Abstract
Banks have been slow to increase green lending while they continue to finance high-GHG-emitting activities, a phenomenon we call the “green banking gap”. Based on interviews with 21 bank employees, supported by interviews with 67 practitioners working for non-bank financial institutions, the public sector, and civil society organisations in areas related to sustainable finance, we argue that explanations for the green banking gap can be grouped into three broad categories: bankability, business model, and regulation. First, there are not many green firms and projects that meet banks’ desired risk/return profile, while high-GHG-emitting activities remain bankable. Second, there are constraints to decarbonise banks’ portfolios arising from the significant change in their business model in recent decades, making (green) corporate, and particularly project, lending relatively less important. Even when they lend, the characteristics of the lending process imply a bias towards high-GHG-emitting over green activities as balance sheets are locked in old loans and banks prioritise long-term relationships with their clients. Finally, there are constraints on green lending and incentives to high-GHG-emitting lending arising from financial (liquidity and capital requirements) and sustainability regulations and overall policy uncertainty over the future decarbonisation path of the economy.