The Rise of Green Banking: Why Eco-Finance Makes Sense

The idea of helping our world just sounds right. That’s why the fight against climate change has evolved and started to be more and more present in everyday life. Now that fight is spilling out into the financial arena, spurring interest in green banking.

Increasingly sophisticated consumers and ethically-minded businesses no longer accept inadequate, token solutions to a planet in crisis. Today’s consumers demand environmental accountability in everything from the cars they drive, to the homes they buy, to the banks they choose.

In fact, before choosing a financial institution for personal or enterprise financing, millions of consumers and businesses now pause to examine the environmental impact of the institution in question. Will the bank they are considering fund industries that drive ecological harm, or will this bank ethically invest their wealth into pollution-reducing initiatives?

As a direct outgrowth of this increased scrutiny, growing numbers of fintech and banking institutions are venturing into the realm of green banking.

What is Green Banking?

Briefly, green banking refers to the practice of financial institutions purposefully leveraging their investment power to help fund green initiatives. This makes capital more accessible for projects which fight climate change and promote clean, sustainable energy.

Green banking also avoids or minimizes investments in companies and industries which are known polluters, like the lucrative fossil fuel industry, or destructive mining industries.

These new kinds of banks can be public (for example the US Clean Energy Finance Corporation, or CEFC), private, or a hybrid of the two. The ultimate goal of green banking is to slow and eventually reverse climate change by investing in green initiatives.

Green Banking Use Cases

What do these green initiatives look like? For a sampling, think of programs that:

• Finance the development of solar and wind power and other renewable energy sources.
• Help farmers develop and implement more efficient agricultural practices to reduce excess water usage and alleviate water shortages in drier areas.
• Incentivize consumers to purchase hybrid and electric cars instead of gas-powered vehicles, to eventually eliminate our dependence on fossil fuels.
• Help homeowners make their homes more energy-efficient, or purchase newer homes built to be energy efficient.

Green Mortgages: a Real-World Application of Green Banking

By far the most consumer-accessible examples of green banking are green mortgages.

Green mortgages offer buyers more favorable mortgage terms if the buyer is seeking to either purchase an energy-efficient home or renovate a home to make it more energy-efficient. The buyer may secure an Energy Efficient Mortgage (EEM) FHA Loan, a VA Loan, or a conventional FHA loan.

Energy-efficient homes save homeowners money on heating, cooling, and water bills each year. Even more importantly, EEMs also significantly reduce the associated carbon footprint.

Since home utility emissions account for as much as 20% of total carbon emissions each year, this represents a significant contribution to lowering greenhouse emissions. In this way, green banks directly combat climate change with each EEM.

Eco-Friendly Companies

Lastly, beyond the consideration of environmental impact, companies are beginning to see the financial and social benefits of embracing an eco-friendly mindset. Eco-friendly companies–like green banks– attract socially responsible businesses and consumers.

In a 2019 Nielsen report, 81% of respondents rated it either ‘very’ or ‘extremely’ important to them that companies implement programs to alleviate environmental decay. Among millennials and Gen Z, the response was even starker: 90% of millennials and Gen Zers want the companies they do business with to work towards improving the social and environmental landscape.

As those generations continue to accrue financial assets and hold sway over more of the investment market in the coming years, the impact of their social priorities will only increase. They will continue to demand that the businesses they patronize contribute meaningfully to the fight against climate change.

Businesses that listen and take action to partner with their ethically-minded consumers to finance meaningful environmental initiatives will be rewarded with growth and success. Now that you know all about green banking, you can start being part of it!