research paper on green banking pdf

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• Published: 06 March 2020

Transition towards green banking: role of financial regulators and financial institutions

• Hyoungkun Park 1 , 2 &
• Jong Dae Kim 3  

Asian Journal of Sustainability and Social Responsibility volume  5 , Article number:  5 ( 2020 ) Cite this article

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This paper provides an overview of green banking as an emerging area of creating competitive advantages and new business opportunities for private sector banks and expanding the mandate of central banks and supervisors to protect the financial system and manage risks of individual financial institutions. Climate change is expected to accelerate and is no longer considered only as an environmental threat because it affects all economic sectors. Furthermore, climate-related risks are causing physical and transitional risks for the financial sector. To mitigate the negative impacts, central banks, supervisors and policymakers started undertaking various green banking initiatives, although the approach taken so far is slightly different between developed and developing countries. In parallel, both private and public financial institutions, individually and collectively, are trying to address the issues on the horizon especially from a risk management perspective. Particularly, private sector banks have developed climate strategies and rolled out diverse green financial instruments to seize the business opportunities. This paper uses the theory of change conceptual framework at the sectoral, institutional and combined level as a tool to identify barriers in green banking and analyze activities that are needed to mitigate those barriers and to reach desired results and impacts.

Introduction

The latest IPCC report (IPCC 2018 ) reaffirmed that human activities caused global warming and are likely to further accelerate it by reaching 1.5 °C above pre-industrial levels between 2030 and 2052 based on a business-as-usual scenario. The IPCC report set highly ambitious targets of reducing global net anthropogenic CO 2 emissions by approximately 45% from 2010 levels by 2030 and reaching net zero around 2050 to meet 1.5 °C of global warming. Limiting global warming to 1.5 °C certainly requires social and business transformations and emissions reductions across all sectors. Whilst the National Climate Assessment (USGCRP 2018 ) was more limited in scope by focusing its findings on the United States, it reached similar conclusions and suggested measures to reduce risks through emissions mitigation and adaptation actions. These findings prove that there is still a long way to go despite negative impacts arising from climate change and global warming (Doran and Zimmerman 2009 ; Cook et al. 2013 ).

To achieve such a structural transformation, the magnitude of the investment required is enormous. The IPCC report projected USD 2.4 trillion in clean energy is needed every year through 2035 and between USD 1.6 and USD 3.8 trillion in energy system supply-side investments every year through 2050, which is equivalent to USD 51.2 and USD 122 trillion exclusively for energy investments. Considering the significant investment needs, the financial sector is expected to play a pivotal role in providing necessary financial resources as it is the backbone of the real economy (OECD 2017 ). The role of the banking sector is central in meeting financial needs of the private sector and delivering credit to households and individuals (Beck and Demirguc-Kunt 2006 ; Wang 2016 ). The banking sector also plays a critical role in supporting a country’s adaptation to climate change and enhancing its financial resilience to climate risks. Banks can help reduce risks associated with climate change and sustainability, mitigate the impact of these risks, adapt to climate change and support recovery by reallocating financing to climate-sensitive sectors.

Climate change is affecting the financial system because of its far-reaching impact across all sectors and geographies, and the high degree of certainty that risks will emerge and have irreversible consequences if no actions are taken today. However, climate-related risks are not yet fully assessed and factored into current valuation of assets (NGFS 2019 ). The role of banks in financing the transition to a green economy is to unlock private investments, to bridge supply and demand while considering the entire spectrum of risks and to evaluate projects from both an economic and environmental perspective (EBF 2017 ). Although several banks have demonstrated their leadership in financing green or climate projects, the green portfolio of most banks is still very low. The International Finance Corporation (IFC) estimated the total green loans and credits of banks in developing countries to the private sector in 2016 to be approximately USD 1.5 trillion, or about 7% of total claims on the private sector in emerging markets (IFC 2018a , 2018b ). This outcome results from both a lack of the necessary regulatory and supervisory framework and failure to integrate environment and climate change risks into banks’ strategies and risk management systems. Additionally, the current financial framework often makes the required investment difficult to be met due to barriers exist at the sectoral and institutional level (Mazzucato and Semieniuk 2018 ). In response to the lack of regulatory and supervisory framework, a growing number of central banks and regulators around the world are becoming aware of their role and potential mandate in addressing climate change and environment risks faced by the banking and financial sector and taking actions (Volz 2017 ). For example, a group of central banks and supervisors launched the Networking for Greening the Financial System (NGFS) in 2017 to contribute to the analysis and management of climate and environment-related risks in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy (NGFS 2018 ). In parallel, more banks, especially private sector commercial banks, have started greening their operations by integrating environmental and climate change risks into their strategies and risk management systems and rolling out green financial products to expand their business horizons.

While green banking is still a new concept in the field of climate finance, it can serve the United Nations Framework Convention on Climate Change (UNFCCC)‘s objectives by financing climate change mitigation and adaptation activities in collaboration with the private sector. This paper aims to identify the challenges that climate change presents to the financial sector and describes and analyzes various tools for financial institutions that can help manage climate and credit risks while developing business opportunities in parallel.

The paper proceeds as follows. Section 2 introduces the topic of green banking and reviews the relevant literature. Section 3 shows the green banking initiatives being undertaken by central banks and regulators and recent discussions about the mandates of central banks in their efforts to make the bank’s operations green and sustainable. It will also analyze the key difference in the approaches taken by developed and developing countries. This is followed by a discussion of the range of strategies, policies, tools and instruments that are being adopted and deployed by banks and presents the framework in Section 4. Section 5 introduces the theory of change conceptual framework as a tool to analyze current barriers and gaps, activities to be performed to mitigate the barriers and expected results and impacts that can be created. The final section discusses implications for academia, policy makers and practitioners and provides directions for future research.

Overview of green banking

Definition of green banking.

There is no universally accepted definition of green banking (Alexander 2016 ) and it varies widely between countries. However, some researchers and organizations tried to come up with their own definition. The Indian Institute for Development and Research in Banking Technology (IDRBT), which is established by the Reserve Bank of India, defined green banking as an umbrella term referring to practices and guidelines that make banks sustainable in economic, environmental and social dimensions (IDRBT, 2013 ). Green banking is similar to the concept of ethical banking, which starts with the aim of protecting the environment, as it involves promoting environmental and social responsibility while providing excellent banking services (Bihari 2011 ). The State Bank of Pakistan defined green banking as promoting environmentally friendly practices that aid banks and customers in reducing their carbon footprints (SBP 2015 ). Green banking can be also called social or responsible banking because it covers the social responsibility of banks towards environmental protection, illustrating that social issues often intersect with environmental issues. Social banking is broadly defined as addressing some of the most pressing issues of our time and aiming to have a positive impact on people, the environment and culture by meaning of banking (Kaeufer 2010 ; Weber and Remer 2011 ). Similarly, responsible banking encompasses a strong commitment by banks to sustainable development and addressing corporate social responsibility as an integral part of its business activities. Finally, green banking can be a subset of sustainable banking which tends to capture broader environmental and social dimensions (Dufays 2012 ). Global Alliance for Banking on Values (GABV) is an independent network of banks and banking cooperatives with a shared mission to use finance to deliver sustainable economic, social and environmental development. GABV has endorsed the principles of sustainable banking which include triple bottom line approach (social, environmental and financial aspects) at the heart of the business model, grounded in communities and transparent and inclusive governance (GABV 2012 ). There are many overlaps between these definitions and concepts which can be confusing to some extent. To make the scope and definitions a little clearer, UNEP provided a good comparison on respective definitions of green vs. sustainable vs. socioenvironmental (UNEP, 2016 ), as shown in Fig.  1 . According to UNEP, sustainable finance is the most inclusive concept which contains social, environmental and economic aspects while green finance includes climate and other environmental finance but excludes social and economic aspects.

A simplified schema for understanding broad terms. Source: UNEP, 2016

Whilst the definition of green finance in the UNEP paper was used to address environmental concerns in general and therefore became broader than the definition of climate finance, the scope of this paper will only apply to banking activities related to climate change mitigation and adaptation. In this respect, the concept of green banking is similar to that of climate finance defined by the UNFCCC which refers to finance that aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts. In this paper, green banking is defined as financing activities by banking and non-banking financial institutions with an aim to reduce greenhouse gas emissions and increase the resilience of the society to negative climate change impacts while considering other sustainable development goals such as economic growth, job creation and gender equality.

Need for green banking as a risk assessment and management tool

IPCC rightfully claimed that there is no clear scientific evidence on how the banking sector will be affected by the impacts of climate change (IPCC 2001 ). Whilst there may not be clear scientific evidence, central banks, regulators and the academia have been analyzing the climate change challenges from a financial risk and stability point of view (Kim et al. 2015 ; Carney 2015 ; Battiston et al. 2017 ; Volz 2017 ). Prudential Regulation Authority (PRA) within the Bank of England identified two primary financial risk factors associated with climate change: physical and transition (PRA 2018 ). Physical risk is defined as the first-order risks which arise from climate and weather-related events, such as floods, storms, heatwaves, droughts and sea-level rise with the vulnerability of exposure of human and natural systems (PRA 2015 ; Batten et al. 2016 ; PRA 2018 ). Physical risks can lead to higher credit risks and financial losses by impairing asset values. Transition risks are those that can arise while adjusting, frequently in a disorderly fashion, towards a low-carbon economy (Carney 2015 ; Platinga and Scholtens). Given that climate change mitigation actions often require radical changes and adjustments by the public and private sector and households, a large range of assets are at risk of becoming stranded. This is especially prevalent for fossil-fuel related sectors and assets, which as a result of a revaluation, can in turn lead to higher credit exposure for banking and non-banking financial institutions. Additionally, liability risks can be another primary financial risk factor. Liability risks can arise if parties suffering losses from the damages of climate change seek compensation from those they hold accountable (Heede 2014 ; Carney 2015 ). Liability risks can be more relevant to the insurance sector rather than banking sector due their nature and compensation mechanism. The three types of financial risk factors constitute a major threat to the stability of the financial system (Carney 2015 ; Arezki et al. 2016 ; Christophers 2017 ).

Those risks can come in parallel as they are interdependent. For example, an agriculture-dominated economy can suffer in many ways. Drought or flood, which is a physical risk, can lead to direct losses in agriculture and other agriculture- and food-related value-added sectors. Such a damage in turn can trigger liability risks if their properties were insured. Extreme weather events will not only reduce incomes generated by those sectors but also hamper economic growth by lowering the gross domestic product (GDP) and affecting the job market and thus threaten macroeconomic stability. As a result, affected corporates and individuals may not be able to repay their loans. Once loan default rates increase, banks with heavy agriculture portfolios will suffer. Ultimately, the stability of the whole financial system can be threatened. Additionally, changes in agricultural input can affect food security and food prices which in turn can influence the inflation rate and threaten price stability (Heinen et al. 2016 ). Figure  2 shows an example of climate change affecting in an agriculture-dominant economy.

Climate change effects in an agriculture-dominant economy

For banking and non-banking financial institutions, the transition risks of policy changes can cause more immediate and serious consequences compared to the other two types of financial risks, especially from a credit risk perspective. For example, valuation of collaterals such as land and properties may have to be downgraded if the governments decide to give up on coastal lands and properties vulnerable to sea-level rise for economic reasons or introduce more stringent building energy efficiency standards. Additionally, more extreme hot weather can decrease agricultural productivity leading to lower valuations. Borrowers in the tourism sector relying on coral ecosystems are likely to suffer from a significant decline of coral reefs of 70–90% under a 1.5 °C global warming scenario. Those banks that hold such collaterals and assets would be expected to reserve more capital against them or require more collaterals to offset the shortfall and manage the probability of default and loss-given-default which will become a financial burden by borrowers. Many banks have high exposure to carbon-intensive industries whose business models may not fit into the transition to a low-carbon economy. As a result, the borrowers in the carbon-intensive sector may face challenges in repaying loans due to a decrease in their earnings and asset value. As a result, more banks can be under pressure to shift their investment and lending patterns by divesting from fossil-fuels and investing more in low carbon and energy efficient technologies.

Additionally, the climate risk factors may increase market and operational risks for banks. Market risks can arise from significant fluctuations in energy and commodity prices due to the transition on carbon-intensive industries. Coupled with weakened macroeconomic conditions such as inflation and economic growth, these market risks can increase transaction costs for banks. Banks may also have to bear higher insurance risk premiums on their own assets vulnerable to climate change. Operational risks associated with business continuity can also increase due to climate change and frequency and depth of extreme weather events. For example, banks may have to relocate their headquarters and data centers. Reputational risks by banks could also arise from investing in carbon-intensive assets and borrowers as some might view such activities as breach of fiduciary duty for failing to consider long-term investment value drivers (Table 1 ).

Banks have increasingly started assessing the risks associated with exposure to their loans by adopting risk management frameworks such as the Equator Principles, which are essentially a credit risk management tool that can be used to identify, evaluate and manage environmental and social risks in project finance transactions. However, many frameworks like the Equator Principles are voluntary, legally non-binding industry benchmark and demonstrated inherent limitations including limited scope, a lack of transparency and publicly disclosed information, inadequate monitoring and a lack of accountability, liability, implementation and enforcement (Wörsdörfer 2016 ).

Arguably, the most effective means to address those issues would be to make such tools more enforceable within the boundary of the regulatory and prudential frameworks, assuming that most banks would not voluntarily undertake such measures. However, with exceptions of a few countries such as Bangladesh, China and Indonesia, most countries have just started exploring this possibility. In the case of China, the People’s Bank of China and the China Banking Regulatory Commission developed Green Credit Guidelines based on their Banking Industry Regulation and Administration Law and Commercial Banking Law. China’s Green Credit Guidelines require that banks establish a monitoring and evaluating system for green credit. The effectiveness of such policies is not easy to measure, and they are mostly still in mixed form between voluntary guidelines and enforceable regulations. Nonetheless, even voluntary guidelines can provide a very strong signal to banks if they come from central banks and supervisors, or organically from banks themselves, and are expected to encourage banks to assess and manage credit risks which may transit from climate risks.

Some argue that green loans possess better credit quality than non-green loans, particularly in terms of a lower non-performing loan (NPL) ratio (Weber et al. 2010 , 2015 ; Cui et al. 2018 ). On the other hand, NGFS conducted a preliminary stock-taking of research on credit risk differentials in terms of default rates and NPL ratio between green and non-green assets and concluded that there were no potential risk differentials (NGFS 2019 ). Existing data gaps is one of the factors that make a conclusion difficult to be drawn. Simply put, there isn’t much data available in this field given this is still a very new area and it’s been only a few years since countries and banks have started analyzing the potential risk exposure. Consistent and reliable data covering the credit exposure to climate risks and risk-return profiles of green and non-green assets over a sufficient period of time is needed (NGFS 2019 ).

The role of central banks and financial regulators in responding to climate change challenges

Debates on the role of the central banks and financial regulators.

As the financial risks from climate change are becoming more apparent and relevant to the banking sector, a growing number of central banks and financial regulators are taking them more seriously (Monnin 2018 ). NGFS members also acknowledge that climate-related risks are becoming financial risks and therefore taking care of climate risks is within the mandates of central banks and supervisors (NGFS 2018 ). Prior to the launch of the NGFS, the Task Force on Climate-related Financial Disclosure (TCFD) and the G20 Sustainable Finance Study Group, which was formerly known as G20 Green Finance Study Group, were established to serve similar objectives. The TCFD was established by the Financial Stability Board, which is an international body that monitors and makes recommendations about the global financial system, with an aim to develop voluntary, consistent climate-related financial risk disclosures that would be helpful to investors, lenders, insurance companies and asset managers in identifying and managing financial risks (TCFD 2017 ). Similarly, the G20 Sustainable Finance Study Group was created to identify barriers to green finance and improve the financial system to mobilize private capital for green and sustainable investment (G20 Green Finance Study Group 2017 ). While these kinds of frameworks and industry-led initiatives are major drivers of innovation and risk management, the public sector, namely central banks and financial regulators, also must play a supporting role in mainstreaming green finance and making sure climate-related risks are properly measured, verified and reported. However, many central banks are still reluctant to ease capital requirements for green lending without clear evidence that green finance indeed carries lower risks. Many debates are now arising regarding the climate change and environmental mandate of central banks and financial regulators (Volz 2017 ).

According to the statutes of the Bank for International Settlements (BIS), a central bank is defined as the bank that has been entrusted the duty of regulating the volume of currency and credit in the country. Central banks have historically had three main functional roles, which are to maintain price stability and financial stability, to support a country’s financing needs at times of crisis and to constrain misuse of its financial powers in normal times (Goodhart 2010 ). Additionally, central banks are often required to contribute to stabilizing exchange rate, creating jobs and fueling economic growth (Barkawi and Monnin 2015 ). Central banks often act as financial regulators that define the rules for banking and non-banking financial institutions such as the minimum capital requirement and specific restrictions on certain types of lending. However, there are other cases where an independent supervisory authority is established with the power of financial regulations and supervision while a central bank solely focuses on the monetary policy. The recent financial crisis between 2007 and 2008 indeed accelerated and expanded the role of central banks as the guardian of the financial system and as a lender of last resort. In this respect, the main job of a central bank is to control inflation and macroeconomic and financial stability. Thus, in a narrow sense evaluating climate-related risks and adjusting its monetary and macroprudential policies accordingly can be seen as overstepping its mandate. Volz ( 2017 ) also described potential conflicts with core objectives and mandates of central banks, overstretching their powers and resistance within the central banking community by incorporating the green objective in the mandate of central banks. Additionally, there is a question on the legal mandate of central banks. Some central banks in developing countries such as the Bangladesh Bank, the Banco Central do Brasil and the People’s Bank of China are active in pursuing green central banking policies and explicitly included sustainability in their mandate (Dikau and Ryan-Collins 2017 ). Also, the Financial Services Authority (OJK), the financial market regulator in Indonesia, has safeguarding financial system stability as a foundation of sustainable development in their corporate objectives and subsequently launched a roadmap for sustainable finance in 2014 and regulation on sustainable finance in 2017 (OJK 2014 ; OJK 2017 ). However, such an environmental sustainability mandate is relatively ambiguous for those in developed countries. For example, Article 127 (1) of the Treaty on the Functioning of the European Union defines price stability as the main objective of the European System of Central Banks (ESCB). Although some rely on Article 3 (3) of the Treaty on European Union, which states that the European Central Bank (ECB) shall support the general economic policies in the Union including a high level of protection and improvement of the quality of the environment, to argue that the ECB already integrated the environmental sustainability in its mandate; however, it is still considered as a secondary objective of the ECB and thus there is room for different interpretations. One study found that 54 out of 133 central banks have a mandate to spearhead sustainable economic growth or support sustainability goals set by the government but their mandates are not explicitly linked to climate change (Dikau and Volz 2019 ). To sum up, most central banks have focused on its interventionist role in the world’s economies since the financial crisis and they have not made significant adjustment of their policies to support a low-carbon transition (NEF 2017 ).

An increasing number of central banks and financial regulators, however, started analyzing the negative climate change effects on their banking and non-banking financial sector, and recent research supports the argument that climate change challenges can damage the financial stability (PRA 2015 ; Batten et al. 2016 ; Dietz et al. 2016 ; Volz 2017 ; Campiglio et al. 2018 ). The negative impact of climate change on the banking sector has already been analyzed from the transition, physical and liability perspectives. As shown in Fig. 2 , climate change challenges can pose potential threats to the stability of the financial markets, price and macroeconomics, all of which are within the key mandate of central banks and financial regulators. Moreover, fluctuations in energy prices while transitioning to a low-carbon economy can directly influence price stability and inflation and can hamper economic growth in all sectors, including the financial sector (DNB 2016 ). Stranded assets caused by transition risks can lead to a climate “Minsky” moment whereby a sudden, major collapse of asset values is expected to threaten the financial stability and trigger cascade effects throughout the interconnected financial system (Minsky 1982 ; Minsky 1992 ; Carney 2015 ; ESRB 2016b ; Battiston et al., 2017 ). The latest IPCC special report also mentioned that central banks or financial regulators could be a facilitator of last resort for climate financing instruments which can help lower the systemic risk of stranded assets (Safarzyńska and van den Bergh 2017 ). Other arguments supporting the expanded role of central banks and financial regulators include their responsibility for wider public goals such as the mitigation of market failure and their role in developing long-term national strategies (NEF 2017 ; Volz 2017 ). Given that climate change is becoming a major threat to the global economy, central banks and regulators are increasingly being asked to analyze climate change effects and intervene when necessary to exercise their duty as public institu7pt?>tions. Also, as putting specific restrictions on certain types of lending is one of their responsibilities, central banks and regulators should restrict financial flows and bank lending to carbon-intensive and environmentally-harmful borrowers to mitigate a credit market failure. Central banks and regulators are required to develop and implement a forward-looking monetary policy strategy (Montes 2010 ) because monetary policies usually affect the economy with a lag. The same principle should apply when dealing with climate change challenges. Central banks and regulators should develop a long-term climate change strategy and provide a long-term market signal to investors who need to deliver a vast amount of investment needed for a low-carbon transition. More central banks and regulators tend to accept their evolving roles. The NGFS declared that climate-related risks fell squarely within their mandate. A member of the Executive Board of the ECB also argued that the ECB can and should support the transition to a low-carbon economy acting within its mandate while acknowledging different views and opinions around this topic (Cœuré 2018 ).

Different approach in developing countries vs. developed countries

It is widely acknowledged that countries that established clear guidelines and mandatory regulations to direct public and private financing towards green products, offer an enabling environment for domestic finance institutions to scale up their green investments (GIZ 2019 ). However, approaches toward green banking policy interventions tend to be different between developing and developed countries, although actions taken by prudential authorities in developed countries vary. For example, rule-based authorities such as those within France tend to act more proactively and introduce policies that aim to measure climate risks, while principle-based authorities such as those within Switzerland and Japan tend to take more market-driven approaches (Spiegel et al. 2019 ). As summarized in Table  2 , many of the developing countries have introduced mandatory regulations which require their banks to formalize and implement an environmental and social safeguards policy and report relevant activities to central banks and regulators. In some cases, central banks in developing countries such as Bangladesh and India set specific lending quotas for climate-sensitive sectors. Many developing countries have received support from multilateral development agencies such as IFC in developing their green banking policy framework. According to IFC, developing countries are at different stages of sustainable finance development and Bangladesh, Brazil, China, Colombia, Indonesia, Mongolia, Nigeria and Vietnam are most advanced as they have started reporting on results of their implementation actions (IFC 2018a , 2018b ). On the other hand, most the developed countries have taken an industry-driven, voluntary approach, focusing mainly on the disclosure of climate-related financial risks as part of supporting the TCFD. As of 2018, governments in Belgium, France, Sweden, and the United Kingdom (U.K.) and financial regulators from Australia, Belgium, France, Japan, the Netherlands, Sweden and the U.K. have expressed support for the TCFD, which fully remains a voluntary initiative (TCFD 2018 ). Furthermore, France made the disclosure of climate-related financial information by listed firms, banks and credit providers as well as investors mandatory under its Energy Transition Law for Green Growth. Japan is another case of a developed country, as the Bank of Japan provides concessional loans to banks that lend to environment and energy businesses. However, even those mandatory schemes under implementation often lack details of the enforcement and thus create some ambiguity as to the extent to which authority within the government will take the responsibility of compliance-check and monitoring.

Green banking policy instruments

Green banking policy instruments can be grouped into four different policy areas which include macro-prudential policy, micro-prudential policy, market-making policy and credit allocation policy according to Dikau and Volz ( 2018 ), as summarized in Table  3 .

Green macro-prudential policy aims to define the rules for financial institutions and mitigate the systemic financial risks to the macro-economy caused by climate change. Green macro-prudential tools can include a climate stress-testing of the banking system, differentiated capital requirements depending on the proportion of green portfolio of the bank and restrictions on credit exposure and financial ratios. Such tools can help central banks and regulators influence the lending activity of banks by encouraging them to make more green investments. Arguably, the most powerful macro-prudential tool would be the Basel accord. The current capital and liquidity requirements under the Basel III accord do not necessarily require banks to evaluate the impacts of climate risks on their balance-sheet (BCBS 2016 ; ESRB 2016a ). Given that the Basel III standards have been adopted and are being implemented by all 27 Basel committee member jurisdictions (BCBS 2018 ), they are the most widely accepted standards in the banking industry across developing and developed countries. Therefore, consideration of climate and environmental risks by the Basel committee in assessing their impacts on the stability of the banking sector will give a very strong market signal and further encourage central banks and regulators to adopt robust environmental and social risk management frameworks.

Green micro-prudential policy seeks to encourage individual financial institutions to incorporate environmental and social safeguards into their policies and operations. Green micro-prudential instruments can include information disclosure of climate-related financial risks by banks, adoption and implementation of environmental and social risks management and differentiated reserve requirements. For example, Banque du Liban, the central bank of Lebanon, introduced a climate finance loan scheme whereby commercial banks are exempted from part of the required reserve when they lend to energy-related projects under the National Energy Efficiency and Renewable Energy Action (NEEREA) (CCCU 2014 ).

Central banks and regulators can play a market-making role to promote green investments and operations. For example, they can develop and provide sustainable finance guidelines for banks that can create an enabling environment in the banking sector. This is the core initiative of IFC’s Sustainable Banking Network. Another example is to develop green bond guidelines to encourage the issuance of green bonds by banks because proceeds of green bonds can be exclusively used to finance green projects. Most green bonds issued in the past followed standards set by the International Capital Market Association (ICMA) and Climate Bonds Initiative. However, some countries and regions such as China and ASEAN (Association of Southeast Asian Nations) recently developed their own standards to propel their green bond market.

Finally, green credit allocation policy seeks to promote lending and investment toward climate-sensitive sectors such as agriculture, energy and water. Some central banks have been implementing such a policy by setting a minimum proportion of bank lending to climate and environment-related sectors, creating concessional green refinancing windows and extending concessional loans to banks that lend to climate-sensitive sectors.

Additionally, the NGFS made six recommendations that can help central banks, supervisors, policy makers and financial institutions manage climate risks and ultimately make the financial system green and climate-resilient (NGFS 2019 ). The six recommendations include integrating climate risks into financial stability monitoring and prudential supervision, incorporating environmental, social and governance (ESG) factors into portfolio management, sharing and disclosing climate risk data, capacity building and awareness raising, supporting the work of the TCFD and development of a green and climate taxonomy. Developing a robust green and climate taxonomy can be a key instrument to mitigate the possibility of a green bubble and green washing.

Measuring the effectiveness of green banking policies

Measuring the effectiveness of green banking-related policies at both a sectoral and institutional level can be premature mainly due to the current lack of data and measurement methodologies, let alone comparing the performance and effectiveness between developing and developed countries and among different instruments. Many scholars have been very active in their endeavors to analyze the performance of China’s Green Credit Policy; however, their findings showed mixed results on whether implementing the policy has been effective in serving its goals (Scholtens et al. 2008 ; Aizawa and Yang 2010 ; Zhang. et al., 2011 ; Jin and Mengqi 2011 ; Stephens and Skinner 2013 ; Gong and Gao 2015 ; Lian 2015 ; Liu et al. 2015 ; Ge et al. 2016 ; Yu and Ren 2016 ). Another study analyzed the relationship between corporate environmental information disclosure, as required under the Green Credit Policy in China, and corporate green financing. It concluded that the environmental information disclosure requirement did not become a risk management tool for banks to make their financing decisions (Wang et al. 2019 ).

Also, China has officially started measuring and reporting the effectiveness of its Green Credit Policy based on the NPL ratio. The China Banking and Insurance Regulatory Commission (CBIRC, formerly the China Banking Regulatory Commission) reported that the NPL ratio of green loans provided by the 21 domestic major banks was 0.41%, which is 1.35% lower than the NPL ratio of all loans, in September 2016. In June 2017, CBIRC subsequently released the same data showing that the NPL ratio of green loans decreased to 0.37%, which is 1.32% lower than the that of all loans (Cui et al. 2018 ; NGFS 2019 ).

Despite early attempts, mostly led by China, to measure the effectiveness of green banking policies and green loans, there is still a significant lack of data availability and inconsistency to draw a clear conclusion.

The role of banks in responding to climate change challenges

Financial institutions, especially banks, have a unique market position as they have deep market knowledge and experience across all economic sectors. They arguably have one of the widest networks, outreaches and client bases and can shift consumer behavior by scaling up and redirecting financing flow towards low-carbon and climate-resilient investments.

Many international and local banks have undertaken various green banking initiatives to seize business opportunities, manage risks, comply with national and regional regulations and guidelines, enable countries to deliver their climate ambitions and encourage corporate social responsibility (CSR). According to IFC, there is USD 23 trillion worth of climate-smart investment opportunities in developing countries between 2016 and 2030 (IFC 2018a , 2018b ). Such investment opportunities will be more enormous if those in developed countries are added. Therefore, it is a natural move by commercial banks to enter into a lucrative market. According to a survey of 90% of the UK banking sector, 70% of banks in the country view climate change as a threat to the financial system, although the same survey found that only 10% are building a strategy on climate-related financial risk management (PRA 2018 ). As the banking sector is a heavily regulated market, eventually all the green banking policy efforts by central banks and regulators will seek to change the behavior of commercial banks and lead them to gradually shift their focus toward more climate- and environment-friendly ways of doing business which can help themselves manage their risk exposure and also countries meet their climate goals. Finally, some banks view green banking as a CSR-related activity as they see growing demands for banks to be greener and more sustainable by their clients and foresee potential reputational risks. CSR as a governance tool can be useful for monitoring the behavior of management in financial institutions, especially for those identified as “too big to fail” because they are critical to the economy (Barclift 2011 ). In this section, actions being taken by commercial banks, both collectively and individually, and their performance will be presented and analyzed, and gaps and areas for improvement will be identified and suggested.

Collective actions and their performance

A growing number of financial institutions around the world have voluntarily either created their own networks or initiatives or joined platforms established by international development agencies such as IFC and United Nations Environment Programme (UNEP). Some of the well-known ones are outlined in Table  4 . The common objectives of these frameworks and initiatives include development and adoption of standards, principles and risk management frameworks and sharing knowledge and best practices such as the Equator Principles. The Sustainable Banking Network (SBN), established by IFC, is a network of central banks, regulators and banking associations in developing countries that facilitates the collective learning of members and supports them in policy development (IFC 2016a ). Several developing countries such as Mongolia have received support from IFC SBN when they developed and launched their sustainable finance principles. The Banking Programme, established by the UNEP-Finance Initiative (FI), aims to help banks understand environmental, social and governance challenges for their operations and is probably the largest green banking initiative with over 130 member banks across the world. The UNEP FI also supported some of their members to create the Principles for Responsible Banking which aimed to define the banking industry’s role and responsibilities in shaping a sustainable future and align banks’ business with the objectives of the Sustainable Development Goals (SDGs) and the Paris Climate Agreement (UNEP FI 2018 ).

Performance of some green banking frameworks and initiatives has been analyzed by researchers and the result so far is mixed. For example, Weber and Acheta ( 2016 ) analyzed reports issued by Equator Principles signatories and concluded that the Equator Principles did not make significant contributions to both sustainability of projects and the financial system because they were primarily adopted as a means to enhance reputation and risk management of the signatories. Earlier research also stated that adoption of the Equator Principles was mainly used to signal responsible conduct and did not find significantly improved aspect of financial performance between adopters and non-adopters apart from the size factor (Scholtens and Dam 2007 ). On the contrary, a research by the GABV compared the financial performance of their member banks and that of the global systemically important banks (GSIB), namely the largest banks in the world, and found that their member banks achieved higher return-on-assets and return-on-equity than GSIBs with lower volatility between 2007 and 2016 (GABV 2018 ). Moreover, some studies have found that green tagging, which refers to identifying green attributes of a bank’s loan and asset portfolio, may lead to lower probability of default of borrowers (Principal 2017 ; Sahadi et al. 2013 ). According to a survey conducted by IFC, 62% of a sample of 42 banks from developing countries responded that the non-performing loan ratio of their green portfolios is lower compared to that of other non-green portfolios (IFC 2018a , 2018b ).

Individual actions and instruments

A bank is a complex institution with financial products and numerous services that they offer to their clients. As more green- and climate-related themes have increasingly become mainstreamed in the banking sector and demands by their clients grow, banks started launching dedicated green financial products and services, mostly using and customizing their existing offerings. Table  5 is not an exhaustive list of those products and services but presents the most-widely used instruments by banks. Arguably, the main function of a bank is to lend money. There are different types of borrowers, but the majority of a bank’s lending goes to companies, individuals and projects. As there have been emerging green investment opportunities and ways to lower the costs by reducing energy bills for example, more borrowers rely on bank lending to develop renewable energy projects,climate-resilient infrastructure projects and install more energy-efficient and climate-smart equipment, appliances, houses and vehicles. Small-holder farmers also borrow from a bank or a micro-finance institution to purchase climate-resilient seeds and climate-smart agriculture equipment. Some banks offer an insurance product, often by using their insurance subsidiary. A green auto insurance product can be offered to financially incentivize users by lowering insurance premium when they use electric or hybrid vehicles which emit less greenhouse gases and other pollutants. Banks can also help finance green projects and refinance existing green assets through securitization using bond issuance and warehousing. Securitization can also help free up capital by selling securities to third-party investors to support further lending to low-carbon and climate-resilient assets. Some banks perform principal investing, using their own balance-sheet, to hold a direct equity stake on start-ups and venture firms that develop green and climate-smart technologies. An alternative way is to invest in a private equity fund as an intermediary who will invest into green projects on behalf of its investors. Many banks offer brokerage and market-making services for trading of green bonds and carbon credits to help facilitate green investments. Finally, some banks provide advisory services to their clients usually for financial structuring of a project. Quite a few borrowers consider a green project complicated in terms of structuring the transaction from a financial point of view and a bank can help them using their expertise and experience. A few banks sometimes try to stimulate demands by offering capacity building support to their borrowers or project developers. For example, a bank can help a borrower perform an energy audit of its firm, factory or house by dispatching the bank’s own resources.

According to IFC (IFC 2018a , 2018b ), the proportion of banks from developing countries that provide climate lending increased from 61% in 2016 to 72% in 2017 among 135 sample banks and they have been most active in the renewable energy and energy efficiency sector. Additionally, 49% of the banks offered dedicated green financial products. Green credit was the most widely used financial product, followed by green insurance and advisory services and green investment funds. Finally, although 55% of the banks currently do not provide green financial products, 88% of them expressed their interest in offering such instruments in the future if additional support is provided. A good example for green financial products can be an auto-loan that can be used to purchase electric or hybrid vehicles which emit zero or significantly less greenhouse gases compared to vehicles with a combustion engine. Some countries provide a subsidy to promote the purchase of electric or hybrid vehicles because they usually cost more. However, not many countries can afford it due to budget constraints. Banks can bridge the gap if they can launch affordable eco-car loans which provide financial incentives to their clients to switch their choice of vehicles in addition to fuel cost savings they can benefit from.

Theory of change in green banking

Application of theory of change

The theory of change framework is generally regarded as an assessment of inputs, activities, outputs, outcomes and impacts, articulating how certain types of interventions are expected to lead to changes and achievements (Rauscher et al. 2012 ; Stein and Valters 2012 ). The theory of change framework provides the logical underpinning of changes and goals and highlights the relation between activities and expected outputs, outcomes and impacts from the carrying out of the activities. According to Stein and Valters ( 2012 ), the theory of change framework serves to map the change process and its expected results and facilitates implementation of projects (strategic planning); to articulate anticipated processes and results that can be monitored and evaluated (monitoring and evaluation); to communicate change processes to internal and external stakeholders (description); and to help organizations clarify and improve the theory behind them or their programmes (learning).

The theory of change can be a useful strategic framework and tool to assess status of green banking, conduct a gap analysis, identify activities needed to be performed to mitigate gaps and barriers and describe expected results and impacts that can be created. Given that there is a lack of data availability in this field of research, a theory of change can also be helpful for identifying the data that should be collected and how they can be analyzed in the future (Rogers 2014 ). In linking the theory of change model to green banking, barriers and gaps will be used instead of inputs as a means to identify and narrow the gap between change objectives and actual potential in green banking. Additionally, outputs and outcomes will be merged into results. The data on barriers and activities were collected and developed based on literature review and market observations. Results and impacts are desired outcomes of green banking activities which aim to contribute to reducing greenhouse gas emissions and enhancing climate-resilient sustainable development.

Three types of theory of change framework – sectoral, institutional and integrated - will be presented as different interventions are required to transform an institution versus the whole banking sector. An integrated theory of change framework aims to capture both aspects.

Theory of change at the sectoral level

The theory of change in green banking at the sectoral level is related to making systemic changes and transformation within the entire banking sector which can drive both supply and demand for green banking products and services. Therefore, it is more inclusive than the theory of change at the institutional level as engaging with other stakeholders such as project developers, beneficiaries and government agencies is critical.

There are sectoral barriers that can influence activities of individual banks and can create institutional barriers as shown in Fig.  3 . Lack of regulatory framework and enabling environment often leads to disincentivizing banks to undertake green banking activities as the banking sector is highly regulated. For example, the banking sector can set criteria for the businesses they finance, especially carbon-intensive industries, thereby mitigating the risks related to an energy transition and ultimately making the economy more sustainable (DNB 2016 ). Other sectoral barriers include insufficient financial incentives for both banks and project developers and limited access to affordable finance.

Theory of change in green banking at sectoral level

While some countries may prefer market-led approaches compared to regulations or rules to encourage green banking activities, development and implementation of green banking policy guidelines or regulatory frameworks is expected to accelerate necessary actions by financial institutions. Such policy-level interventions should also include supports for capacity building, knowledge sharing and awareness raising to maximize their impact and to reach desired results and outputs.

Theory of change at the institutional level

The theory of change in green banking at the institutional level, as shown in Fig.  4 , assumes that most financial institutions are not active in terms of providing green banking products and services because they often do not recognize the climate and green sector as commercially viable. This is mainly due to the perception of risks associated with climate change projects and their existing capacity or willingness to develop and grow financial supply in the sector is insufficient. Most financial institutions from developing countries have short-term and high cost funding which prevent them from providing more affordable financing to their borrowers which is critical to stimulate market demands for climate projects. Additionally, other types of barriers include low awareness of business opportunities and best-available climate technologies and absence of overall climate change strategies and environment and social safeguards that are needed to properly finance climate change projects. Establishing green financial products and services is often constrained by such barriers as knowledge gaps to design and operationalize the products and services and high upfront costs necessary to assess and verify technology performance.

Theory of change in green banking at institutional level

To mitigate those barriers, activities such as capacity building and access to long-term and concessional financing are needed. Additionally, financial institutions need to put more efforts into identifying and developing climate change projects and raising internal awareness. All of these activities will lead to an increased supply of financing to climate change projects. Also, developing a climate strategy and environmental and social safeguards including gender policy will help in obtaining buy-in from internal stakeholders and properly managing the projects.

Integrated theory of change framework

Mainstreaming green banking into the core banking policies and practices remains a challenge at both institutional and sectoral level because there are still many barriers and gaps to overcome and activities to be undertaken to achieve desired results and impacts.

As shown in Fig.  5 , barriers or gaps refer to impediments to promotion of green banking and they exist at both the institutional and sectoral level and are often intertwined with each other. For example, the sectoral barriers are likely to naturally become institutional barriers unless financial institutions either individually or collectively take their own action on a voluntary basis. The costs of the transition to green banking by reducing the barriers and undertaking desired activities can be evenly shared among the public sector, private sector and financial institutions, although the financial institutions are expected to be more responsible to cover many of their own activities. The public sector can be divided into domestic and international, depending on the source of financing. The domestic public sector can support the transition through various policy measures such as policy lending, subsidies and tax benefits. On the other hand, the international public sector, such as climate funds and multilateral development banks, can provide grants for technical assistance and capacity building and long-term concessional loans. The private sector can contribute by developing bankable climate projects and technologies. Expected results are also likely to happen at both the sectoral and institutional level.

The application of the theory of change indicates that if the establishment of a green financing programme with more affordable terms for climate purposes is achieved and the capacity of banks is built up, then demand for such a lending product is expected to be stimulated within the country, driving the spread of green banking activities. It is expected that expanding lending for the purpose of investing in greenhouse gas mitigation and climate resilience projects is likely to lead to the achievement of climate change mitigation and resilience impacts throughout the economies of the countries where such green banking activities are being established.

Conclusions and implications for further studies, policy makers and practitioners

The concept of green banking still has a long way to go until it gets fully mainstreamed in the banking sector. However, simultaneous activation of both top-down and bottom-up engagement in raising the awareness of green banking has taken off. Policy makers and regulators have been increasingly realizing the importance of adopting green banking policy interventions as a means to transform the financial sector which can immensely contribute towards helping countries meet their climate targets and goals. Especially, the role of central banks and financial regulators is key as they have the power to change and control dynamics and landscape of the financial sector. Considering that most developed countries rely on a voluntary code of conduct by their banks and focus on the information disclosure while developing countries tend to use more regulatory approaches to promote green banking activities, future research could examine the performance and effectiveness of each green banking policy instrument and identify which approach is proven to be more effective or has the better prospect. However, it is expected to take considerable time before any researcher can undertake such analysis because of a lack of data availability as this is very new research area. It would be equally challenging to design and develop the criteria against which performance and effectiveness of the policy instrument will be measured.

Simultaneously, more banks are willing to become greener either individually or collectively and started launching green financial products, mainly in order to increase their economic value, but also to be good corporate citizens. Green financial products serve banks to fulfill several important objectives: banks can comply with government’s regulations or guidance, enhance firm reputation, and seize emerging business opportunities. The size of the green market has been steadily growing and expected to grow further. Banks that can establish themselves as early-movers and market leaders are more likely to enhance their reputation which can in turn help attract new clients. Further, from strategic perspective, change of consumer buying behavior by encouraging them to maximize the use of green financial products is most desirable. Thus, banks will have to develop and implement robust environmental and social safeguard standards to be able to manage their green financial products and comply with the regulations or guidelines.

While there is a limited number of studies that found a positive relationship between green and social banking activities and financial and operational performance of banks, it is too early to draw such a conclusion. To do so, more data are needed and various studies should be conducted both theoretically and empirically. For example, a formal survey targeting financial institutions on current barriers and desired activities can be a useful tool for collecting the data and making the theory of change more robust. With such data in place, a structure for a more systematic and empirical analysis of root causes of market barriers and activities to address them can be developed. Also, it could be interesting future research to identify if reputation plays a mediating role between green banking activity and financial as well as operational performance of banks. Other future research topics in this area can include investigating whether green banks outperform non-green banks in terms of climate as well as operational and financial performance, and comparing the effectiveness of green banking policy measures. However, parameters and standards need to be developed to measure the green and climate performance of banks and such a task is expected to be a major challenge.

Availability of data and materials

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Abbreviations

Association of Southeast Asian Nations

Bank for International Settlements

Corporate Social Responsibility

European Central Bank

European System of Central Banks

Environmental, Social and Governance

Global Alliance for Banking on Value

Gross Domestic Product

International Capital Market Association

International Finance Corporation

Intergovernmental Panel on Climate Change

National Energy Efficiency and Renewable Energy Action

Network for Greening the Financial System

Non-Performing Loans

Financial Services Authority

Sustainable Banking Network

Sustainable Development Goal

Task Force on Climate-related Financial Disclosures

United Nations Environment Programme Finance Initiative

United Nations Framework Convention on Climate Change

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Green banking practices, bank reputation, and environmental awareness: evidence from Islamic banks in a developing economy

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Fulfilling the international considerations of environment, societal, and governance challenges, the financial industry, especially banks, has initiated “Go Green” practices to help sustain the environment and enhance “banking” across the globe. Amidst the green and climate-friendly drives, there is scarce literature highlighting the banks’ green practices, environmental awareness, and their effects on bank reputation, especially the reputation of Islamic banks. This study aims to investigate the green banking practices of Islamic banks in a developing Islamic country. Focusing on the greening ambitions of banks, this study argues that the reputation of Islamic banks can be better enhanced through adopting green banking initiatives that will beget better climatic outcomes in Muslim societies. Therefore, the study illumes green banking practices and their impact on the reputation of Islamic banks in Pakistan. Moreover, this study checks the moderation effect of employees’ environmental awareness on banks' reputation. The study used deductive rationale and quantified the employees' data to unravel their go-green perceptions and bank green activities. In this regard, the 390 response data, collected through a survey from the employees of Islamic banks, were analyzed through Smart-PLS, using structural equation modeling technique. The study finds that banks’ employees-related practices (ERPs), daily operations-related practices (DORPs), customers-related practices (CRPs), and banks’ policy-related practices (PRPs) have a significant positive influence on bank reputation. The authors also find that there is a significant moderating impact of environmental awareness between the relationships of ERPs, DORPs, CRPs, PRPs, and bank reputation. The study might increase understating and enlighten regulators and bank management to sustainably transform their operations to green banking practices, particularly adding to the environmental sustainability in Pakistan.

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1 Introduction

In order to meet the needs of UN sustainable development goals (SDGs), the banks’ scope must be amplified from mere conventional to more strategic and pro-environmental institutions (Carè, 2018 ). The growing population, use of conventional energies, carbon dioxide emissions, and hectic economic activities have worsened the global environment (Wang & Zhang, 2021 ). The worrying ecological conditions have led the banking industry to a major uptick in sustainable banking practices where green financing and investing activities are prioritized. Noticing the growing environmental concerns, banks are holistically working for promoting a sustainable and clean environment. Aiming to save money and protect the environment, the banking industry has emerged as the main driver of sustainable economic growth (Nwagwu, 2020 ). Being an active partner of the worldwide greening drives, the green banks are responsibly working to maintain and promote the environment (Ibe-enwo et al., 2019 ), thus proving their existence as an indispensable part of the sustainability moves. Green banking prevents damage to the environment by encouraging investments in pro-environmental goods and services (Linh & Anh, 2017 ; Nizam et al., 2019 ).

Climate changes are heavily impacting financial systems, and accordingly, financial institutions are working to ensure environmental, social, and governance considerations that ultimately generate sustainable growth (Park & Kim, 2020 ). A key agent of the financial system, banks' credit management should be primarily modeled to support those industries that invest in environment-friendly activities and introduce technologies for green environmental management (Dörry & Schulz, 2018 ). The waves of global warming, the deteriorating air quality, and the emissions of greenhouse gases have laid down the basis to work collectively for protecting the environment from further deterioration. Abdicating the responsibilities, banks’ customers feel guilty if their banks do not support the green projects that make the environment better (Burhanudin et al., 2021 ). In this regard, environmental awareness, the banks’ readiness, and the regulatory framework to govern the banking activities are fundamental to the success of green banking (Julia & Kassim, 2019 ). In the changing Go Green era, all the banking endeavors that aim to depollute the environment would be counted in the green banking initiatives. Several activities have been identified as green banking practices, like online banking (Khan, Hameed, Khan, Khan, & Khan, 2021 ) issuing green loans (Giraudet et al., 2021 ), use of green credit cards (Huang & Fitzpatrick, 2018 ), lesser use of equipment creating carbon emission, financial support of climate-friendly projects while banning those projects that have intensive carbon emission (Bukhari et al., 2020 ; Park & Kim, 2020 ). Banks’ proactive role is indispensable to honoring ecology-friendly considerations as a principle of lending that would stimulate industries to primarily work on environmental management (Sharmeen et al., 2019 ).

Several researchers highlighted the vulnerability of the ecological conditions of Pakistan. The metropolitan wind which is full of pollutants is probably very severe in Pakistan (Abbas et al., 2020 ). Pakistan was recurrently ranked fifth on the list of most vulnerable nations to climate change (Eckstein et al., 2019 ). Such contaminations, like heat waves, and debilitating smog/fog, have a direct impact on human lives and economic activities. The ecological contamination and impurity level in Pakistan is four times greater than the level set by the World Health Organization, and it is mainly due to the high level of carbon dioxide emission (Ullah & Takaaki, 2016 ). Taking the issue with a holistic approach, all the institutions, including financial actors, banks, and regulators have a binding role to address climate-related financial threats and risks (Galaz et al., 2018 ). In the pressing need for pro-environmental initiatives, the banking sector is supposed to work for climate-friendly resources to materialize a clean and green environment in Pakistan.

This research exclusively contributes to the existing literature on green banking, sustainable Islamic banking, and environmentalism. First, it highlights the green banking practices by taking into consideration the employees-related, bank operations-related, customers-related, and daily operations-related practices of Islamic commercial banks in a developing country, Pakistan. Most of the previous research on green banking was contextualized in advanced countries (Nizam et al., 2019 ), targeting mainly conventional banks (Ratnasari et al., 2021 ). This study will highlight green banking practices and their implications for banks and society. Being in the embryonic stage, the concept of green banking can add to the literature on corban and climate-friendly finance and can help meet the targets of the United Nations Framework Convention on Climate Change (Park & Kim, 2020 ). The study focuses on the banking sector of Pakistan which has a dual conventional and Islamic model (Khan et al., 2018 ), and where there is a dearth of studies on the sustainability drives of Islamic banks. Islamic banks have a different profit-sharing-based model than commercial banks. The growing banking industry in Pakistan and Islamic countries can better spotlight environmental awareness and more compliance with pro-environmental practices. The community residing in Islamic countries gives more weightage to the Islamic banking injunctions, and therefore, highlighting Islamic banking’s role in ‘Go Greening’ initiatives might add to the climate-friendly banking drives. Moreover, previous studies focused on examining the green banking practices and environmental performance of commercial banks thereby overlooking the practices of Islamic banks (Chen et al., 2022 ).

The study determines the corporate reputation of Islamic banks through the lens of environmental performance in Pakistan which has a huge financial and environmental impact on the socio-economic fabric of citizens. The greening performance of Islamic banking can help pave the way for sustainable economic growth (Mehreen et al., 2020 ). It is also pertinent to mention that Islamic banks are emerging agents of change in Pakistan where the “Go Green” concept is getting roots in the offering of green products (Qureshi & Hussain, 2020 ). The Islamic banks with green initiatives might have a deep impact on the sustainability drives of financial industry. The sustainable role of Islamic banking industry has dire policy implications for achieving the US SDGs (Jan, 2021). This study will be a new one to determine the banks’ reputation through environment-friendly drives of Islamic banks in Pakistan. This study also investigates the environmental awareness of bank employees that helps determine their green orientations. So far, the existing studies on green banking practices have rarely focused on employees’ awareness of the green banking regulatory framework. The moderation effect will prove a plausible addition to the existing models on green banking and will reinforce the greening initiatives as the environmentally aware employees or management can better work for climate-friendly banking (Borah & Baruah, 2020 ).

2 Literature review

2.1 green banking and corporate reputation.

Amidst the race for economic and financial growth, organizations and governments are compromising on the environment which leads to degradation and climatic issues. Therefore, international bodies are more concerned about the environment and are encouraging pro-environmental initiatives (Sarma & Roy, 2020 ). To this end, green banking presents more inclusive efforts to save the existing and future generations from environmental harm. Similarly, the increasing trend in the literature on environmental sustainability evidences the green concerns which have given birth to many green activities including green finance and green banking (Sun et al., 2020a , 2020b ). Green banking exalts banks, industry, economy, and overall society through pro-environmental practices and reducing carbon footprints from operations. Green banking recognizes the responsibility to adopt practices that can keep the environment clean and green. Green banks support those initiatives that are helpful to transform the traditional economy into low carbon, and climatic-friendly economy (Burhanudin et al., 2021 ). Green banking accepts the environmental responsibility of banks where the banks ethically and administratively cover low carbon footprints and pro-climate activities (Huidong Sun et al., 2020a , 2020b ).

The vision of green banking carries the notion to inculcate greening and environmental consciousness, letting employees and customers develop green behavior, and offering such products and services that are helpful to curb environmental threats (Park & Kim, 2020 ). This is truly a paradigm shift in the banking industry to focus on greening aspects of investments, financing, and provision of services in line with UN sustainable development goals. The environmental risks have irreversible and far-reaching effects on all sectors including banks, and there is a need for studies that identify such risks (NGFS 2019). Overcoming the anthropogenic load of the ecosystem, green banking follows the eco-responsible principles that give triple benefits i.e., achieving economic efficiency, discouraging harmful effects on the ecosystem, and promoting the good image of banking (Kondyukova et al., 2018 ). Previous literature demonstrates that green banking is an emerging banking model that might encourage all stakeholders to work collectively for the benefit of society, governments, the general public, and the environment. Investigating green banking, especially in developing Asian economies, might prove to be a launching pad for future bank policy-making and will also be helpful in environmental management. The well-being of employees, customers, and future generation depends on the environmental standing and provision of climate-friendly products and services of banks.

Nath et al. ( 2014 ) supported that banks when abdicating their responsibility of taking green initiatives will lose their reputation. The sustainable activities of banks can enhance their reputation along with reducing costs and risks. This study attempts to examine how banks’ reputation can be increased through sustainability and green drives in Pakistan, as evidenced by previous studies where corporate social responsibility was used as an antecedent of corporate reputation (Ruiz & García, 2019 ). The environmental responsibility of banks also matters in the image building and reputation of banks (Quevedo-Puente et al., 2007 ).

2.2 Green banking in Pakistan

The worldwide unprecedented environmental concerns led countries to keep the agenda of environmental protection on their priority list. The climate and warming issues badly affected the world economies. The government of Pakistan established a Ministry of Climate Change that aimed to formulate a National Climate Change Policy (NCCP) in 2012. The provinces were also directed to make laws that correspond to the Federal Environment Protection Act of the federal government (SBP, 2017). The State Bank of Pakistan (SBP) is quite optimistic and is thoroughly working to regulate the greening drives in financial markets and instruments in Pakistan. Especially, the SBP issues different circulars to commercial (Islamic) banks to proactively operationalize green banking activities. SBP launched new guidelines for banks in October 2017 to meet international standards where the initiatives of green banking, the development of a mechanism to finance climate-friendly industry, and the adoption of green practices for internal control were the key points (SBP 2018). The SBP also advised banks to go online for saving the time and effort of customers and get rural inclusion in the banking network (Khan et al., 2019a ; b ). Digital banking is a part of the pro-environmental drive where the click-and-mortar set is concentrated instead of a physical system, and therefore, the SBP promotes it to have banking channels free of papers and physical equipment. The spiraling energy issues also impact the industrial and human growth in Pakistan where the banks can help reduce climate hazards. Taking this motive, the SBP encourages banks to work sustainably and rely on renewable energy resources to realize the dream of a sustainable financial system.

Few scholars addressed the green banking initiatives in Pakistan. For example, using qualitative research design Javeria et al. ( 2019 ) investigated the problems and challenges in the way of green banking in Pakistan. They proposed further studies to examine the transformation from conventional to sustainable (green) banking using quantitative models. In their recent work on green banking, Rehman et al. ( 2021 ) found that there is a positive impact of green banking practices (policy, operations, and investments) on the environmental performance of conventional banks in Pakistan. They exhibited how environmental performance can be predicted through green banking initiatives and directed future researchers to use more comprehensive frameworks for understanding green banking in Pakistan. The current study is a leading one incorporating a comprehensive set of practices including daily operations-related, customers-related, bank policy-related, and employees-related practices of the Islamic banks. The corporate reputation aligning with the green performance of Islamic banks has not been investigated so far, and it could be a good addition to the literature on the greening drives of Islamic banks. This study also believes that the green practices of Islamic banks can be moderated by the environmental awareness of the employees and management. It is more likely that environmentally aware employees will accelerate the pace of green banking and the reputation of banks.

2.3 Islamic green banking and corporate reputation

Islamic banking which is an icon of ethical banking has the potential to address the issues of equity, and sustainability for curbing the environmental and economic woes of any society (Kenourgios et al., 2016 ). The “Go Green” drive of Islamic banking denotes the fact that Islamic banks take care of both the existing and next generations. Today, the environment is key attention in sustainable Islamic banking where climate change, rising emissions from conventional energy resources, global warming, and pollution control are the main concerns. So far, there is limited research on the sustainability orientation of Islamic banking (Aliyu et al., 2017 ), especially the greening facets of Islamic banks that are covering the institutional and societal aspects need more descriptive, explanatory, and explorative models. Correlating bankers’ green behavior with green banking growth in the Malaysian Islamic banking industry, Ali et al. ( 2020 ) found that the five types of green orientations have a significant impact on the growth of green banking. They reported that conservation, sustainability in work, no harm to the environment, influencing fellows, and taking green initiatives have a positive relationship with green Islamic banking.

Though previous studies found that the performance of conventional commercial banks can be increased with sustainable green banking, little research exists on how the reputation and performance of Islamic banks can be exalted with greening adaptability. Agreeing with the recommendation that policymakers should give more focus to introduce interactive green products and services (Sharmeen & Yeaman, 2020 ), this study argues that Islamic banks can better work for sustainable banking with ethical and responsible approaches. It is also reported that stakeholders’ engagement and development of emotional attachment are necessary for conventional and Islamic banks to convert to green banking practices (Bukhari et al., 2019 , 2020 ). The current study proposes that the reputation of Islamic banks can be increased with green banking practices of the banks.

3 Theoretical background and hypotheses development

This study utilized the stakeholders’ theory (Frooman, 1999 ) as underpinning for the underlying assumptions that the growth of green banking depends on the orientation and interests of stakeholders (customers, employees, community, management, etc.). There is a central role of the stakeholders’ conceptions about green banking behavior that might cause enhance banks' reputations. Green innovation in banking can be spurred using the lens of stakeholders’ theory where stakeholders’ pressures like government, customers, suppliers, employees, and competitors have a significant impact on developing greening behavior (Lin et al., 2014 ).

The banking practices related to employees may result in increasing the banks' good reputation. Such activities might include the training of employees to work for greening like saving papers, energy saving, use of renewable sources of energy, lesser use of carbon emissions, etc. Such type of practices leads to banking reputation and development (Zafar et al., 2019 ). The daily operations of banks also matter in reducing environmental pressures like decreasing paper usage and controlling the wastage of materials. The daily operations also include using online platforms like ATMs, online banking, mobile banking, and SWIFT for funds transfers as well as smart ways of waste management (Shaumya & Arulrajah, 2017 ). These green operations enhance banks’ sustainability and thereby promote banks’ reputation. In terms of customers-related green practices, banks favor the environment by extending loans to those customers that focus on renewable energy and work for environmental protection. Banks sponsor those customers that have climate-friendly proposals like tree plantation drives, smart city projects, solar systems, and clean water schemes. Banks also offer guidance to such drives through consultancies and other media platforms.

Zheng et al. ( 2021 ) worked on green finance and postulated the four dimensions that shape bankers' conceptions that lead to green development. Rehman et al. ( 2021 ) connected the environmental performance of commercial banks with the four dimensions of green banking practices (employees related, operations related, customers related, and policy related). They found that the mentioned practices do lead to the better performance of commercial banks. Moreover, the reduction in harmful environmental activities like cutting paper usage and minimum use of coal and oil-based energies have a negative impact on the overall banking performance.

This study believes that customers’ selection on the basis of environment-friendliness exalts the reputation of banks. The Islamic banks’ policy concerning green branches, green infrastructure, involvement of management in environment-related planning, and buying from climate-friendly suppliers are key to “Go Green” banking that consequently excites corporate reputation. Lunching green banking products by Islamic banks testify to sustainable policies and their implementation (Qureshi & Hussain, 2020 ). Islamic banks are especially interlinked with environmentally friendly banking that ethically works to sustain the environment by supporting natural resources, maintaining and motivating cleanliness, and striving to meet social and environmental responsibilities (Masukujjaman et al., 2015 ). Considering the employees-oriented green banking practices, we propose the following hypotheses;

The green banking employees-related practices have a positive impact on the reputation of Islamic banks.

The green banking daily operations-related practices have a positive impact on the reputation of Islamic banks.

The green banking customers-related practices have a positive impact on the reputation of Islamic Banks.

The green banking policy-related practices have a positive impact on the reputation of Islamic banks.

3.1 Green banking and moderation of environmental awareness

One of the main prerequisites of environmental protection is environmental awareness, which refers to employees’ awareness of the rules and regulations of environmental policies regarding banking. The effective planning and implementation of policies depend on environmental awareness (Kokkinen, 2013 ). It has been observed that green practices have not solely been able to translate into greening behavior or reputation. Gadenne et al. ( 2009 ) reported that despite the green attitude of the employees, the climate-friendly practices and their implementation were low. They attributed it to the fact that it is environmental awareness that translates into greening actions within organizations. Recently, Arocena et al. ( 2021 ) found the moderating influence of environmental awareness on the relationship between ISO standardization and firms’ environmental performance. Cao and Chen ( 2019a , 2019b ) investigated the moderation effect of environmental awareness and declared that green innovation policy is stronger when environmental awareness is higher. Similarly, Khan et al. ( 2022 ) examined the moderation of environmental awareness in the hospitality industry and found that environmental awareness strengthens employees’ sense of sustainable development. The moderating role of environmental awareness was also investigated by Rustam et al. ( 2020 ) who reported that environmental awareness has a significant effect on environmental disclosure and customers' eco-friendly consumption behavior.

This study believes that environmental awareness will strengthen the association of employees-related, daily operations-related, customers-related, policy-related practices, and the reputation of Islamic banks in Pakistan. Therefore, the following moderation hypotheses are posited;

Environmental awareness moderates the relationship between employees-related practices and the reputation of Islamic banks.

Environmental awareness moderates the relationship between daily operations-related practices and the reputation of Islamic banks.

Environmental awareness moderates the relationship between customers-related practices and the reputation of Islamic banks.

Environmental awareness moderates the relationship between bank policy-related practices and the reputation of Islamic banks.

Figure  1 details the conceptual model explaining the proposed hypotheses of this study.

Conceptual model

4 Methodology

4.1 data collection.

To meet the objectives of this study, the required data were collected through an online questionnaire from the employees of Islamic banks in the Khyber Pakhtunkhwa (KP) Province of Pakistan. The target population of the study consisted of all the personnel of Islamic banks as well as the employees working in Islamic branches of conventional banks. The major chunk of the data collection was conducted online through a virtual questionnaire, as some of the bank employees were cautious in personal contacts due to COVID-19. In some areas where there were no Corona lockdowns, the scholars and their research assistants personally visited the banks and circulated the questionnaire. The data collection process was thoroughly discussed and approved as per the SOPS of the banks and government. Chiefly, the respondents were contacted through emails and social media (WhatsApp).

The staff members were briefed about the purpose of the survey and requested to fill out the questionnaire and share it with their colleagues within the branch as well as in other Islamic branches. More than 50 Islamic branches of different Islamic banks were visited for data collection purposes, comprising almost 75% of the banks. Specifically, four main cities, namely Peshawar, Kohat, Bannu, and Dera Ismail Khan districts of KP, were chosen for data collection. The authors clarified to the respondents that data-giving is quite optional and depends on their free will. They were also ensured that their data will be carefully handled with complete secrecy and sanctity. The respondents spent their free time filling out the questionnaire and rated their most appropriate choices. Some small prizes were also announced for the respondents to be distributed on a draw basis, and follow-up emails were sent to accelerate the data collection. The respondents were also promised to get the final findings of this study once it is completed. Finally, we received 390 responses, which were then used for the final analysis. Table 1 provides the respondents’ demographics.

4.2 Measures

The online version of the questionnaire was divided into sections A and B. Section A was concerned with the demographics and data profiles of the respondents, whereas the B section was devoted to measuring the proposed constructs. The measures of the represented constructs were adapted from the available works of literature with slight modifications to suit the context of the current study. A five-point Likert scale (1 “strongly disagree” to 5 “strongly agree”) was used for measuring the degree of satisfaction of the respondents.

The measures of employees-related practices, daily operations-related practices, customers-related practices, and bank policy-related practices were adapted from previous studies (Rehman et al., 2021 ; Shaumya & Arulrajah, 2016 ). The instrument and measure of environmental awareness were taken from Cao and Chen ( 2019a , 2019b ). Moreover, we borrowed a four-item scale for bank corporate reputation from Ruiz and García ( 2019 ).

4.3 Data analysis

As our model was predictive in nature, we conducted structural equation modeling (SEM) using the Smart-PLS (version 3). PLS-SEM is extensively used in research articles where the data are collected through survey questionnaires (Hair et al., 2017 ). Several reasons justify that the adopted PLS-SEM approach is an appropriate tool for the current study. PLS is useful for testing complicated cause–effect relationships among constructs (Reinartz et al., 2009 ), and according to Beh et al. ( 2019 ), the PLS-SEM approach is particularly suitable for checking moderating effects. The study intends to investigate the moderation effects of management’s environmental awareness; thus, the adopted PLS approach was reasonable. Following Hair et al. ( 2017 ), the study used a two-step approach to evaluate the results of the collected data. First, we validated the measurement model to know the external measures of goodness, and second, we tested the proposed relationships among the constructs by applying the structural model.

5 Data analysis and results

5.1 demographic information.

The authors contact the respondents for giving their opinions on how they perceive green banking practices and their bank's reputation. Table 1 elaborates the respondents’ data which are diversely spread in terms of gender, education, geography, and level of experience. The diverse data comprehensively cover the employees’ ratings of their opinions on the given phenomenon.

Table 1 further indicates that there were a majority of male respondents (60%) which is a usual phenomenon in Pakistani banking culture. The employees whose ages were less than 25 years were mainly responsive and gave their perceptions of the green banking practices and their impact on the bank's reputation. Similarly, the number of respondents with a bachelor's level of education constituted the major portion (57%) while the experience bracket of smaller than 3 years was greater (59%) in numbers.

5.2 Common method bias (CMB)

In this research, we used Harman’s single-factor test, to examine the presence of CMB in our dataset (Podsakoff et al., 2003 ). In our case, the principal component analysis illustrates that all the variables produced six distinct factors that together accounted for 61.26% of the total variance, and the first factor produces only 17.40% of the variance. Therefore, our results show that CMB is not a serious concern for this research. Moreover, the degree of multicollinearity among the independent variables was assessed through both variance (VIF) and tolerance values (Cohen et al., 2003 ). In our case, the VIF scores are between 1.34 and 1.82 and the tolerance value is greater than the recommended cut-off level of 0.10, which indicated the multicollinearity issue is not present in our dataset.

5.3 Measurement model

The measurement model in PLS-structural equation modeling represents how the external walls of any model support the goodness of proposed measures. Before conducting the structural model, it is compulsory to have a goodness of fit of the observed indicators or constructs to successfully run the model for hypotheses testing (Hair et al., 2017 ). Table 2 shows that the measurement model accurately and satisfactorily describes the model fit and goodness of our measures. The table explains the loadings of each construct having met the standards, i.e., greater than 0.70 (Nunnally, 1978 ).

Table 2 further details that Cronbach’s values using Alfa (α) meet the cut-off standards. The Alfa values represent that the measures have no reliability issue. The composite reliability (CR) values also indicate that the items, constructing the latent variables, have a good level of internal consistency. The values are reasonably expressing the goodness of the constructs as per the designated criteria of previous studies (Hair et al., 2017 ; Khan et al., 2021 ). To get the appropriate convergent validity, the average variance extracted (AVE) is used in the PLS-SEM. Table 2 elucidates that the AVE values are in the proper range, i.e., higher than 0.50 for each construct, thereby indicating a sound convergent validity.

5.4 Descriptive statistics, correlation, and discriminant validity

Descriptive statistics, correlation coefficients, and the diagonal values on the correlation table are further steps explaining the relationships among the constructs. To this end, Table 3 gives details that how the means values (M) and the level of dispersions through standard deviation (SD) lie in the data. The first two columns M and SD show the descriptive statistics of the given variables depicting that there is overall little dispersion and the means values are around 3.5. The correlation coefficients show that the variables are positively associated with each other having different levels of correlation. The correlation coefficients, lower than 0.70 (Hair et al., 2017 ), also depict that there is no issue of multicollinearity among the predictors. The diagonal bold values in the table picturize divergent validity where all the values are higher in their respective rows and columns, thereby showing a good divergent validity of the constructs.

All the values in Tables 2 and 3 conjecture that the measurement model and the correlation coefficients are advocating goodness of fit and sound measures that can be used for further detailed analysis of the inner model. The inner/structural model in PLS-SEM allows checking the relationships among the latent constructs and hypotheses testing.

5.5 Structural model

The hypothesized relationships among the constructs were checked using the structural model using smart-PLS. There were four direct links in the model and one moderating variable (environmental awareness) that was found to have a stringent effect on the direct relationships with the outcome variable (banks’ reputation).

Table 4 and Fig.  2 put forth the results of hypotheses testing and also show the moderating effect of environmental awareness. Overall, the model explains a 59% (R 2 ) variance in the banks’ reputation. Hypothesis 1, i.e., employees-related practices (ERPs → BR), has a significant relationship ( β  = 0.23; p  < 0.05) with bank reputation indicating that employees’ inner feelings for green banking can increase bank reputation. Hypothesis 2, which postulates that banks’ daily operations practices have a significant impact (DORPs → BR) on bank reputation, was supported ( β  = 0.18; p  < 0.05). Our data evidence that the banks’ routine green practices lead to a good reputation of the banks in Pakistan. The third hypothesis was stating that customers-related practices have a positive effect on bank reputation and we find that it was supported. Table 4 shows that CRPs → BR is highly significant ( β  = 0.21; p  < 0.05) on 99% confidence level. The final direct hypothesis PRPs → BR representing the bank policy-related practices and their impact on bank reputation was also found significant ( β  = 0.33; p  < 0.05).

Research framework with regression weights

5.6 Moderation results of environmental awareness

Figure  2 and Table 4 also specify the moderating influence of environmental awareness on the four paths of the direct hypotheses. The results explain that H5, i.e., environmental awareness (ERP × MEA → BR), moderates the path of employees-related practices and bank reputation ( β  = 0.08; p  < 0.05). The higher the employees-related green practices, the better will be the banks’ reputation. The environmental awareness also moderates the daily operations-related practices (DORP × MEA → BR) and bank reputation ( β  = 0.10; p  < 0.05), thereby supporting H6. The next hypothesis (H7) believed that environmental awareness moderates customers-related practices and bank reputation. Our results support the H7 ( β  = 0.12; p  < 0.05) indicating that the customers-related practices improve the banks’ reputation if there is environmental awareness among the bank employees. The study also finds that the relationship between banks’ policy-related practices and bank reputation is moderated by employees’ environmental awareness ( β  = 0.14; p  < 0.05); thus, H8 is supported.

6 Discussion

The study attempted to investigate the impact of green banking practices on bank reputation using the context of Pakistani banks. Data were gathered from banks’ employees and were analyzed using structural equation modeling with Smart-PLS. Previously, few studies examined the direct relationship of green practices with banks' environmental performance (Rehman et al., 2021 ), but this study uniquely examined the impact of green banking practices on bank reputation. Additionally, the study used a moderator (Environmental Awareness) to know whether the link between green practices and bank reputation is changed with the moderator.

The study found that employees-related practices of banks such as banks’ training and orientation of employees have a larger effect on bank reputation. This result is supported by previous studies (Rehman et al., 2021 ; Shaumya & Arulrajah, 2017 ) which reported that performance rewards to employees and the provision of other privileges based on employees' green performance increase the banks' environmental performance. If the employees are educated enough about green banking practices, they will take care of environmental protection, saving energy, and other issues that are consistent with environmental sustainability. The banks’ daily operations-related practices such as minimum use of papers, effective utilization of digital file processing, increasing focus on ATMs, LED lighting, Swift transfers, etc. are effectively increasing the banks’ Go Green imperatives thus adding to the overall reputation. This study found that daily operations-related practice has a significant impact on bank reputation. Tara et al. ( 2015 ) described that the banks’ green operations lead to their overall success thereby adding to banks’ reputation. The use of e-statements, intranet, online approval, and online meetings determine green banking operations. Such online activities will reduce costs and other resources of banks (Khan et al., 2021 ) as well as recapitulate the green initiatives on the part of banks. The other dimension of green initiatives is concerned with customers, i.e., choosing the right customer to sustain green activities. Customers with green projects such as environmental protection, tree plantations, and other environmentally friendly projects assume to be supported through loans, and other bank advances. For reputation causes, banks may provide guidance and support to those who can potentially work for a better and sustainable environment. Preferring customers based on green works is the notion that is hypothesized in this study, and the result supported that customers-related practices have a sizable effect on the bank's good reputation. Another perspective of green initiatives is the banks’ policy formulation and implementation. Focusing on banks’ green policies, Rehman et al. ( 2021 ) encapsulated that green policies lead to sustainable banking activities. Similarly, corresponding to our findings, Galletta et al. ( 2021 ) acknowledged that banks’ green policies have a major impact on banks’ performance and reputation. This study conceded that the bank policies related to the environment and sustainability will strengthen their reputation.

This study explored the moderating role of management environmental awareness (MEA) and how it affects green banking practices and bank reputation. Several studies substantiated that bankers’ knowledge and their attitude have a positive influence on the development of green banking and sustainable economic development (Raihan, 2019 ; Zheng et al., 2021 ). Previous studies also disclosed that MEA is a key to accelerating the pace of green banking. The current study checked the MEA whether strengthens the link between green banking initiatives and bank reputation. As found by Rustam et al. ( 2020 ) that there is a positive moderation effect between firms' sustainable relationship and green choice, this study too finds that environmental awareness supports green banking activities and reinforces the banks' reputation. Similarly, Cao and Chen ( 2019a , 2019b ) reported that environmental awareness has a significant moderating impact on green strategies. Awareness about green technology, green behavior, and green loans all is imperative for management to understand and implement them for environmental betterment.

7 Conclusion

Amidst the global sustainability drives and fulfilling the sustainable development goals (SDGs), this study targets the banking sector by identifying the green banking practices (employees-related, daily operations-related, customers-related, and bank policy-related practices) and their ultimate effect on bank reputation. Unique in several aspects, this study focused on Islamic banks for data collection. The sustainable role of Islamic banks in Muslim countries is quite fruitful and can help stimulate such initiatives in other traditional banks due to the enhanced reputation of Islamic banks. Commercial banks, competing with Islamic banks, are also likely to extend their portfolio and include such green banking practices. The employees’ opinions of Islamic banks were quantified using a survey method by rating their inputs about green banking initiatives and their bank reputations. The study found that there is a direct link between green banking activities and the good reputation of Islamic banks that are supposed to be more ethical and green in their essence. The banks that care for greening and sustainability will help materialize the sustainable development goals in Pakistan and other Islamic countries. The employees and management's environmental awareness was also found to have moderating effect in strengthening the cause of sustainable banking. The higher the management's environmental awareness, the higher the chances to practice green banking, thus contributing to the banks' reputation and performance. Though the management of Islamic banks can work in multiple ways to achieve their banks’ future growth and reputation, the study finds that green banking activities can better add to the future growth and reputation of the Islamic banking industry.

8 Theoretical and managerial implications

Concentrating on the green banking practices in Islamic banks, this study devotes itself to exploring the green behaviors of bankers and the ultimate reputation of their banks. There is a dearth of research on green banking in Pakistan (Rehman et al., 2021 ), especially in emerging Islamic banks. The Islamic banks can be proved as a symbol of change that can better impart the global idea of sustainable goals. This research might help achieve the base for future research on green banking and green finance in Pakistan and other developing countries. Theoretically, the green initiatives on the part of banks and other financial institutions can be further researched using many models that can highlight various aspects of green banking. The study also furnishes theoretical implications for academicians and researchers in Islamic banking and finance to sort out the climate-friendly and Shariah-compliant practices in Islamic banking. The theoretical bases will translate into policymaking and practical steps that might provide sound food for academia and practitioners. This research also highlighted the management’s environmental awareness which is the first step in understanding the importance of green initiatives and environment-friendly acts. Such conceptions can be further explored in future research for better assimilation of green banking.

This research attempted to empirically investigate green banking in the Islamic banks of Pakistan. Islamic banks are an emerging phenomenon in the Islamic world and have a major contribution to the financial intermediation and partnership of funders and investors (Khan et al., 2019a ; b ). To work the UN agenda of 2030 in the shape of SDGs and the social acceptability of green banking, the green orientation of Islamic banks is critically important. This research calls for relevant policy-making and practical initiatives on the part of Islamic banks to work on the sustainability agenda. Particularly, the practitioners and directors of Islamic banks can devise such types of policies that are pro-environmental, reduce carbon emissions, and work on paperless and digital banking (Khan, 2021 ). Climate-friendly banking is dependent on environmental awareness and its practical implementation for safe, clean, and green banking in Pakistan. Today, banks are in dire need to include green strategies in their operations, buildings, investments, and financing strategies and keep highlighting the green rating standards given by the state bank of Pakistan, and the World Bank, upholding environmental and social norms, initiatives taken by public and private sector banks in Pakistan in implementing green banking practices and to list significant strategies for adoption of green banking. Based on the findings of the study, it is the right time to encourage such types of projects that have some positive environmental implications. Banks should discourage granting loans to those industries that are harmful to the environment. Furthermore, this research can spur the agenda of green banking in a socially responsible way thus appealing to society to be aware of the green initiatives and inculcating such worthy norms in the local community. The governing bodies and regulators of banks and other financial institutions may use the findings of the study to regulate green banking policies and make it mandatory for banks to disclose such types of activities in their financial statements.

9 Limitations and future research directions

Despite having a significant contribution to the literature on green banking, this study acknowledges certain limitations. The study quantified employees’ perceptions at a single time using primary data that could potentially limit the generalizability of the study. One might be cautious in applying the study’s results as the data have been gathered from one province. New researchers may focus on a large set of data thereby enabling more generalizability. The data collection and sampling size can be more rationalized in future studies to have more robust analyses and findings using a larger sample size or a longitudinal design. The study used a few green banking practices that can be broadened to cover other aspects of green banking like government mandatory requirements, environmental agencies' role, or community support for green banking. Secondary data can also be a worthy source for strengthening the results of such studies investigating the actual performances of banks in respect of going green. More descriptive and explanatory studies on green banking could further the agenda of green banking. The data for measurement and structural model were mainly taken from the employees of Islamic banks that could be more diversified, sampling conventional banking employees or using the interviews of the experts in the field. Future studies should examine the moderating effects of employee demographic variables on their perception of green banking practices and bank reputation relationships. Several control variables can also be added to future models like age, sustainable education, gender, media role in greening initiatives, and the leadership vision. We measured the bank's reputation through the employees’ perceptions and this can be further validated using other methods like bank sustainable rating by various formal agencies or other performance measures. Green banking, passing through its development stage, is worth exploring using the lens of mandatory disclosures, market, and environmental pressures, or cross-cultural studies on green banking that would help uplift the agenda of green banking in developing countries.

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Institute of Management Sciences, University of Science and Technology Bannu, Bannu, KP, Pakistan

Ikram Ullah Khan

College of Business Administration, Prince Mohamed Bin Fahd University, Dhahran, Saudi Arabia

Zahid Hameed

Institute of Business Administration, Gomal University, Dera Ismail Khan, Pakistan

Safeer Ullah Khan & Manzoor Ahmad Khan

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• The bold values shows the items' loadings

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Khan, I.U., Hameed, Z., Khan, S.U. et al. Green banking practices, bank reputation, and environmental awareness: evidence from Islamic banks in a developing economy. Environ Dev Sustain 26 , 16073–16093 (2024). https://doi.org/10.1007/s10668-023-03288-9

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Received : 29 September 2022

Accepted : 21 April 2023

Published : 05 May 2023

Issue Date : June 2024

DOI : https://doi.org/10.1007/s10668-023-03288-9

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International Journal of Ethics and Systems

ISSN : 2514-9369

Article publication date: 30 June 2020

Issue publication date: 14 August 2020

The purpose of this study is to propose Green Banking best practices for the adoption of this business construct based on the dimensions of environment, social and governance (ESG). This paper proposes a number of green practices under the ESG dimensions that can be adopted by individual banks at any stage of Green Banking adoption. It provides tactics for implementing this business construct that can serve as a tool for regulatory authorities forming Green Banking guidelines or policies for adoption. Such research has not been undertaken up until now.

Design/methodology/approach

The Green Banking adoption model is based on the concept of human ecology in which the inter-dependency and inter-connectivity of the variables impacting the phenomenon of environmental sustainability. These influencing variables are, in turn, connected with the natural environment. In the proposed model, the variables of ESG are inter-connected and impacting the natural environment as well. The proposed best practices have been derived from the Green Banking practices of the global industry leaders and Green Banking regulations of developed and developing countries. It can be beneficial to the stakeholders, as it proposes a step-by-step guide to Green Banking adoption that can be followed either sequentially or in parallel by the banks.

Green Banking adoption can be achieved by banks through implementing certain practices in either sequential or parallel manner. The adoption process depends on the various external and internal environmental dependencies. The Green Banking adoption practices can be broken down in three areas, i.e. ESG, allowing the construct optimal depth of coverage and complexity.

Originality/value

The literature on Green Banking is steadily increasing but a lack of research exists in the area of Green Banking adoption. Currently, limited literature exists that can provide the banking industry or the regulatory authorities with a framework or guideline to adopt Green Banking.

• Green banking
• Green banking adoption
• Green banking best practices
• Environment
• Social and governance (ESG)
• Corporate environmental responsibility (CER)

Bukhari, S.A.A. , Hashim, F. and Amran, A. (2020), "Green Banking: a road map for adoption", International Journal of Ethics and Systems , Vol. 36 No. 3, pp. 371-385. https://doi.org/10.1108/IJOES-11-2019-0177

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