Banks Pen Sustainability Policies with Flair But Fall Short When Profit Meets Principles

Banks Pen Sustainability Policies with Flair But Fall Short When Profit Meets Principles

Nov 22 , 2025. By Abreham Tesfaye ( Abreham Tesfaye is a consultant and trainer specialising in change management, sustainability, strategy management and transformational leadership. He brings more than 15 years of experience in Ethiopia's financial sector, having served in both public institutions and private banks, rising from a junior officer position to the role of vice president. He can be reached at (abreham07@gmail.com) )

The language, structures and energy around Environmental, Social and Governance (ESG) standards do exist. What is missing is follow-through. Turning ESG from a set of policies and committees into a working reality will require persistence, investment, and a willingness to confront deep-seated structural issues, especially around data, skills, incentives, and governance. For the domestic banks, the challenge is not simply to look the part but to act it.

The domestic banking industry appears to be caught in what could be described as an "ESG theatre", publicly endorsing sustainability frameworks, establishing dedicated Environmental, Social and Governance (ESG) units, and partnering with international financiers, without yet embedding these standards into operational and financial core practices.

This signals a risk of ESG becoming performative rather than transformative. Indeed, the formation of committees, the release of green finance guidelines, and the appointment of sustainability officers are essential signals of intent. However, intent alone does not alter lending patterns, boardroom behaviour, or risk assessments. What is missing is the translation of policy into institutional behaviour, and this is where the gap widens.

The National Bank of Ethiopia (NBE) is moving to weave climate risk into its regulatory oversight. The Ethiopian Bankers Association, working with international organisations, has issued guidelines intended to guide banks towards sustainability. International players such as the International Finance Corporation (IFC), the European Investment Bank (EIB), and Germany’s International Climate Initiative have arrived with technical support and funding.

Commercial banks themselves are building ESG units at various levels, hiring new sustainability officers, and releasing internal guidelines. A handful have announced trial programs for green lending or social-impact financing. The machinery appears to be running, and the industry looks ready to embrace the ESG wave. But beneath the surface, a more complicated reality is unfolding.

In practice, ESG still lives mostly on paper. Bank executives, regulators and development partners are eager to show support for sustainability and governance. Committees have been formed. Policies written. Pilot projects launched. But, as many in the industry admit, the decisive test, putting ESG into action, has proved elusive.

Three main impediments stand in the way.

ESG is built on information where banks need clear and reliable data on the environmental, social and governance performance of their borrowers and their own operations. That data is scarce. Many companies do not systematically track or report on emissions, labour standards, energy use, or social outcomes. Large corporations are no exception. Without reliable and standardised data on ESG, banks are left guessing. They struggle to assess risk properly, regulators cannot run effective climate stress tests, and shareholders are unable to evaluate performance.

The absence of a mandatory ESG disclosure rule for banks means that reporting, where it happens, is voluntary and often inconsistent.

Another barrier is limited technical capacity. Building a credible ESG program takes specialised knowledge, including climate risk modelling, environmental impact assessment, and sustainability reporting. Most domestic banks lack staff trained for these tasks. Newly formed ESG units tend to be small and under-resourced. Traditional credit officers, skilled at weighing financial risk, rarely have the tools or training to factor ESG considerations into lending decisions.

In many cases, banks depend on a few externally funded workshops to build capacity. These can be useful, but they fall short of the sustained effort needed to develop in-house expertise.

Lastly, in the real world, banks operate on the basic logic of risk and reward. Unless sustainable finance delivers clear financial benefits or regulatory requirements, most financial institutions default to conventional lending practices. Today, there are few incentives for domestic banks to prioritise ESG. There are no preferential capital rules to encourage green loans. Enforcement of supervisory requirements for ESG compliance is weak. Green bonds and sustainability-linked loans remain at a very early stage. ESG exists in policy, but not in the profit model.

There is a further risk, often overshadowed by talk of climate and social impact, that could prove the most damaging in the long run. It is the foundation on which the rest of the structure stands. While banks have announced initiatives in financial inclusion and community engagement, governance frameworks have not kept up. Many banks still operate with traditional, hierarchical management and board systems that offer limited transparency and weak oversight.

In a more competitive and technology-driven environment, these gaps pose a growing risk. Weak board supervision, potential conflicts of interest, and a lack of independent voices at the highest level can undermine progress on ESG, leaving banks exposed to operational, compliance and reputation risks.

A closer look at governance reveals deep vulnerabilities. Boards are often dominated by founding members or concentrated shareholder groups, raising questions about objectivity in strategic decisions. Internal controls and audit systems can be patchy. This lack of robust oversight makes it harder for banks to monitor new risks and adapt to rapidly changing regulations. The consequences go beyond any single bank.

Weak governance chips away at shareholders' confidence, slows the industry's move towards global ESG standards, and undermines the financial system’s ability to withstand shocks. As Ethiopia seeks to attract more foreign investment and play a bigger role in global markets, strong corporate governance transcends compliance issues and becomes a strategic necessity. Improvements, such as autonomous boards, stricter regulatory enforcement, and more transparent reporting, are needed to ensure resilience and unlock the potential of ESG.

This points to a wider choice facing the domestic financial sector.

Will ESG become a fundamental tool for modernisation, risk management, and sustainable growth? Or will it remain another policy document, impressive in appearance but ineffective in practice?

The signals are mixed at best. Regulatory momentum is building. Banks are showing curiosity and some initiative. International partners continue to offer support. But there is a difference between interest and implementation, between policy and practice.

To bridge this gap, all actors will need to raise their game. Regulators should show courage in enforcing standards. Banks will need the discipline to invest in skills and systems, even when immediate rewards remain unclear. Shareholders should demand more transparency. And the public will have to hold both banks and regulators to account. If done right, ESG could reshape the banking industry and steer development in a positive direction.

PUBLISHED ON Nov 22,2025 [ VOL 26 , NO 1334]