There are 42 Green Banks or similar entities involved in green finance initiatives across the United States. In Europe there is no equivalent network of green finance institutions and this number of specialised entities in combatting climate change is close to Zero. How the U.S. becomes successful with its market-driven approach and what can Europe learn from it.

This article demonstrates how evolving societal expectations and the well-being of future generations determine that ESG is both a key and a challenge to organizations pursuing long-term value creation and financial sustainability.

The biggest threat to successfully achieving the sustainability goals is the so called Greenwashing. Underestimating and neglecting its role in the process is a fundamental mistake on our way forward. But what is it and how exactly it impacts the risks of financial institutions? Here are some hypothetical considerations for further discussion…

The emerging and comprehensive nature of the ESG risks brings the general question of including them into the prudential regulatory capital framework. The consideration under the supervisory review process under Pillar 2 and the binding disclosure requirements under Pillar 3 are probably not enough. A minimum capital requirement for ESG within or alongside the major bank risk types could revolutionise the prudential framework and adapt it to anticipate future developments towards more sustainable economy and society. But how?

Value added from the transition towards sustainable finance lies in the possibility to enter new markets and to become profitable in the current low interest rate environment. From a regulatory perspective banks will be rewarded, if they re-balance faster and more efficiently, meet expectations and help to set industry standards.

In the last ten years financial institutions have experienced an evolution of their stress testing activities, strongly influenced by regulatory pressure. More recently, it has become necessary to incorporate these activities into the decision-making process and thus potentially generate additional value.