Sustainable Banking: Why Banks Need to Take Action Now
The clamour to achieve sustainability in banking isn’t anything new. Banks are fully aware of their need for action plans that drive increased efforts for a net zero future.
Leading institutions are setting out bold plans to reach net zero by 2030, 2040 and 2050. Banks like HSBC, which recently launched a three-pronged strategy to action systemic change by 2050, are making their commitments heard far and wide.
But while leading banks are responding to consumer demands for net zero to be actioned and meeting tighter regulations for sustainable practice, are they meeting demand and taking action quickly enough?
Banks: Time to action sustainable promises
For Oli Cook, CEO and Co-founder of ekko, while the awareness from banks to meet sustainability demands is there, most are “too slow to respond to the demand and take action”.
He continues: “Customers have long demanded the ability to make a change and now increasingly want brands, and banks, to help them do this in the easiest, but most impactful, ways. There is a lot of internal focus within banking institutions, and these first steps are great.”
However, as Oli puts it, there is so much more banks can do. “Banks could be utilising their connection with the millions of businesses and people who transact through them to make a positive change,” he says, “and turn ideas and goals into impact. I think this is where we’ll see leaders really start to appear.”
The Head of Science, Sustainability, and Climate Research at Normative, Dr Alexander Schmidt, is similarly unsatisfied with banks’ current efforts to action bold plans.
“Despite an initial surge in net-zero commitments, particularly following COP26 and the formation of the GFANZ, a subsequent levelling off occurred as institutions realised the complexities of their net-zero goals,” he says.
This is a key issue, given just how pivotal the role of financial institutions is in driving the global net zero transition.
But today, institutions are at a crossroads with how best to implement their net zero initiatives. “There are two paths,” says Dr Alexander. “Either a reactive path, on which business-as-usual is continued with a focus on mere compliance while crucial investments are delayed, or a proactive path, which entails embracing a leadership role, systematically assessing climate-related risks and adjusting operations fundamentally.
“The latter not only secures long-term growth and resilience but also positions institutions to lead in the transition to a global net-zero economy.”
It’s clear to Dr Alexander that choosing a proactive path and following a transition plan is not just important, but crucial for future-proofing operations.
Indeed, financial services providers must avoid accusations of greenwashing too.
“Choosing the proactive path to net zero creates long-term resilience and growth for financial institutions – and is thus the only viable option,” he adds.
Why banks must take a leading role in the energy transition
Of course, banks that delay the adoption of credible transition plans will not only be exposed to future risk but also sit at a competitive disadvantage. That’s because the institutions that do take a lead in transformative change will have maximised the various avenues that support the energy transition.
“This includes green financing, divesting from fossil fuels, advising clients on sustainability and promoting transparency in environmental practices,” says Pablo Orvananos, Global Sustainability Practice Lead at Hitachi Digital Services.
“One area often overlooked by banks is the decarbonisation of their own IT infrastructure,” he continues. “IT emissions contribute about 3.9% of global carbon emissions, surpassing those of the aviation sector. Banks should systematically assess their entire IT ecosystem (including data centres, colocation and cloud services) to identify and reduce their carbon footprint.”
Not only this but as the conduits for the flow of capital, banks have a critical role to play in accurately and deliberately redirecting the flow of funds so the net zero transition can be achieved.
“Energy accounts for the majority of all human-caused GHG emissions,” says Dr Alexander. “The financial sector will be a key player in bridging the financing gap to scale existing green energy solutions and unlock their full potential.”
Encouragingly, Dr Alexander is starting to see banks take their first steps in this direction.
“By offering sustainability-linked loans, banks incentivise businesses to lower their own carbon footprint,” he notes. “Through such mechanisms, financial institutions - either directly or indirectly - provide financing for green energy projects, promote sustainable practices, integrate climate-related risks into their lending decisions, and collaborate with various stakeholders to develop supportive policies and frameworks.
“By leading these efforts, banks not only contribute to a sustainable future but also align themselves with the growing global demand for green finance.”
Despite some positive initiatives put into action at several financial institutions, too many portfolios of financial institutions still fail to align with net zero principles.
“Even among those that claim to be aligned, only 25% of managed assets on average are actually covered by their respective net zero targets,” cites Dr Alexander from a New Climate report.
Accelerating net zero initiatives: The role of AI
For financial institutions yet to align with net zero principles, could the advent of AI help propel sustainability plans forward?
For Hitachi’s Pablo, while AI can help significantly with data analysis and prediction, banks must implement the right strategy for AI implementation first and foremost.
“A well-thought-out approach to sustainability, supported by clear goals, effective policies and robust stakeholder engagement, is essential,” he says.
“AI can complement these efforts by providing insights and optimisation opportunities, but it should be seen as a tool rather than a silver bullet. Ultimately, success in sustainability initiatives hinges on the quality of the overall strategy and execution.”
Dr Alexander goes on, to claim it is vital that AI is paired with human intelligence to achieve desired outcomes, while input data must be accurate to achieve full success when implementing AI in sustainable strategies.
“The algorithms can be used to analyse massive data sets and identify the most cost-efficient approach for a certain impact category,” he says. “Human intelligence can then help companies make sense of the data and decision recommendations that algorithms generate.
“This ensures that the insights generated by AI are interpreted correctly and aligned with the company's sustainability goals. Therefore, AI can be a powerful tool to support sustainability initiatives, but it should be viewed as a means to achieve a certain end, not an end in itself.”
Can financial institutions really achieve their net zero ambitions?
While Hitachi’s Pablo is optimistic that net zero goals will be met, “unanimity across the board will be difficult”.
He notes: “Banks face challenges in achieving sustainability goals due to outdated systems, concerns about risk management, unclear metrics, and fears of short-term revenue losses.
“Overcoming these obstacles requires innovative solutions, robust risk assessment frameworks, transparent metrics aligned with sustainability objectives and a shift towards long-term profitability strategies.”
However, the speed at which banks overcome these obstacles is not fast enough for ekko CEO Oli. “We need to move faster,” he says. “As an industry, we need to be bolder and move faster if we are to achieve our ambitions and deliver on what our customers are rightly expecting of us.”
But how to force greater speed? For Dr Alexander, it's a mindset change: “The financial services sector must take a long-term view in their decision on how to proceed with their sustainability goals.
“When considering the long-term consequences of their choice, it becomes apparent that there is only one feasible way forward – the path of proactively engaging in the net-zero transition.”
He concludes: “There are many institutions currently incentivised to aim for short-term gains, which threatens a timely net-zero global economy transition.
“While some financial institutions have taken proactive steps towards sustainable banking, achieving unanimous agreement may be challenging due to the competing interests of stakeholders and the lack of a globally aligned incentive structure set forth by regulations.”
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