In this article and accompanying video, Daniel Theobald (Senior Manager, Banking Advisory, Sustainable Finance Consulting, PwC Luxembourg) answers a few of the burning questions many people have in terms of green banking products .

Sustainability, ESG, SDGs, climate change, the European Green Deal, the Sustainable Finance Disclosure Regulation and the EU-Taxonomy are terms that increasingly dominate our conversations. We are all thinking about the environmental consequences of climate change and the ambitious political goals that aim to mitigate it.

All this is also changing the behaviour of us as bank customers, because we would like to understand how our bank is positioned within the complex landscape of sustainability and how we can make a positive contribution.

The good news right at the beginning; we are not alone with our thoughts and the desire to act. More and more bank customers and investors are calling for a shift towards banking with positive impact and social responsibility. Established ‘green’ banks have already been positioned in the market for years. But as a result of the fundamental change these days, the entire industry is on the move.

What is meant by ‘green banking’ and ‘sustainability’?

Let's start from the beginning and answer the question of what green banking or sustainable banking is about. There is no universally accepted definition of green banking or sustainable banking and it varies widely between countries. However, some organisations and researchers tried to come up with their own definition in the past.

As there were meanwhile many overlaps between the different definitions, it was necessary to formulate the scope and definitions a little clearer; thus, the United Nations Environment Programme (UNEP) provided a basis for the European Action Plan on Financing Sustainable Growth that is a comparison on respective definitions of the keywords green, sustainable, and socio-environment.

The picture below shows that sustainable finance is the most inclusive concept as it contains environmental, social, and governance (ESG) aspects, while green finance includes climate and other environmental finance but excludes social and economic aspects. The most recent definitions refer to green banking as financing activities by banks and non-banks that aim to reduce greenhouse gas emissions and increase society's resilience to the negative impacts of climate change. The bridge to sustainable banking is then built by adding social and governance related topics to the aforementioned, e.g., economic growth, job creation, and gender equality.

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The following picture illustrates that sustainable finance plays an important role within sustainable banking, as it provides finance taking into account environmental, social, and governance (ESG) aspects.

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What can be understood by green and sustainable banking products

Current Accounts

Every month, we receive a certain amount of money that is paid into our current account, e.g., salary; money is colloquially parked. A part of the money is then used to pay rent, bills, living expenses, and many more. Banks have decades of experience, so they know that there is always a certain amount of money on the bank accounts that we do not use. Even though we always have access to the money, banks work with the money. Hence, this available part of the money is used to grant loans or make investments, i.e., invest in companies and shares.

However, many banks invest our money in conventional companies without paying much attention to standards in their investment decisions. Each bank pursues an individual strategy to work and earn money with our capital. On the one hand, there is the aforementioned traditional form of bank account, but on the other hand, the so-called sustainable or green bank account. Green bank accounts, often also simply referred to as sustainable bank accounts, follow the approach of fair and responsible financial management.

From a definitional point of view, the two accounts are not the same, as ‘green bank accounts’ follow environmental aspects exclusively, whereas ‘sustainable bank accounts’ follow environmental, social, and governance aspects. Nevertheless, they are often used as synonyms. For both, transparency is important and should prove that the money is really being used for what it is intended for. The focus of these types of products is on investments that have a positive impact. Orientation towards E, (S and G) is of great importance, which is also communicated accordingly by giving relevant information about actions. This often goes hand in hand with a bank's holistic business orientation.

As our demand for these types of accounts is growing, more and more banks have adopted an approach of sustainable orientation in recent years. In this way, we as customers can achieve an impact with our money that we do not use without being active ourselves.

Investment Products Financial investments with a sustainable character have proven to be sometimes more advantageous compared to conventional non-sustainable investment options. It has become apparent that these investment products could bring advantages and will be increasingly offered by banks in the future. Thus, these investment opportunities are becoming more and more interesting for us as banking clients. Institutional and private investors who previously did not have a pronounced green attitude are now suddenly striving for sustainable investments. In order to create transparency for us in the field of investment, politicians and the financial industry have

reacted to this sustainable development. Rules are being drawn up for all those who offer investment products. The so-called EU regulations (Sustainable Finance Disclosure Regulation - SFDR) as well as the EU taxonomy oblige investment offers (e.g., funds) to classify themselves in order to create transparency for us as clients. This classification, for which the respective providers are responsible and which is ultimately checked for accuracy by the authorities, distinguishes between three levels of sustainability (also called non-sustainable, light green and dark green investments):

● ‘Mainstream investment without specific sustainable investment orientation’ (“Article 6” product)

● ‘Consideration of ecological or social characteristics of the investments’ (“Article 8” product)

● ‘Sustainable investment objective of the investment’ (“Article 9” product)

Meanwhile, this information is increasingly found in promotional materials and is intended to provide us with additional transparency about what we (can) invest in and, furthermore, what the impact of our investment will be. Not only marketing material, but also the bank advisor has to provide additional information on the respective classification of the products and thus help us to make investment decisions. However, this process towards full transparency in investment is not yet accomplished and will take some time. The holistic implementation of this communication concept for sustainability and reliable transparency is not expected before 2023. As a result, although customers can already orient themselves by the information on the respective classifications, fully reliable classifications can only be expected in the coming years.

Our practical experience when it comes to sustainability in banking

PwC's many years of experience in the banking market have shown that financial institutions are gearing their business activities towards maximising profits. From an economic point of view, this is indeed more than reasonable. However, the recent past has shown that ecological aspects are increasingly coming into focus; over time, this has led to the manifestation of the topic within the banking industry and banks are beginning to rethink their approaches and business orientation. Above all, the transformation towards more sustainability of our everyday lives plays a major role and has become a significant trigger for the increasing sustainable orientation of the banking business. As clients, we hold an important position today and will continue to do so in the future through our demand behaviour, which directly could accelerate the development. This means that if our demand for

sustainable products increases, the range will also expand. It is therefore all the more important that we pay more attention to sustainability aspects in our banking products in the future, so that banks align their product and service offerings even more closely with sustainability aspects and thus achieve an even greater impact.