Theoretical Framework for the Influence of Crucial Factors on Green Banking Strategy Implementation

Full text

Theoretical Framework for the Influence
of Crucial Factors on Green Banking Strategy
Implementation
Anh Nguyen(B)
School of Law, College of Economics, Law and Government, University of Economics Ho Chi
Minh City, Ho Chi Minh, Vietnam
Anhnnt@ueh.edu.vn
Abstract. Over the past decade, most research in sustainable development has
emphasised the implementation of green banking as an essential component of the
transition to Sustainable Financial 2.0. By maximising the integrated value, which
integrates financial, social, and environmental value, it provides stakeholder value.
Generally, one of the most important objectives of sustainable growth is to ensure
environmental value. A stable environment could let the next generation gain more
profit without worrying about hardship and risks from natural disasters. As a result,
the stakeholder approach to corporate governance and the practice of corporate
social responsibility leads to the adoption of green banks. The purpose of the study
is to analyze the factors that affect how green banking strategies are implemented
and to make hypotheses about how effective these factors are for green banks. To
fulfil such purpose, the theory of change is used to classify these factors into ESG
(environment, society and governance) model under the theoretical framework.
While external factors influencing green banking strategy include the environment
(including physical risks, transition risks, and liability risks) and society (including
policy, regulation, customer demand, and competition), bank management is a
crucial internal component to guiding the banking system toward going green.
Keywords: Bank management ·Environmental pressure ·Green banking ·
Policy and regulation ·Social impacts ·Theory of change
1 Introduction
This paper points out and analyses key elements in the input of green banking transfor-
mation in sustainable development strategy based on the theory of change model. The
green banking strategy was introduced based on profit maximisation and the stakeholder
approach to corporate governance [1].
In respect of profit maximisation, the banking industry has a long-time history with
the earliest evidence of banking activity can be traced back to ancient Mesopotamia more
than 2000 years ago. The role of the banking system is considered barely changeable
over hundreds of years since they are large financial intermediaries that support the
distribution of wealth by transferring savings into investment and facilitating trade.
© The Author(s) 2023
P. Tra Lam and P. Quang Huy (Eds.): ICECH 2022, AEBMR 238, pp. 253–269, 2023.
https://doi.org/10.2991/978-94-6463-150-0_18

254 A. Nguyen
Regarding macroeconomic analysis, banks protect financial stability by following the
monetary policy, boosting economic growth while managing risks. Climate changes and
ecological devastation cause credit risks and market risks in the banking industry. A likely
explanation is that climate change and pollution may lead to supply chain disruptions
thus generating damages for traders and customers. It might raise the default rate and
increase financial transaction costs. As a result, banks should be more active in managing
environment-related financial risks.
Additionally, banks refer to an undertaking the business in finance sectors so banks
have to operate to make profits and risk minimisation is a tool to maximise profit. [2]As
discussed above, environmental risks might contribute to market risks and operational
risks of banks involving reputational risks that require banks to attempt to prevent.
The business decision should consider the interest of various individual groups as
much as possible. Ecosystem saving is necessary to not only ensure the health of share-
holders, employees, and customers and reduce risk to business and society. Therefore,
stakeholders put pressure on banks to complete a green bank model reducing risks to
their life. Under the stakeholder approach, the theory of change illustrates the interven-
tions of related parties and other factors to predict a specific development change based
on the causal analysis. The theory of change draws the map to reach long-term goals
by defining inputs, outputs and outcomes of a change in the social phenomenon. The
models help to understand the pressure and influence of stakeholders on the promotion
of green banking strategy.
Recently, stakeholders concern about the environment and national habitats as they
realise the adverse impacts of overexploitation and climate change. International treaties
such as Cartagena Biosafety Protocol (2000) to the Rio Convention on Biological Diver-
sity (1992) and its Supplementary Protocol on Liability and Redress (2010); UNFCCC
Framework Convention on Climate Change (1992); Kyoto Protocol (1997); Paris Agree-
ment (2015) and Montreal Protocol (1987) as amended indicates the pressures of specific
stakeholders like governments and society on the adoption of sustainable development
policies in which sustainable finance plays a key role. Following the global greening
trend, the banking system around the world tries to adopt a green bank strategy for a
brighter future.
2 Literature Review
The development of green banks is compatible with the transformation of the sustain-
able finance stage. According to Schoenmaker and Schramade, sustainable finance can
be categorised into 03 stages [3]. In the first stage (SF1), business entities, especially
banks, try to refine the shareholder value and focus on maximising financial profits with-
out directly focusing on environmental issues. However, sustainable finance 2nd stage
(SF2) witnesses the change in the banking industry while banks and financial institutions
significantly improve their integrated values (including financial value, environmental
impacts and social value). Banks try to impact the ecosystem directly and indirectly by
internalising the social and environmental externalities into the portfolio and decreas-
ing risk in the medium to long term. In the future, sustainable finance 3.0 expects to
orientate financial decisions to sustainable development, which moves from avoiding

Theoretical Framework for the Influence of Crucial Factors 255
risks to making opportunities. It creates common good value by optimising the social
and environmental long-term value more than only focusing on financial gains. Glob-
ally, the banking industry is likely in the SF 2.0 with a variety of efforts to conduct
eco-friendly practices while taking care of total income. Since the banking industry con-
tributes to a sensitive sector of the economics, regulations and supervision framework
for green banking adoption work strictly to protect financial stability and turn the whole
system into a sustainable way.
Initially, national cooperation tries to cover the environmental issues in the Basel
framework for banking system stability. It occurs implicitly in the formula to calculate
the risk ratio (credit risk, market risks and operational risks). Therefore, in the first stage,
green policies are likely a part of codes of conduct in the corporate social responsibility
of banks and a risk management tool to protect the financial market.
The concept of Green Banks first began in 2003 to shed the idea of the engagement
of the financial system in protecting natural resources and habitats. In 2012, the Inter-
national Finance Corporation (IFC), a member of the World Bank Group, established
Sustainable Banking Network. It is considered a community of central banks, regula-
tors and supervisors in financial sectors, and associations of countries around the world
who take charge of advancing sustainable finance based on managing environmental,
social and governance issues. Contributing to finding solutions for climate change and
other environmental problems is one of the core objectives of the sustainable Banking
Network. [4].
2.1 The Definition of Green Banking
Nowadays, green transformation becomes an inevitable trend in new era. The concept
of “green banking” combines the meaning of “green” and the definition of “banking”.
Green practices are defined as method to save the environment and preserve natural
resources. Specifically, the term “green” is clarified as a method for climate change
mitigation and adaptation in accordance with the definition simplified by United Nation
Environment Programme [5] (Fig. 1).
Meanwhile, to make the scope of green practices a little bit clearer, United Nations
Framework Convention on Climate Change (UNFCCC) defines the concept as “reducing
gas emissions and enhancing greenhouse gases, reducing vulnerability, maintaining and
increasing the resilience of human and ecological system”. Following global sustainable
development, each national system designed a particular concept of green practices based
on its own social, economic and political governance.
Green practices could be adopted in the banking sector in a wide range of approaches.
Kaeufer divides the environmental-friendly activities of banks into five-level, including
unfocused corporate activities, isolated business projects or business practices, systemic
business practices, strategic ecosystem innovation and intentional (purpose-driven) eco-
system innovation. [6] At the same time, Karyani and Vangi classify green banking
practices into two approaches (lending and operating activities) with three specific steps,
including defences bank, preventive banks and offensive banks. [7] Their classification
is based on the responsibility and autonomy of banks in the contribution of integrated
value. While the defences bank only follows the environmental protection rules as the
law imposes on itself, the preventive bank begins to run cost-saving projects by applying

256 A. Nguyen
Fig. 1. Elaboration on Definitions and Concepts: Background Note [5]
a paperless process and reducing investment risk. At a higher level, the offensive bank
introduces new practices to increase its eco-friendly portfolio and improve its reputation
in social responsibility. The study would have been more synoptic if it had addressed
the issue from the nature of banking activities which relates to the flow of capital and
other business services of the banking system. It means that green banking could be
considered with the use of money for environmental purposes as well as the effect of
green practices on customer behaviour. The banks do not only adopt green practices to
change themselves but also to change society.
2.2 The Definition of Green Banking
Green practice in the banking industry can be conducted by an independent legal entity or
by adding eco-friendly products and services to a commercial bank. A typical example of
the prior model is the green investment bank. Green investment banks can be defined as
public entities established functionally to mobilise the capital flow into climate-friendly
and low-carbon infrastructure. [8] The United Kingdom, Japan and The United States
of America are concerned about such a model because they want to support public
finance to improve green projects as well as generating and controlling private climate
finance and investment in “their unique national and local context”. In this useful study
of green investment banking, OECD pointed out that this model becomes a communi-
cation method to signal the rise in cost competition and retrofits of clean energy [8].
Also, centralising green bank functions in one institution might save costs and time for
technological application, staff training and project management. Despite those benefits,
the operation of a green investment bank has to deal with several barriers [8]. First, the
development of renewable energy is costly and time-consuming. Till now coals make
up the largest part of electricity production and the investment in building infrastruc-
ture for new energy might affect the exposure of the whole country to a large extent.

Theoretical Framework for the Influence of Crucial Factors 257
Also, green banking is an interdisciplinary issue. As a result, inconsistent policies might
be an obstacle to sustainable development. Next, the transition toward environmental
and social values has a long-term impact, therefore, it is difficult for central banks and
financial regulators can react immediately to the mistake in policy and regulation. Addi-
tionally, due to the long payback period, green bank investment lacks financial sources
from individual or private investors. The most serious problem could be found that once
national budgets have to be spent on other sectors, the operation of green banking might
be suspended. Banks and financial institutions had better increase the private funds for
the implementation of eco-friendly practices because the voluntary of market players
implies the corporates’ awareness of environmental value [9]. Especially, the asymmet-
ric information of banks in the system might affect the performance of green banking
practices. These obstacles can be solved by creating a database and a supervision board to
manage risk and guide the firm to ensure the smooth run of this transition. It is therefore
considered a stepping stone for the transition of the banking system toward sustainable
finance [8]. It attempts to provide a wide range of relations between the green invest-
ment bank and other actors in the financial markets such as government-sponsored loan
programs, institutions for cleantech research and development, public agencies, banks
and international funds. Green investment bank builds a shared database and connects
related subjects to help the green strategy run smoothly. The study might have been
more persuasive if the author had explained why developing nations like India, Pakistan,
Bangladesh and Vietnam tend not to apply such a model and whether there are proper
ways to construct an independent institution to implement green practices and allocate
green funds in the banking industry. It may be because when environmental resilient
programs are housed in different banks and financial institutions, consolidated projects
might expand green practices to a large scale. However, intervention may cause a stir
in business operations. Meanwhile, centralising green banking into one institution can
prevent unexpected change but require huge national budgets and a completed working
strategy.
In general, green banking practices refer to internal operations, also known as bank
culture and external operations including the products and investments of banks. Bank
cultures refer to the shared values in a bank as practised by bank staff in an informal
and unspoken language that makes each bank distinct. Nowadays, the integration of
innovative technology and digital management contributes to the reduction of paper and
leads to a paperless working environment in near future. Some internal operations can
be listed as training staff for environmental protection, paperless operation and a green
work environment. Banks make lots of attempts to develop a unique green working
culture [10].
At the same time, green products and services open up new opportunities for business
thanks to the support of authority and the increase in demand from corporate. Green
products can be listed as online and Mobile Banking, Green checking accounts, green
bonds development, green lending and green deposit schemes. Banks tend to spend more
money on research and development (R&D) to create new green products and integrate
technology to reduce paper use and provide customer-friendly services.

258 A. Nguyen
2.3 Green Financial Products and Services from Banks
In addition to covering environmental-friendly internal operations, green banks have
the function of developing and improving the diversity of the green product market
as a financial instrument for protecting the environment. New generation products are
designed to promote consumer awareness of environmental issues, manage medium and
long-term risks, and finance the future.
As mentioned above, green banks join in the green process by innovating sustainable
banking services such as offering green deposit-taking schemes, green credit extensions
and green payment accounts. Further, banks are encouraged to widen their investments
by providing diversified financial products and services to protect the ecosystem.
The green finance market has risen from $5.2BN in 2012 to $511.5 BN in 2021 [11].
It demonstrated a significant increase in supply and demand for green financing.
Concerning green banking services, green credit extension accounts for the most
significant proportion of green financing. For personal lending, banks introduced green
mortgage lending, green car lending and green loans for small businesses. Banks offer
reductions of interest or incentives for loans that meet environmental criteria like using
renewable energy. In Vietnam, BIDV collaborated with BIC and SolarBK to introduce
BigK solar power solutions for households, which guarantee to support 70% of the total
cost for households to install solar electricity systems, to sponsor 277,000 home instal-
lations in Vietnam by the end of 2019 [12]. At the same time, Sacombanks provides loan
packages without credit line limits with many incentives, for example, loans valued at up
to 100% of capital need (maximally VND500 million) for individuals and households
in need of solar power equipment installation or buying cars with eco-friendly labels.
Meanwhile, Agribank reduces interest from 0.5% to 1.5% per year for individuals joining
in building green, clean, smart and sustainable agricultural product chains [12]. For cor-
porate lending, following governmental policies, banks focus on green project financing
by funding large-scale renewable energy and green agriculture development. In 2017,
the State Bank of Vietnam promulgated decision 813/QD-NHNN on the loan provision
program serving high-tech and clean agriculture development under the government’s
resolution no. 30/NQ-QH. Agribank, Vietcombank, Vietinbank, BacABank, HDBank,
Sacombank and ACB proposed a VND135.000 billion to support green and hi-tech
agriculture. Further, solar energy projects, green tourism, water management and waste
management are specialised long-term investments for climate change mitigation and
ecosystem protection that banks lead the effort to finance [13]. Therefore, banks issue or
underwrite green bonds to provide a new fund-raising channel for long-term investment
projects. According to the HSBC report, Vietnam is the second largest green bond issuer
in ASEAN (reaching 01 billion USD and focusing on transportation and energy) [14].
Generally, green lending finance environmental-friendly projects with high-standard of
supervision and transparency. The fund comes from social lending and the government
budget to support long-term sustainable goals.

Theoretical Framework for the Influence of Crucial Factors 259
Regarding other financial services, banks introduced a green deposit scheme by
green checking accounts. It reduces the paper used and improves the digitalisation in
the banking system with the purpose of saving resources [10]. Also, green cards and
cashless payment systems are designed to provide discounts and low fees to users who
purchase eco-friendly products and services [5]. Since there is a wide range of prod-
ucts and services that green banks provide, the efficiency of these financial instruments
relies on many factors. Besides the internal banking strategies, environmental pressures
and policies & regulations might be mandatory elements to urge the bank to commit
the green development. Additionally, customer demand and competitive pressure are
supplementary factors to improve the green growth of banks.
3 Methodology
The theoretical framework proposed in this study based on the theory of change which
evaluates the impact of input factors, including the legal frameworks, social pressures,
environmental pressure, competition pressure and corporate governance requirement on
the efficiency of green banking implications.
The theory of change can be traced back to the late 50 decades of the twentieth
century in the United States before it was developed and popularised by Weiss in 1995
as “a theory of how and why an initiative works” [15]. ToC was widely used to navigate
how “an initiative—such as a policy, a strategy, a program, or a project—contributes
through a chain of early and intermediate outcomes to the intended result” [16]. It
provides basic criteria to identify the resources, recognise stakeholders and build a plan
and framework for monitoring and assessing the efficiency of such changes. Shortly, it
helps to explain the causal links between stakeholders’ pressure and the outcomes thus
suggesting lawmakers and supervisors regulate and direct the green transformation in
the banking and finance sectors for a long-term process.
The motive for the theory of change in green banking practices might come from
the “results agenda”. Donor funds in global development are making change and “value
for money”. The theory of changes provides a strategic framework to demonstrate the
connection between changes in externalities and corporate behaviours as well as the econ-
omy toward green growth. ToC is illustrated in a diagram with narration covering the
problem, monitoring methods and evaluations.
As applied in the green banking adoption, ToC can be analysed as a table bellowed
(Figs. 2and 3).
For the green banking adoption, the stakeholder group and input factors could be
defined as:
(i) Environmental pressures include
a. Physical risks;
b. Transition risks;
c. Liability risks

260 A. Nguyen
Fig. 2. Cited from Norfund [17]
Fig. 3. Factors affecting green banking strategy
(ii) Social pressures cover
a. Policy and regulation requirements
b. Competition: reputation and support from the state
c. Customer pressure: green life and green concern
(iii) Governance pressures include
a. Green banking culture
b. Management requirements
The environmental pressures land the lead role in the process of green banking
adaptation. Tara pointed out that environmental sustainability is one of the constituents of
using resources without damaging the environment and depleting the supplies for current

Theoretical Framework for the Influence of Crucial Factors 261
and future generations [18]. As a result, banks bear high pressure from environmental
protection requirements.
In addition, social issues such as policymakers, regulators, and customer pressure
force the banking industry to conduct green practices. Public awareness about the harmful
effects of climate change and environmental pollution increases the number of policies
and legal frameworks focusing on green finance [19]. If banks do not follow these rules,
they might not get support from national priority programs for green growth or even
might be liable for an administrative fine. However, policy risks exists when there is
uncertainty about the effect of regulation on low carbon assets overtime. It might cause
harmful impacts on many sectors. For example, the uncertainties in consistent policy
have damaged the real estate market and energy efficiency, causing the energy crisis in
China and inefficiency operation of energy market in the EU [20]. Similarly, besides the
influence of Russia – Ukraine war, the late reaction of government significantly raises
the energy costs, thus causing cost-of-living crisis [20]. Consumers are struggle to pay
higher bills. Long-term policy, framework and plans have to be consistent to reach sus-
tainable goals. Also, customers are one of the main stakeholders of financial institutions.
Owing to the importance of stakeholder theory in corporate governance, banks have a
concern about the demand and interests of customers while making financial transac-
tions. Customers and society encourage responsible manners and ethical behaviour [21].
In case banks could not adapt to their need, they might choose services from other com-
petitors that not only do banking activities but also provide better profits for the society
and environment. As a result, competition also put pressure on the green transformation
of the banking industry due to the mimetic effect. Once the banks’ competitors introduce
new eco-friendly practices, the banks tend to evaluate these practices and improve their
operations to catch up with other players in the market.
Another crucial input factor of green banking adoption is management pressures.
Environmental pressure and social pressure require bank managers commit the applying
green strategy. The management had better include internal approach and external activ-
ities to develop a completely sustainable bank. From the scope of this paper, the impacts
of vital stakeholders including the environment, society (policymakers, regulators and
supervisors, customers) and managers will be discussed in detail. The management pres-
sures deal with technology risks and business model risk. It plays an important role in
the financial decision making of a bank.
4 Discussion
4.1 Environmental Pressure on the Green Banking Policy
Environmental degradation and climate change impose serious risks to banks in the
process of green growth, which can be classified into physical, transition and liability
risks [22]. Physical risks can broadly be defined as direct risks resulting from natural
disasters such as floods, hurricanes, ice storms, rainy storms, droughts and fires as well
as damages from ocean level rise, temperature increases and ecosystem disturbances
like productivity decrease, poor harvest and freshwater shortage. It might lead to higher
default credit rates in vulnerable industries such as agriculture, forestry, fishery and
tourism. Additionally, bank properties might decline in case of a global food crisis or

262 A. Nguyen
economic crisis caused by ecosystem disruption. Meanwhile, transition risks refer to the
reduction in asset values or the rise in transaction costs of some industries on the pathway
to a carbon-lower economy [22]. It occurs when there is a lack of carbon-neutral to
substitute fossil fuels (steel, oil, coal and gas) so businesses have difficulties in changing
their decision and redesigning their production to an eco-friendly manufacturing chain.
As a result, banks face problems of higher default rates by carbon-intensive sectors
and “impaired loan portfolio due to stranded assets” [23]. Also, the increase in energy
and commodity prices more or less negatively affects the liquidity and monetary policy,
forcing banks and insurance companies to modify the value of investments. However, the
transition offers a chance for innovation in the digital revolution, the creation of new jobs
and competition improvement. At the same time, banks take their eyes on the liability
risks, which come from business entities claiming damages and losses generated from
physical or transition risks as indicated. It increases insurance costs and guarantees fees
that require banks to adjust their working plan.
Although the transition toward green banking has to face risks related to the signifi-
cant remodelling of carbon-intensive sectors, the benefits of the green banking strategy
to mitigate physical environmental risks might be much more extensive than the impacts
of transition risks on financial stability. What the bank manager should do is design a
management strategy to cope with transition risks and related liability risks to avoid
catastrophic tipping points while supporting other businesses with greener financing
[24]. As a result, the paper proposes the following hypothesis for further empirical
research:
H1: Environmental pressure will positively speed the green banking implementation.
4.2 Social Pressure on Reaching a Green Growth in Banking System
Policy and Regulation Requirement. It is necessary to examine how legislators involve
these theories in making a framework for environmental-friendly operations toward
sustainable development. Central banks and financial regulators contribute significantly
to the policy-making and regulation implementation of green banking development.
Green banking policy instruments or legal frameworks could be classified in a variety
of ways. Looking at the economic perspectives, the framework of green banking can be
grouped into four categories which include macro-prudential policy, micro-prudential
policy, market-marketing policy and credit allocation policy [23]. Loan exposure restric-
tion aims to limit the credit exposure given to high-carbon projects. It might become a
barrier for investors who fund their carbon-intensive work. Environmentally damaging
products could be reduced by this macro-prudential policy. Generally, these policies are
consistent with the Basel accord to ensure the harmonisation and cooperation of the
international community.
Different from Dikau and Volz, Oyegunle & Weber divide green banking policy or
framework by the interference of government power [1]. These policies or rules can be
classified into three main categories, including mandatory regulation, voluntary guide-
lines and the hybrid approach. Mandatory regulations such as are widely known as
disclosure requirements, green macroprudential regulation and climate-related Stress
Testing (CIGI research Convening), reserve requirements and Capital requirements (as
criteria under Basel III) Mandatory regulations are widely used in Bangladesh, China,

Theoretical Framework for the Influence of Crucial Factors 263
Indonesia and France. These requirements state specified quotas of the amount of credit
that banks have to lend for green projects and the quota of exposure for the green facili-
ties of internal operation. The advantage of this approach is that it provides a transparent
framework with disclosure requirements and provides the same opportunities and chal-
lenges to banks in reaching environmental goals without bias. However, this paper does
not demonstrate the drawback of this approach. One major disadvantage is that compul-
sory regulation might affect the autonomy of banks and violate the market principle to
some extent. As a result, the International Finance Corporate (IFC) recommends the use
of the voluntary framework for eco-friendly banking practices [4]. Despite those bene-
fits, one drawback of compulsory rules can be mentioned is the resistance of banks and
financial institutions to follow green practices. Under some circumstances, eco-friendly
operations might be a financial burden to banks unless subsidies are given since green
bank investments take a long period to pay back and receive positive results [4]. Further,
the lack of consistency in legal frameworks of other sectors might affect the whole of
economics since banks play a core role in the financial systems. Voluntary guidelines
include the performance of directed green credit policy instruments like subsidised loan
rates for priority sectors (low-carbon industry), rediscount rates, budgetary subsidies and
extend of the payment period [23]. Also, accepting a carbon certificate is considered a
tool to attract the inclination of firms as it helps gain reputation and earn economic profits.
Banks are encouraged to voluntarily change their goals from maximising the financial
value to optimising the integrated value for sustainable development. Unfortunately, the
research of voluntary guidelines lacks data management and a transparent system to
help firms compare and contrast the pros and cons of each voluntary instrument. For
the government, they inspire the participation of banks in the green programmes by
supporting communication, creating priority and providing subsidies in investment and
taxonomy policy. Looking for profit from such policies, banks and financial institutions
are eager to join and design innovative methods for climate adaption and mitigation as
well as other environmental issues.
Combining the advantages of both approaches, hybrid instruction is another way of
green banking implementation. It combines reserves requirements and voluntary guide-
lines for green banking practices. According to Park and Kim, Brazil and Switzerland
are countries applying such a hybrid approach to enhance green banking practices [23].
Practitioners’ Dialogue on Climate Investments (PDCI) has another way to classify
the green banking guidance related to the scope of application for each category. Based
on their discussion, regulations are “specific mandatory for governance or lending”.
At the same time, policy refers to “specific mandatory instructions for financial and
business activities” while guideline means suggestions to comply with the regulation or
the policy. In short, guidelines are soft laws to support the implementation of regulation
and policy in practical cases.
In fact, the consideration of what instruments could be chosen and how these instru-
ments complied together depends on the decision of financial authorities. The role of
central banks and financial regulators is evaluated in some recent papers [22,25]. Before
reaching an agreement about the important role of central banks and financial regulators,
there are debates about the incentives of central banks and financial regulators to impose
a framework on green banking. G20 Sustainable Finance Study Group specified barriers

264 A. Nguyen
to green practice and mobilise private capital for eco-friendly projects. Similarly, the
Bank for International Settlement (BIS) indicated the core function of central banks
which is regulating the monetary policy to support the nation’s financing and ensure
stable financial development. Although financial profits are considered the main goals
for banking systems, they argue that there is no conflict of interest in gaining profits and
reaching environmental and social values because maintaining financial stability and
sustainable development are also functions of central banks and financial regulators for
earning profits in the long term.
Central banks and financial regulators are considered decisive state agencies who are
responsible for boosting the green banking strategy. Firstly, central banks and financial
regulators are active and powerful subjects in the financial system. They adjust the
monetary policy, test the stability of the whole system, and prevent distortion to maintain
public safety. Consequently, they should interfere with the banks’ operation as soon as
possible to manage risk and guide market players in the healthy and equal competition
[22]. Secondly, central banks are the caretaker of financial stability. Based on the theory
of political economics above, to protect price stability and mitigate environmental risks,
monetary policy has to take concern of energy prices. Therefore, central banks and
financial regulators are responsible to predict and prevent harmful effects on the financial
system [3].
However, the central banks and financial regulators have to face several challenges
in imposing a stable model for development. One of the most difficult is dealing with
multi-objective optimisation. Central banks and financial regulators have to balance the
goals of economic growth and the re-investment in the ecosystem [25]. Some financial
profits have to be integrated with social welfare and environmental protection. Moreover,
the banking industry is put in relation to a variety of disciplines. A small change in
banking operations might influence a wide range of players in the market. Central banks
have to co-operate and coordinate with the regulators and supervisors of other sectors.
Although some difficulties occur in the implementation of policy and regulation for
green banking, it cannot deny that the guidelines from these documents provide a more
transparent overview of the green growth of the banking system.
In Vietnam, policies and regulations are core elements to change the green growth
of the banking system. Decision 1604/QD-NHNN dated August 7, 2018, the State Bank
approved the green banking development project in Vietnam, whereby the main goal is to
increase awareness and responsibility of the banking system. It aims to protect the envi-
ronment, combat climate change and gradually transform to green banking operations,
direct credit capital flows to work in support of environmentally friendly projects, pro-
mote manufacturing and service industries, green service, clean energy and regenerate
energy. By 2025, 100% of construction banks are expected to have rules for environ-
mental and social risk management in credit granting activities and 100% of banks carry
out risk assessments in operating banking services. Banks have to apply environmental
standards and incorporate risk assessments for the environment. The government make
an attempt to form a legal framework for green banking development in Vietnam. The
basis for the implementation of green banking activities in Vietnam is the National Green
Growth Action Plan for the period 2014–2020 (Decision No. 403/QD-TTg dated March
20, 2014) and currently, the Decision No. 1658/QD-TTg, approving the National Green

Theoretical Framework for the Influence of Crucial Factors 265
Growth Strategy for 2021–2030 period, vision to 2050. Legal documents such as Direc-
tive 03/CT-NHNN 2015, Decision 528/QD-NHNN 2015, Decision 1355/QD-NHNN
2016, Decision 1604/QD-NHNN 2018 and Decision 1552/QD-NHNN 2020 issued by
the State Bank to impose rules and soft methods to improve the green strategy. Policy
and regulations not only encourage the green development of the banking system but
also prevent environmental and financial risks for them by requiring banks to develop
frameworks, standards, and implement environmental and social risk management in
lending operations.
Customer Pressure and Competition Pressure on the Implementation of Green
Banking. Customer pressure and competition pressure on green banking adoption are
intimately connected to the reputation of a bank as an eco-friendly and ethical corporation
which are deserved to receive trust and encouragement from society.
Customers are considered one of the major stakeholders stimulating the process of
greening the banking system [13]. It is widely known that consumers own the free right
to choose the products and services that adapt to their satisfaction. Nowadays, they are
concerned about the environment. From surveys conducted by Deloitte and Butler in
the UK and the US market, the number of people who have adopted a more sustainable
lifestyle by choosing sustainable and ethical brands increase remarkably [26,27]. To
save the ecosystem, customers pay attention to sustainable products, waste reduction and
carbon-neutral operations. Eco-friendly marketing identity and green practices innovate
banks by developing the relationship between customers and green banking products
thus creating a competitive advantage for green banks over other financial institutions.
Although customers establish a positive attitude toward green products and services,
costs and information asymmetry seem the biggest barriers to conducting green banking
practices [28]. It put high pressure on banks to build a generic strategy for competition.
Leveraging the bank’s distinctive combination of attributes, including brand equity,
brand image, carbon emissions, and eco-friendly banking operations, could generate
long-term competitive advantages [29]. Therefore, banks should improve customers’
awareness through green news, websites, social networks and publication to promote
their image and show their social responsibility toward the environment, investors, cus-
tomers and other stakeholders. To fulfil this target, green banking adoption has to cover
three following pillars:
(i) Green cost leadership means decreasing costs by controlling carbon-intensive raw
materials and increasing the cost of “poor environmental performance” [29].
(ii) Green differentiation refers to offering a wide range of green products based on
a different level of green demand of customers. It might mitigate transition risks
while ensuring green transformation in the banking system.
(iii) Green focus is the strategy built on the combination of green cost leadership and
green differentiation. It involves the match of a specific green product to a specific
segment of the market.
According to these pillars. The strategy for green banking adoption requires not only
the cooperation and supervision of the state agency but also the bank management to
process creatively competitive advantage for green banks.

266 A. Nguyen
In brief, it cannot deny that policy and regulation, customer pressure and com-
petition pressure of the market change the way the bank operates. Toward the green
transformation, it is hypothesised that:
H2: Social pressure will positively impact the application of green banking.
4.3 Internal Governance Coercive Pressure for Green Banking Adoption
The management of bankers is likely a direct factor that involves high influencing and
cooperative ability for the green banking adoption [18]. The implementation of green
practices in daily banking operations requires the combination of green internal activ-
ities and green external activities which are coordinated smoothly by the bank’s top
management.
Regarding green indoor activities, internal constituents refer to banking culture,
banking staff and banking infrastructures. They are powerful internal motivations to
adopt environmental practices in the banking industry. Banking culture focuses on the
application of institutions’ rules, changing attitudes and behaviours toward sustainable
development. At the same time, bankers can train their staff and set greener goals for
their work. Bonus and praise are effective methods to encourage banking staff to follow
the green path. Also, green infrastructure plays an important part in the green indoor
strategy. It includes the building design to minimise the use of land & save water and
electronic consumption, paperless or paper reduction and green waste management (for
example, the zero-waste banking model). On another sides, the management have to face
the technological risks to ensure that green strategy is completely sustainable for the
banking system. It because low carbon technology can be relatively nascent. There can
be uncertainty whether the performance of such technology is effective and stableor not.
New technology used in the next ten years is almost in the demonstration or prototype
phrase [20]. As a result, internal management have to strictly follow the early-stage
development of the technology and prepare a backup for risk management.
In respect of external operation, as the banking industry focuses on deposits, credit
activities and payment method, the green transformation of outdoor management have
to take into account these business lines. However, business model risks relate to the
difficulties in balance the new trend of investment. It raises a question about the revenue
generating and operating model of some low carbon investments, which contribute to a
large proportion of banking portfolio [23]. The high risks associated with changes in low
carbon infrastructures might lead to a higher cost of capital and, given the competitiveness
of global capital markets, difficulties in attracting the capital required. Banks should
apply low costs and differentiation strategies to provide green products such as green
deposit accounts, green lending, green bonds and environment-friendly debit or credit
card. Additionally, banks had better support lenders with carbon-neutral projects and
improve the cashless payment system to reduce the use of natural resources. Also, green
marketing and green logos might increase public awareness and boost green banking
implementation.

Theoretical Framework for the Influence of Crucial Factors 267
Based on these arguments, a hypothesis is proposed that
H3: Management strategy will positively turn the banking operation into greener
way.
These hypotheses could be empirically tested in further research to assess the
influence of these inputs on the green banking strategy.
5 Limitations and Conclusion
5.1 Limitations
The generalisability of these results is subject to certain limitations. First, the study does
not include an empirical test for the hypothesis related to the theory of changes in green
banks. The analysis might be empirically evaluated in the banking systems in different
national jurisdictions to figure out the impact of interested parties on the adoption of green
banking as a tool to achieve sustainable finance goals. Second, the study was limited
by the absence of giving solutions for unexpected factors that affect the effectiveness of
green banking adoption. It can be addressed by including additional aspects based on a
specific banking activity scenario. Last, the study only applies theoretical underpinnings
like legal description and theory of change. Further research could be carried out to
explore the connection between theoretical insights of green banking adoption with
additional theories which are relevant to banking governance or sustainable development
strategy.
5.2 Conclusion
Green banking is recognised as one of the effective tools for sustainable finance toward
sustainable development goals [3]. Additionally, the banking system turns into a greener
industry since banks try to fulfil their corporate social responsibilities as well as take care
of their stakeholders’ interest in environmental protection. As a result, green banking is
developed as the core national strategy of developed countries like the US, the UK, Japan
and developing countries such as China, Bangladesh, India and Vietnam. According
to the theory of changes, the efficiency of the green banking transformation process
depends on the pressures from environments, society and internal governance because
these factors are important inputs having causal links to the outcomes of the whole
process [23].
The paper attempts to add more information to the green banking literature thanks to
applying the theory of change to identify determinants of green banking implementation
and develop a theoretical framework for the green growth of the financial market. Based
on existing literature, the paper analysed the role of environmental risks, including phys-
ical, transition and liability risks in the banking industry. Also, it discussed the influence
of policy, regulation, customer pressure and competition on the green program. These
social pressures might let bank managers cover eco-friendly practices in the operation
of the bank. Accordingly, the paper posited several hypotheses for the influence of such
inputs on green banking development. Despite having some limitations, the paper sug-
gests several ideas to assess the effectiveness of green banking implementation which
can be tested in the near future.

268 A. Nguyen
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