Green banking is a branch of the financial industry that focuses on promoting environmentally-friendly practices. Similar to sustainable investing, green banks emphasize the importance of reducing negative environmental impacts as they go about their business.
The latest data indicates that global warming is likely increasing, and, in response, so is the market for renewable energy sources and other green solutions. The emergence of green banking may also reflect this rising interest in being more eco-conscious.
Read on for a closer look at what green banking is and how it works, plus some examples of green banking.
Key Points
• Green banking focuses on environmentally-friendly financial practices.
• These banks fund clean energy projects using both public and private investments.
• These also focus on ways to reduce a bank’s environmental footprint.
• Other objectives include financing green jobs and expanding solar power.
• Over 20 U.S. green banks have driven significant clean energy investments.
What Are Green Banks?
There is no standard way to define what a green bank is. According to the Environmental Protection Agency (EPA), green banks are public, semi-public, or nonprofit financial institutions that use public and private funding to pursue clean energy projects. More broadly speaking, green banks are mission-driven. They work to further environmentally sound goals alongside financial goals. Those objectives can include:
• Financing projects that will create green jobs
• Expanding solar power
• Lowering energy costs
• Reducing greenhouse gas emissions
• Building green infrastructure
• Closing funding gaps for green energy retrofitting projects
• Advancing sustainability
As of 2023, there were over 20 financial institutions in the U.S. operating as green banks, according to the Green Bank Consortium. Collectively, those banks have helped to drive $9 billion in clean energy investment over the past 10 years, using only $2 billion in public funds.
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How Do Green Banks Work?
Broadly speaking, green banks work by adhering to practices that promote sustainability. Sustainable banking encompasses two different things:
• Green banking
• Sustainable finance
So what does that mean? When you’re talking about green banking, you’re referring to implementing practices that are designed to reduce a bank’s environmental footprint.
Sustainable finance, on the other hand, involves the use of financial products to support or encourage environmentally-friendly behavior.
Green banks work by incorporating aspects of sustainability into their operations. That spans everything from the products and services the bank offers to its IT strategy to the way it hires and retains employees. It may encompass socially responsible investing as well.
It’s important to note that it can be easy to confuse banks that are authentically green with financial institutions that engage in greenwashing. Greenwashing happens when companies have the appearance of being environmentally-friendly or sustainable, based on their marketing claims, but in reality are not. It may require a bit of consumer research to make sure you can differentiate what is a green bank and what isn’t.
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Sustainable Banking Examples
The number of green banks in the U.S. is still relatively low, and they don’t exist in every state yet. You may not see them among your local retail banks. However, there are some notable examples of financial institutions that are focused on sustainable banking. These include:
California Infrastructure and Economic Development Bank
The California Infrastructure and Economic Development Bank (known as IBank) offers a variety of paths to sustainable banking. The bank offers infrastructure loans, bonds, small business financing, and climate financing in order to create jobs, bolster the economy, and improve quality of life for Californians. IBank financing has provided $1 billion in infrastructure loans within the state over the last 10 years.
Connecticut Green Bank
Connecticut Green Bank is the nation’s first green bank, established in 2011. The bank evolved from the Connecticut Green Energy Fund and bases its business model on the use of sustainable financing to maximize the use of public funds. As of 2022, the bank and its partners have helped $2.26 billion in capital to find its way into clean energy projects across the state.
NY Green Bank
NY Green Bank is a state-sponsored financial institution operating in New York that works with the private sector to increase investments into clean energy markets. The bank is specifically interested in projects that are both financially sound and focus on creating energy savings or clean energy that helps reduce greenhouse gas emissions. Many of the bank’s funding projects revolve around the expansion of solar energy.
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Advantages and Disadvantages of Green Banks
Green banks and sustainable banking aim to play a role in environmental preservation. However, they aren’t the same thing as your standard brick-and-mortar or online bank. While you may never use a green bank directly, it’s important to understand how they can still affect you. Here’s what to know about the advantages and potential downsides associated with sustainable banking.
| Banking Advantages | Banking Disadvantages |
|---|---|
|
• Green banks help to advance the use of clean energy technology. • Clean energy projects funded by sustainable banking can help to increase job growth and promote economic development. • Green banking can attract large-scale private investment, which can help to accelerate clean energy projects. |
• Green banks are not widespread, and their reach may be limited. • Sustainable banking is still a relatively new subset of the banking industry, which can translate to higher credit risk. • Banks that engage in greenwashing can taint the image of sustainable banking and lead investors to look elsewhere. |
The Future of Green Banking
Predicting the future of sustainable banking is difficult, though signs indicate a growing interest in green banks might help create a cleaner environment. At the federal level, for instance, the passage of the 2022 Inflation Reduction Act notably included a provision allowing for the establishment of a national green bank. In August 2024, the first U.S.-based national green bank opened. It’s being run by the nonprofit Coalition for Green Capital using over $5 billion in funding from the Inflation Reduction Act.
Globally, sustainable banking is increasingly in the spotlight in emerging markets. There’s growing interest in the positive environmental gains that may be made through green banking. That said, there are still questions about how to encourage sustainable finance in economies that are still developing. This could in turn lead to more global collaboration among banks in furthering sustainable finance worldwide.
One potential result of sustainable banking: There may be greater carryover in the traditional banking sector. For example, there may be a push for banks to offer personal or small business banking products and services that have a sustainable or green angle. Green loans and mortgages could end up being another byproduct of enhanced attention on sustainable finance.
As the spotlight on green banking grows, you may begin to notice changes at the retail banking level. For example, Citigroup issues an annual report on its ESG (Environmental, Social and Governance) program results. And it’s not just traditional banks showing dedication to this topic; online banks are part of the effort, too. In March 2022, SoFi announced the launch of its ESG Committee to help formulate strategies for positive environmental, social, and governance impacts.
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The Takeaway
Many people are adopting a greener lifestyle and finding ways to reduce their carbon footprint. Where you choose to bank could make a difference in your efforts if you’re keeping your money at a financial institution that advocates sustainability. Green banking is the term used to describe financial institutions that try to both make their business practices more sustainable as well as invest funds towards eco-conscious goals. This segment of the market may well grow in the years ahead.
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FAQ
What is sustainable banking?
Sustainable banking encourages environmentally-friendly practices, products, and services. A sustainable bank or green bank may be committed to specific environmental goals, such as reducing greenhouse gas emissions, promoting the advancement of clean energy, or funding green building projects.
How can banks be more sustainable?
Banks can encourage sustainability by reviewing their environmental footprint and addressing areas that could improve. The types of changes banks can implement may be large or small, but the end goal is fostering a cleaner environment. Reducing paper waste, for example, is one simple way to be more sustainable.
Which banks are green banks?
There are a handful of banks operating in the U.S. that are designated as green banks, according to the Green Bank Consortium. Whether a bank is considered “green” or not can depend on the type of certifications they hold. Examples of green banks include IBank, Connecticut Green Bank, and NY Green Bank.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/baona
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