29 licensed banks and financial institutions as at June 2017, according to central bank records. However, the question to ponder is how these banks can direct their business from short-term prospects to long-term environmental and social value for a wide range of stakeholders, including employees, customers, suppliers and communities, towards the needs of future generations.

It is important that financial institutions focus on managing environmental social risk through strategic decision-making, and by evaluating loan appraisal processes on companies and projects with high environmental and social performance with an aim of protecting their asset portfolios. This can be achieved by finding ways to reduce non-performance loans to spur financial stability in the long-run.

As a way of decreasing non-performing loan level, banks should screen and filter defaulters by incorporating and implementation of environmental and social risk management assessments.

They can also identify opportunities in new areas for innovative products related to sustainability, such as renewable and efficient energy, technologies, clean production processes, as well as financial services targeting women empowerment and low-income housing.

As Kofi Annan said, “The empowerment of women is the most effective tool for development.” Therefore, banks should continually fund women entrepreneurs; women skills development, and increase financial literacy among young females, among others. Those that have been involved in these areas have benefited greatly in terms of new clients and deepening their market reach.

Supporting women enterprises and causes help banks to differentiate themselves from competitors, and attract new capital generating goodwill from stakeholders and clients, thus improving reputation. However, this requires strong commitment from the bank management to prioritise and incorporate sustainable banking strategies for the long-term.

Besides, brand visibility can be significant in helping focus social corporate responsibility initiatives toward environmentally-supportive programmes that also promote sustainability.

These projects can be aligned in energy, green facilitation, climate change and acquisition of new client segments that will increase revenue in all areas of the bank’s business, especially in retail banking that may later increase return on investment.

Establishing a strong data collection, analysis culture and encouraging investments that promote sustainable resource utilisation or environmentally-friends practices. This way, the banking sector will be able to establish and promote useful linkages that ensure that their sustainable banking plans and activities are aligned with country’s priorities for SDGs.

The writer is a lawyer specialising in international trade law and policy.

Views expressed are of the writer and do not represent those of Business Times.