National Policy
July 12, 2022

Banking on the Environment: the relationship between environmental policy and the banking industry

This past year presented many challenges to people all around the world. In the US alone, California burned, the stock market dipped, unemployment skyrocketed, and Texas froze. However, these seemingly unrelated events have led bankers and world leaders alike to a question: could the banking industry help protect the environment and slow global warming? The answer is yes, through protectionary policy and green banking. 

While it may not seem like it, the banking industry has a strong impact on the environment through economic policy. Both economic growth and recessions are influenced heavily by banking policy, and both have an impact on the environment. As our world continues to burn, protecting the environment is becoming one of a bank’s major priorities. 

The most obvious impact of banking policy occurs during periods of growth. When an economy expands, resources are often limited, leading to deregulation of the environment. It is hard for an economy to grow if all the raw material is hidden under layers of protections and laws. An example of this is found in President Trump’s bid to begin drilling for oil in Alaska. This project—known as the Willow Project—was approved by the Bureau of Land Management and is set to begin in 2021. Drilling in the area is planned to produce more than 160,000 barrels of oil per day for 30 years. However, environmentalists are concerned that allowing this project to move forward will only increase global warming in Alaska--especially since Alaska’s global warming rates are more than twice as fast as the rest of the US. During times of economic growth like this one, the banking industry needs to find a way to protect the environment while allowing economic expansion. 

On the other hand, recessions can be both good and bad for the environment. In some political climates, recessions can result in a drastic drop in carbon emissions. Results from studies analyzing the CO2 emissions rate in the US suggest that total emissions and emissions intensity reduce much faster in contraction than they increase in expansions. Additionally, research shows that the Great Recession in the United States led to an 11% drop in carbon emissions between 2007 and 2013. However, in the long run, recessions can prove dangerous to an environment. When in a recession, it is imperative that the government work quickly to bolster the economy. One of the ways they do this is by stripping environmental protections, making it easier to produce goods and services quickly and cheaply, so that the economy can recover. For example, in early 2020 President Trump weakened auto emissions standards through a change in EPA regulations. This rule change meant that instead of auto manufacturers being required to cut emissions by 5% every year--as was required under Obama era policy--they are now allowed to only decrease emissions by 1.5%. The goal of this policy change was to decrease the cost of cars to consumers by decreasing production costs. However, this policy will take a significant environmental toll, with some critics saying it will increase CO2 in our atmosphere by nearly a billion metric tons. Clearly, the banking industry has a profound impact on the environment in both positive and negative ways. The question then becomes how to best utilize that impact. 

In the US and around the world, the banking industry is making progress in environmental protections. In 1992, the United Nations developed a program called the  Environment Programme Finance Initiative. Recently, the Initiative presented a set of banking principles, called the “United Nations Principles for Responsible Banking.” These principles outline seven areas of focus, simultaneously creating a plan for banks to follow. The principles cover alignment--contributing to the needs of society and respecting previous promises--impact and target setting, governance and culture, transparency and accountability, as well as other key foci. So far around 230 banks internationally have committed to becoming signatories of this program. 

Green banks are also on the rise in the US, notably in Connecticut, New York, and California. The priority of green banks is to encourage more environmentally friendly spending and investment among their consumers. They typically pursue this goal by providing bundles for solar investment or investment in other clean energy and guaranteeing low interest rates on loans for environmentally friendly projects. In an interview with Public News Service, David Gibson put it this way: “A green bank is a public or nonprofit entity that uses public funding to leverage private investments into clean energy and other climate solutions.” The public funding that green banks use is typically obtained by placing a small surcharge on electricity bills. As of 2016, collective investment from the New York and Connecticut green banks in green energy totalled more than $575 million

While both of these programs and projects do help move banking in a sustainable direction, the banking industry is going to need to do more. Increasing the number of green banks and the incentives for positive investment is a good place to start, with some advocates of green banking pushing to make the US Central Bank green. The key here is to make the Central Bank a green bank while not over politicizing the issue, something that could prove difficult. Senate bill 2057 is a bill introduced to the Committee for Environment and Public Works in 2019, aiming to establish a National Climate Bank separate from the government. This approach seeks to avoid the political tension of converting our established Federal bank into a green bank and instead creates an entirely separate entity. It has been stalled on the Senate floor for the past two years, but with the recent transition of power between parties and renewed focus on the environment, advocates hope it will be revisited. 

As temperatures once again rise in the Pacific Northwest to record highs of 108 degrees in Portland, the need to fight climate change becomes obvious. Hopefully, with continued advancements in green banking and international support, the banking industry can play an important role in this fight.