Effect of Green Finance on Environmental Performance of Banking Institutions: A Critical review

Abstract

Purpose-The purpose of this article is to study the effect of green financing on the environmental performance of banking institutions in India. This study also focuses on the initiatives undertaken by the banks towards achieving environmental goals. Design/methodology/approach-This research paper is conceptual in nature, based on an extensive review of literature, data from websites of different banking institutions and government websites, and evaluation of other resources. The study focuses on four banks, two banks from the public sector and two from the private sector were selected for the study, that are listed on the NSE Bank Nifty index as of October 2023. These banks were selected based on the following criteria: (a) they actively engage in ESG (Environmental, social, and Governance) activities and disclose them in their sustainability reports. Based on this criterion, we have found that only two public sector banks (State Bank of India and Bank of Baroda) out of three that are indexed in NSE Bank nifty, meet these requirements. Therefore, to match the number of banks with the public sector and to provide diversity, we have decided to select two private sector banks that also meet the above criterion and since we have more private sector banks following these criteria, we have further decided to choose the banks on other criteria: (b) the banks with highest net profitability for the year 2022-23. So, based on this, two private sector banks (HDFC Bank and ICICI Bank) out of Eight large private sector that were indexed were selected. Findings-This study has explored the relationship between green financing and the environmental performance of a few selected Indian banks, both public (State Bank of India and Bank of Baroda) and private sector (HDFC Bank and ICICI Bank). It was found in all selected banks that green financing and environmental performance are positively related and green initiatives have a significant impact on the environment. These banks are successfully reducing their negative impact on the environment through green financing in eco-friendly projects. It also indicates the green energy (renewable sources) is crucial for a good future and helps fight climate change and this will also require a lot of money in the form of green financing. Countries (e.g., the United States, China, Germany, Netherlands, etc) that have adopted these eco-friendly strategies have seen benefits for their economy and the environment. The study also noticed that Public and private banks might have different approaches to doing things, but they might also be working towards the same green goals of the country. The study also found that we need better rules (ESG frameworks), like the one used by the State Bank of India. In this regard we can also take an example from Triodos Bank (Netherlands), Nordea (Sweden), and Rabobank (Netherlands) as these are the top banks in the world that are adopting the best sustainable banking practices (as per the article of Fintech Magzine February 20, 2023), so from there we can also adopt policies and measure as per our Indian context. The study also revealed that there is a need for government support, clear policies, and increased transparency in financial reporting where we are investing money in environmentally friendly and non-environmental projects. Also, for the green revolution in India, there is a need for a strong partnership among Indian governments and financial institutions. These things together with cultural changes help promote sustainability and better environmental performance that guarantees a resilient future. Research limitations/implications-Theoretical implications: The study helps in understanding the relationship between green financing and environmental performance. The study highlighted that there is a positive impact of green financing in promoting sustainability. The findings stress incorporating environmental factors in financial decisions. The research identifies a gap in India's green financing understanding and urges further exploration. Currently, India's banks are at an early stage in adopting green financing practices, while some countries have made significant progress. So, this is one of the earliest studies conducted in the country that seeks to establish a relationship between green finance practices and environmental performance, especially focusing on the banking industry. It has been focusing primarily on some main public as well as private sector banks in India. Limitations: While this study has provided essential information, there are some limitations that need to be focused on in future research. One of the major limitations is that the study only looked at the green finance practices and environmental performance of a few commercial and public sector banks in India using secondary data, which limits the scope and generalizability of the findings. Managerial implications: We have identified key points from our study that can be applied to the banking sector. They are: Firstly, there is a need to enhance the transparency of financial reports. When providing details on the financial breakdown, banks must indicate the funds allocated to both green energy and non-green energy projects. Secondly, each bank must adopt Environmental, Social, and Governance (ESG) norms compulsorily. These norms should be integrated into their day-to-day business operations, ensuring responsible lending practices. Thirdly, all banks should establish a green financing framework, taking inspiration from the success of the State Bank of India. Additionally, collaborating with renewable energy initiatives and promoting environmentally friendly financing practices are crucial steps towards a greener and more sustainable approach. Lastly, each bank should engage in the development of green products and services, fostering innovation with a sustainability focus. By following these practical implications, Indian banks can become significant contributors to sustainable development and the reduction of the effects of climate change. Social implications: are considerable. It places a focus on addressing the societal and environmental effects of climate change. It fosters ethical lending and a sustainable future by showing successful cases. The importance of policy frameworks for green finance is emphasised, along with collaboration between governments and banks. Adopting environmentally responsible financing can improve sustainability, environmental performance, and resilience for future generations. Originality/value-The authors provide one of the first reviews of the effect of green finance on environmental performance in India concentrating on initiatives undertaken by different public and private sector banks.