Banking on climate change: the levers and limits of voluntarism and lessons for effective regulation

Abstract

Climate change is as much an economic phenomenon as an environmental or moral one. Therefore, discussion of climate change mitigation needs to include the finance sector. Banks, in particular, are economic gatekeepers. Their day-to-day activities of financing, lending, investing, trading and advising bring them into frequent and direct contact with large corporations that are responsible for intensive global greenhouse gas (GHG) emissions as well as the development of low-carbon technologies. This has two consequences, both of which make banks key players in the transition to a low-carbon economy. First, nearly all economic decisions made by banks will have indirect environmental impacts - for better or worse. Second, banks are optimally placed to enrol other corporate actors in GHG mitigation efforts.

However, little research exists concerning whether, to what extent, or why banks would seek to facilitate climate change mitigation, especially when not compelled to do so. What makes this subject particularly important is that despite regulatory uncertainty on climate change at international and national levels, early-moving private sector banks are making voluntary climate-related changes to their business practices. Yet it remains unclear why they are doing so, and whether or how such 'enlightened' practices might become mainstreamed in the industry as a whole.

The purpose of this dissertation is twofold. First, it answers the question of why early-moving private sector banks are adopting climate-related practices. It does so taking account of but going beyond the relevant literature on 'why companies go green', which is conceptualised through intra-organisational (micro), inter-organisational (meso) and socio-cultural (macro) theoretical lenses. In so doing, it employs a multiple case design and analyses interview data from seven early-moving or 'leading' banks to provide insights about internal and external influences on corporate environmental behaviour. Second, this dissertation draws implications from the empirical findings for: (a) the mainstreaming of 'enlightened' banking practices in the industry as a whole; and (b) effective climate finance policymaking.

The findings in this dissertation demonstrate that the meso-level literature on the business case provides the most convincing explanation as to why early-moving banks are 'going green '. In so doing, a new taxonomy of corporate 'reputation' is proposed, which includes a new classification of 'client service reputation' with the established 'social reputation' as twin drivers of corporate greening. Equally as important, this dissertation demonstrates that ethical or 'corporate social responsibility' motivations do not drive corporate greening in the banking industry. Finally, this dissertation yields jurisdictionally-specific findings on how regulatory contexts shape corporate decision-making on climate change.

In drawing implications from these findings, this dissertation shows that mainstreaming of purely voluntary 'leading' bank practices will probably occur over time incrementally, which will not assist the transition to a low-carbon economy fast or far enough. Therefore, this dissertation recommends that government regulatory intervention at the national/regional level is required, regardless of international agreement. Theories of 'new governance' and 'nudge economics' are used to suggest that indirect 'steering' regulation can expand clean energy markets while harnessing the business case imperative of banks to assist timely transition to a low-carbon global economy.