The case for a more sustainable banking regulation framework

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Recent complaints by NGOs, academics and regulators about the lack of serious action taken against greenwashing highlights a major problem in the banking industry. Alarmingly, the Bank for International Settlements has compared climate risks to black swan events, calling them green swan events because the question is not if, but when these events will occur. In this paper, I argue that this mismatch between what is being done and what is needed stems from a vision of sustainability that fails to address current climate and social challenges. Indeed, there are two main visions of sustainability, weak sustainability and strong sustainability. To date, market-based initiatives in international banking have focused mainly on the former, through corporate social responsibility initiatives or voluntary participation in programs such as the United Nations Environment Programme Finance Initiative. The apparent lack of ambition of these initiatives to enforce concrete climate and social imperatives which could negatively impact profitability in the short to medium term shows the limitations of the current paradigm of sustainability in banking. Banking regulators who focus on system-wide stability rather than immediate profitability appear to be the best emergency responders in the current circumstances – even though some have historically rejected such a role. For example, FINMA, the Swiss financial regulator, states that its role is to protect against greenwashing and climate risks, but not to actively promote climate-friendly banking activities, which is a somewhat confusing stance.

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