Banks are subject to various sustainability regulations, depending on their location and the nature of their operations. However, despite the numerous regulations across the sustainability arena, there are several core themes banks may need to comply with:
Climate-related regulations: In many countries, banks must report on their exposure to climate risks and disclose how they are addressing these risks. For example, in the European Union, the EU Taxonomy Regulation establishes a framework for classifying sustainable economic activities, and the EU Climate Benchmark Regulation sets standards for creating and using climate benchmarks.
Social and governance regulations: Banks may also be subject to regulations related to social and governance issues, such as human rights, labour practices, and corruption. For example, the United Nations Guiding Principles on Business and Human Rights require companies to respect human rights, and the UK Modern Slavery Act requires companies to disclose their efforts to address slavery and human trafficking.
Sustainable finance regulations: Many governments and regulators are introducing rules and guidelines to promote sustainable finance. For example, the EU’s Sustainable Finance Disclosure Regulation requires financial institutions to disclose how they integrate ESG factors into their investment decisions, and the China Green Bond Endorsed Project Catalogue provides guidelines for issuing green bonds.
Environmental regulations: Banks may also be subject to environmental regulations, such as those related to waste management, water usage, and emissions. For example, the US Environmental Protection Agency (EPA) requires banks that offer loans to the oil and gas industry to disclose their environmental risks and liabilities.
Banks must comply with a range of sustainability regulations, and the specific regulations they are subject to will depend on their location and the nature of their operations. Still, besides compliance, sustainability plays a much more significant role across financial services. Financial institutions recognise the importance of integrating environmental, social, and governance (ESG) factors into their operations and investment decisions. As a result, there are several areas across banking where sustainability has become an essential agenda item :
1. Risk Management: Financial institutions must manage the risks associated with ESG issues, such as climate change, resource depletion, and social inequality. Companies that ignore these risks may face reputational damage, legal liabilities, and financial losses. Customers are also asking for more transparency around these areas, with banks needing to disclose more of their strategy in this space
2. ESG-Centric Investment: Investors are increasingly interested in investing in companies with strong ESG credentials. Financial institutions are responding by offering sustainable investment products, such as green bonds, renewable energy funds, and socially responsible investment (SRI) funds. Significant innovation in the area of sustainable investment has also given rise to many fintechs looking to drive the next generation of wealth management, e.g. Wealthify, Path, BestInvest and many others
3. Corporate Social Responsibility: Financial institutions have a responsibility to act in the best interests of their stakeholders, including their customers, shareholders, and the wider community. By promoting sustainability, financial institutions can contribute to positive social and environmental outcomes
4. Regulation: Governments and regulators are introducing new rules and guidelines to promote sustainability in the financial sector. For example, the EU’s Sustainable Finance Disclosure Regulation (SFDR) requires financial institutions to disclose how they integrate ESG factors into their investment decisions
Sustainability is becoming increasingly important in financial services as companies recognise the need to address environmental and social challenges and meet the growing demand for sustainable investment products. As a result, more efforts are being made to create ESG-centric products such as green mortgages, carbon offset loyalty and many other features that turn everyday banking products into more responsible offerings.