Published in the ‘Journal of International Financial Markets, Institutions & Money’, the research analyses data from 861 banks across 67 countries between 2002 and 2023. It finds that banks with stronger environmental performance benefit from lower costs of deposits, funds and liabilities.
For customers, this matters because lower borrowing costs can allow banks to offer more competitive interest rates on loans and mortgages, supporting business growth and community investment. Banks that reward sustainability can also help direct capital towards clean energy, greener infrastructure and responsible enterprise.
The research shows that green banking delivers clear financial advantages, particularly in advanced economies, competitive markets and banks that rely less on traditional deposits. Agreed by 195 countries at a United Nations conference in 2015, the Paris Agreement was a landmark moment in global efforts to slow climate change and cut greenhouse gas emissions. In the years since, investors have shown growing confidence in banks that take their environmental responsibilities seriously, accepting slightly lower returns to back sustainable finance. When real interest rates rise or markets come under strain, however, that preference often fades as investors turn their focus back to short-term gains.
The authors identify specific actions that make the most significant difference. Banks that use renewable energy, implement resource-reduction policies, finance clean energy projects and establish dedicated environmental management teams see lower funding costs. In contrast, ecological controversies or hazardous-waste activities increase such costs.
Mr Md Jaber Al Islam said: “We found a clear connection between how responsibly a bank operates and how strong it is financially. Investors and depositors see environmentally engaged banks as safer and better managed, enabling them to raise capital at lower cost. This pattern appears across countries and over time, showing that sustainability isn’t just about values, it also makes solid financial sense.”
For banks, environmental engagement is no longer a public relations exercise; it is a financial strategy. Credible, sustained action builds market confidence, strengthens capital resilience, and lowers the cost of funds. In an industry where small changes in borrowing costs translate into millions, sustainability pays off.Dr Fernando Moreira
Dr Mustapha Douch said: “The policy message is clear. Integrating environmental goals into banking regulation can enhance stability, reduce systemic risk, and accelerate the sector’s contribution to global climate targets.”
Jaber Islam is our Research Assistant and Teaching Assistant.
Fernando Moreira is our Senior Lecturer in Banking and Risk Management.
Mustapha Douch is our Senior Lecturer in Business Economics.