Chapter 1
Sustainable Finance and Banking 



Humankind's awareness of its dependence on the environment goes back to the very beginning of human history. Through the centuries, the scale, degree and location of environmental problems and awareness have evolved correspondingly. One can speak of structured environmental awareness since the Industrial Revolution. Less than 30 years ago, the world of science also acknowledged the severity of environmental problems. It became clear that it was no longer just a matter of incidents - such as an oil tanker accident off the coast of La Coruņa in Spain - but that the existence of all of humanity was threatened by a silent global environmental crisis. In the 1980s especially, it became evident that economic development, which had brought significant prosperity, also caused not only social but environmental abuses as well. Concern for the environment has now been translated into laws; most countries are trying to pay back the environmental debts that have been incurred and stimulate preventive actions.

In view of the North-South problem, the concept of sustainable development was introduced into the political lexicon. Emphasis was laid on the interrelationship between environment and economy. Initially, protection of the environment was interpreted as a burden, an increase in business costs. As time passed, businesses nevertheless began seeing a positive relationship between the environment and economics and began opening up to the idea of environmental concern. A growing awareness among consumers, producers, employees and competitors is prompting an increasing number of businesses to go on the offensive in terms of sustainable development. The realization that pursuing sustainable development is an integral component of doing business is starting to hit home with many people in the business world; prospects of additional revenues exist in addition to considerable cost savings.

Besides being a sign of social accountability, an offensive stance in terms of protecting the environment is often necessary because of business continuity. Consumers and producers are making demands on end products and semi-manufactured goods respectively. Competitors distinguish themselves through new environmentally friendly or sustainable products. Some businesses are entirely dependent on finite natural resources. In order to secure permanent business continuity, care in handling these resources is essential; soft drinks manufacturers must think about where they are going to get clean drinking water in the future. Another example is the cooperation between Unilever and WWF concerning the conservation and management of fishing grounds. These initiatives, which go beyond short-term interests and are based on the principal of sustainable development, are examples of sustainable business.

A similar move towards sustainability is perceivable in banks and other financial institutions, although they are still somewhat behind the times. This is related to the perception that banking is a relatively clean industry and to the fact that concern for environmental aspects is equated with meddling in the affairs of their business relations. A 1990 survey revealed that financiers had little interest in the environmental concerns of their business partners (Tomorrow, 1993). The environment and sustainable development are nevertheless full of risks for banks (a customer faced with having to decontaminate his soil, for instance) as well as opportunities (particular investment products or internal environmental care, for instance). In the US particularly, the risks for banks rose substantially in the 1980s due to a number of lawsuits (direct liability). US banks therefore began paying attention to environmental aspects before their European counterparts. Certain European banks are now running ahead of those in the US, particularly concerning product development and financing the environmental industry directly, with Swiss banks having been active for some time. Dutch, British and German banks are also ahead of their counterparts in the south of Europe in this respect. The range of activities is also continually evolving. Interesting developments are the foundation of the Dow Jones Groups Sustainability Index, in which a very reputable party set a benchmark at the end of 1998 for sustainable investment in the market and the collaboration between governments and businesses (including BP, Deutsche Bank and Rabobank) in the World Bank's Prototype Carbon Fund (PCF) in 1999. The PCF is being regarded as a vehicle that will enable the participating parties to gain knowledge and experience so that economic solutions can be generated to fight the problem of climate change. The interest banks show in sustainable development has evolved rapidly over the last few years. Various banks perceive the importance and opportunities of sustainability (whether implicitly or otherwise) and have signed declarations, such as those by the International Chamber of Commerce (ICC) and the United Nations Environment Programme (UNEP), in which they endorse common and individual responsibility for bringing about sustainable development.

The role of banks in the achievement of sustainable development is significant considering the intermediary role that they play in society. This last point explains the concern that governments, the European Union (EU), the United Nations (UN) and non-governmental organizations (NGOs) are showing over the effect of banking activities on sustainability. If sustainable business is to succeed at the macro level, the attitude taken by banks will be critical. A bank transforms money into place, term, size and risk in an economy and, as such, it affects economic development. This influence is not only quantitative but can be qualitative, since banks can influence the nature of economic growth. Its financing policy is one way for a bank to create opportunities for sustainable business. An example is funds that are specifically designed for investment in environmentally friendly ways, such as green funds. But banks can go a step further by applying premium differentiation (not based on financial values), for instance, in which a certain investment or credit application must satisfy return or risk-management requirements from a sustainability perspective.



Should banks use financial instruments to allow sustainable development in their own 'sustainable' dealings? That is, base their credit and investment policy on sustainability ratios instead of exclusively financial ratios? Defined like this, there seems to be little place for sustainable banking in the current economic/social paradigm, in which so much is determined by financial ratios. Generally speaking, sustainable development can be achieved through incremental improvements in the production process and in the durability of products. These steps must be taken, and the private sector and a variety of banks have taken up the challenge. In theoretical terms, they are referred to as first-order change processes (see Voogt, 1995, or Watzlawick et al, 1973). Many things are possible in this way and considerable steps can be made towards sustainability.

We may ask ourselves whether sustainable development could be achieved without having to revise current norms and values or the current worldview. Modern society is dominated by economic materialism. There is nothing fundamentally wrong with this - in fact it has resulted in considerable prosperity. But this orientation and fixation on material economic growth has brought with it undesirable side effects, such as dire poverty in developing countries, environmental problems, declining social cohesion, wars and the threat of war. Not only are the problems directly related to the single-minded pursuit of wealth, some problems are even statistically recorded as economic growth (and therefore as increases in wealth). The drive to define, and recognize the importance of, sustainable development in fact implies that the current modes of wealth pursuit are too narrowly focused. A place must be found for immaterial aspects, or even better, a balance between the material and immaterial in the growth of prosperity. The question is whether this can be achieved within the current economic system or economic orientation. Other methods of organization at the meta level are probably needed to take the place of the market mechanism now predominating, or complement it. Change processes of this nature are referred to as being 'second order'. This approach to the question of sustainability will be discussed in the last part of this book, with the final chapter attempting to combine this approach with a vision of banking and sustainability in the future.



This book's objective is to contribute to expanding awareness with respect to sustainability and the steps that banks can take. It does not attempt to provide definitive answers, but does aim to stimulate thinking in terms of solutions. It also tries to stimulate people to go beyond their preconceptions by posing and discussing a number of essential questions. The primary target group is managers, directors and people working in all layers of the financial sector. However, the book will also be explicitly of interest to bank customers, governments, environmental organizations and scientists. The analyses and descriptions are primarily written from a Western perspective. The emphasis is therefore more on environmental pollution as a social problem than on erosion and poverty related to natural resources. Box 1.1 shows the geographical scope of the book.


This book focuses on 'developed' countries, a category that classifies developed or Western countries on the basis of the following three criteria. Firstly, there are the 'high income' countries identified by the World Bank, 49 in all with a per capita gross national product (GNP) (1999, based on the World Atlas method) exceeding US$9,266. Some 20 of these countries attribute the high per capita GNP to a combination of a relatively modest population (less than 100,000 people) and the fact of being a tourist paradise or tax haven. But prosperity also relates to aspects like life expectancy and schooling. So, the second criterion is the top 30 countries from the UN's Human Development Index (UNDP, 2000, p186). Within this group, two countries (Malta and Barbados) do not come into the 'high income' category of the World Bank and the top 21 are all OECD countries. Of the remaining seven countries, three have been involved in the past decade in war, or the threat of it (Israel, Cyprus and Slovenia) while two countries are city states (Singapore and Hong Kong); these have been omitted from consideration. The remaining two countries are members of both the OECD and the EU (Portugal and Greece). The final criterion is related to accessibility of data, which has led to the omission of the five countries above and inclusion of all EU countries.

The definitive selection comprises, therefore, OECD countries that are in both the 'high income' category of the World Bank and the top HDI countries of the UNDP (see Table 1.1).

Table 1.1 Geographical scope of this book
Europe, EU
Austria (10, 16)
Belgium (7, 7)
Denmark (8, 15)
Finland (21, 11)
France (13, 12)
Germany (16, 14)
Greece (36, 25)
Ireland (23, 18)
Italy (20, 19)

Luxembourg (1, 17)
The Netherlands (14, 8)
Portugal (35, 28)
Spain (31, 21)
Sweden (22, 6)
United Kingdom (19, 10)

Europe, non-EU
Iceland (9, 5)
Norway (6, 2)
Switzerland (4, 13)

North America
Canada (12, 1)
US (2, 3)

Asia and Oceania
Japan (11, 9)
Australia (18, 4)
New Zealand (30, 20)

Note: Numbers in brackets represent the ranking of each country by GDP per capita (on the basis of 'purchasing power parity' and in USD) and HDI respectively.

The 23 countries selected have an overall population of some 846 million, or about 14 per cent of the world's total population (23 per cent if China and India are excluded). In respect of total world gross domestic product (GDP), these 23 countries account for a 75 per cent share (World Bank, 2000, pp274-275). This book concentrates specifically on these 23 countries, as a whole and individually. All references to 'developed' or 'Western' countries relate to this group. As for banking, only banks with headquarters or origins in developed countries are considered. The activities of these banks in developing countries are considered as well. Some background on most of the banks mentioned in this book is given in Appendix VIII.

The book is organized into three parts. Part I offers a general introduction of environmental awareness, sustainable development, 'pure' banking, and sustainability and banking. It thus forms the framework of the discussions in Part II which examine the first-order change processes and the various approaches that banks and other actors in the financial sector can take in terms of solutions. These considerations are formulated with both negative and positive aspects; that is to say, both the opportunities and the threats are examined. Part II is the core of this book and looks at things from a pragmatic and descriptive angle. Part III reflects on Part II and explores second-order change processes that break through the existing economic paradigm. The potential role of banks (financial sector) in a new social order will be discussed in the last chapter.

In theory, any of the parts or chapters can be read separately though they form a concise whole. Part II is, for instance, accessible to readers with a practical interest in the interfaces between banks and sustainable development, while Chapter 10 is for readers with an interest in a more philosophical approach to the sustainability issue.



Chapter 2 outlines the development of environmental consciousness and the concept of sustainable development, beginning with the Ancient Greeks and moving on to the development of environmental policy in the 19th and 20th centuries. It reveals humans to be dependent on their ecological environment. The awareness of that dependence and the influence of human actions on that environment and themselves has grown through the centuries, and since the 1960s - albeit in fits and starts - has accelerated at a powerful rate. It is not only awareness of the environment that has evolved; government policy on the environment reveals trends that attempt to bring about a symbiosis of the environment and the economy. Sustainable development is thus often seen as an evolution of environmental consciousness, but it is really a revolution because the narrow economic thinking has to be broken. In this book sustainable development is predominantly summarized as the merging of the environment and the economy, since it is in this area that many improvements are possible. As a counterbalance to the domination of economic thinking, the environmental dimension of sustainable development weighs rather heavily in this book.

Chapter 3 considers what sustainable development means for businesses, and which phases or stances must be distinguished in this. This issue is also addressed in the light of the 'corporate governance' problem - how external verifiability is applied, and how far businesses are responsible for sustainable development. This is why attention is also paid to environmental reporting.

Chapter 4 discusses the roles of banks in sustainable development. An introduction to banking itself and the development of banks in recent decades is a prelude to the link with sustainability. This link is made by analysing the environmental pressure on banks, the stance of their stakeholders towards sustainability, and the potentially special role that banks can fulfil in sustainable development. Questions that arise are: Can banks promote sustainable development through their intermediation function? Would sustainable banking mean that environmental return is regarded as more important than financial return? Can we progress beyond 'offensive' banking, which tackles environmental consciousness from the standpoint of costs and revenues without considering the sustainability of business activities and credit provision?

In Part II, Chapter 5 looks at the opportunities that emanate from the integration of sustainable development in financial products. Can we conceive of new products that respond to the need for an emerging 'sustainability segment' - that is, businesses and consumers that want to invest or save in a sustainable manner? What opportunities for financing in general are offered by new markets created by the drive for sustainable development? Which new financial products or constructions would stimulate more sustainable investments through financing businesses or private consumers?

Chapter 6 explores the environmental risks associated with credit provision, participation and investments. A crucial aspect of this is that the risks for the bank are mainly determined by the risks of the business which is receiving credit facilities. Can separate methods be developed to analyse such risks in an efficient and systematic manner? In addition, is there an achievable synergy between the methodologies used in the products discussed in Chapter 5?

Chapters 7 and 8 deal with the supporting and organizational activities within banks. These chapters are strongly interrelated. Chapter 7 tackles what a bank can contribute to sustainable development within its own production process. That is, the possibilities for internal environmental care, for example the reduction of the environmental burden through the reduction of energy consumption and waste, and the implementation of sustainable building.

Chapter 8 then explores the organization of internal processes whose objective is to link sustainability to the way a bank operates: that is, the issue of how to instigate and facilitate the necessary first-order change processes. For the successful integration of sustainable development in the activities of banks, there has to be broad internal support for the environmental policy and the sustainability concept. A key to this is consciousness, and therefore much emphasis is laid on internal communication. Chapter 8 also considers the role of external communication and the issues concerning external verification.

In Part III, Chapter 9 reflects on the activities of 34 major international banks and provides insights into the differences between them. Chapter 10 then returns to the question of whether the incremental improvements discussed in Part II and Chapter 9 are sufficient to get sustainable development off the ground. The next question is, what second-order change processes have to be implemented to actually achieve a sustainable society? What are the conditions for this? A picture is given of the potential elements of such a new paradigm. This chapter therefore has a more philosophical angle.

Finally, Chapter 11 forms a link between the more philosophical chapter and the practical chapters in Part II. It takes a look into the future and investigates which developments, some of them already visible, may facilitate the achievement of sustainable development, and what role the banks may play in this.