The clamor to achieve sustainability in the banking sector is nothing new. Banks are fully aware of the need for action plans that drive greater efforts towards a net-zero future.

Major 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 deliver systemic change by 2050, are making their commitments heard far and wide.

But as major banks respond to consumer demands to reach net-zero emissions and comply with stricter regulations for sustainable practices, are they meeting demand—and acting fast enough?

Banks: Time to Act for Sustainable Promises

For Oli Cook, CEO and co-founder of ekko, although banks are aware of the need to meet sustainability demands, most of them are “too slow to respond to demand and take action”.

He continues: “Customers have long asked for the ability to make a change, and now they increasingly want brands and banks to help them do so in the simplest, most effective ways. There is a lot of internal focus within banks and these first steps are fantastic.”

But as Oli says, there’s much more banks can do. “Banks could use their connection to the millions of businesses and people who transact through them to make positive change,” he says, “and turn ideas and goals into impact. I think that’s where we’ll really start to see leaders emerge.”

Normative’s head of science, sustainability and climate research, Dr. Alexander Schmidt, is also dissatisfied with banks’ current efforts to implement bold plans.

“Despite an initial surge in net zero commitments, particularly after COP26 and the formation of GFANZ, there has been a subsequent levelling off as institutions have realised the complexity of their net zero targets,” he says.

This is a key issue, given the critical role of financial institutions in driving the global transition to net-zero emissions.

But today, institutions are at a crossroads on how best to implement their net zero initiatives. “There are two paths,” says Dr. Alexander. “Either a reactive path, where you continue to do business as usual with a focus on compliance while critical investments are delayed, or a proactive path, which involves taking a leadership role, systematically assessing climate risks, and fundamentally adjusting operations.

“The latter not only ensures long-term growth and resilience, but also positions institutions to lead the transition to a net-zero global economy.”

Dr. Alexander is clear that taking a proactive path and following a transition plan is not only important, but crucial to ensuring the future safety of operations.

Financial service providers must also avoid being accused of greenwashing.

“Taking the proactive path to net zero creates resilience and long-term growth for financial institutions, and is therefore the only viable option,” he adds.

Why banks must take the lead in the energy transition

Of course, banks that delay adopting credible transition plans will not only be exposed to future risks, but will also be at a competitive disadvantage. This is because institutions that take the lead in transformative change will have maximized the various pathways that support the energy transition.

“This includes green financing, divestment 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 that banks often overlook is decarbonizing their IT infrastructure,” he continues. “IT emissions account for approximately 3.9% of global carbon emissions, surpassing that of the aviation sector. Banks should systematically assess their entire IT ecosystem (including data centers, colocation, and cloud services) to identify and reduce their carbon footprint.”

Not only that, but as conduits for the flow of capital, banks have a critical role to play in carefully and deliberately redirecting the flow of funds so that the transition to net zero emissions can be achieved.

“Energy is responsible for the majority of human-caused greenhouse gas emissions,” says Dr. Alexander. “The financial sector will be a key player in bridging the financing gap to scale up existing green energy solutions and unlock their full potential.”

It is encouraging to see that Dr. Alexander is starting to see banks taking the first steps in this direction.

“By offering sustainability-linked loans, banks incentivize companies to reduce their carbon footprint,” he notes. “Through such mechanisms, financial institutions directly or indirectly provide financing for green energy projects, promote sustainable practices, integrate climate risks into their lending decisions, and work with various stakeholders to develop supporting policies and frameworks.

“By leading these efforts, banks are not only contributing to a sustainable future, but are also aligning themselves with the growing global demand for green finance.”

Despite some positive initiatives by several financial institutions, too many financial institutions’ portfolios still fail to align with net-zero emissions principles.

“Even among those who claim to be aligned, only 25% of assets under management on average are actually covered by their net zero emissions targets,” Dr Alexander quotes from a New Climate report.

Accelerating Net Zero Initiatives: The Role of Artificial Intelligence

For financial institutions that have not yet adopted net-zero emissions principles, could the advent of artificial intelligence help advance sustainability plans?

For Pablo of Hitachi, although AI can make a significant contribution to data analysis and forecasting, banks must first implement the right AI implementation strategy.

“A well-considered approach to sustainability, supported by clear goals, effective policies and strong stakeholder engagement, is essential,” he says.

“AI can complement these efforts by providing insights and optimization opportunities, but it should be viewed as a tool rather than a panacea. Ultimately, the success of sustainability initiatives depends on the quality of the overall strategy and execution.”

Dr. Alexander goes on to say that it is crucial that AI is paired with human intelligence to achieve the desired results, while the input data must be accurate to achieve full success in implementing AI in sustainable strategies.

“Algorithms can be used to analyze huge data sets and identify the most cost-effective approach for a given impact category,” he says. “Human intelligence can then help companies make sense of the data and the decision recommendations generated by the algorithms.

“This ensures that AI-generated insights 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 seen as a means to an end, not an end in itself.”

Will financial institutions actually achieve their net-zero emissions goals?

While Hitachi’s Pablo is optimistic about achieving net-zero emissions targets, “unanimity across the board will be difficult.”

He notes: “Banks are struggling to meet sustainability goals due to outdated systems, risk management concerns, unclear metrics and fears of short-term revenue losses.

“Overcoming these obstacles requires innovative solutions, robust risk assessment frameworks, transparent metrics aligned with sustainability goals, and a shift to long-term profitability strategies.”

But the speed with which banks are overcoming these hurdles isn’t 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 what our customers rightfully expect from us.”

But how do you force a greater speed? For Dr. Alexander, it’s about a change in mindset: “The financial services industry needs to take a long-term view when deciding how to proceed with its sustainability goals.

“When considering the long-term consequences of their choice, it becomes clear that there is only one viable path forward: to proactively engage in the transition to net-zero emissions.”

He concludes: “There are many institutions currently incentivized to pursue short-term gains, which threatens a timely transition of the global economy to net-zero emissions.

“Although some financial institutions have taken proactive steps towards sustainable banking, reaching a unanimous agreement may be difficult due to the conflicting interests of stakeholders and the lack of a globally aligned incentive structure established by regulations.”

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