Banks Struggle with ESG Pressures and Lack Clarity on Climate Risk Management

A recent survey conducted by Bain & Company involving 55 banks and financial services institutions, which account for over $40 trillion in assets, reveals a split in how banks are reacting to ESG pressures from regulators, shareholders, and customers. The global survey, which included members of the International Association of Credit Portfolio Managers (IACPM), showed that banks are divided on whether ESG factors mainly represent risks to manage or opportunities to capitalize on, with European respondents being the most optimistic about the latter.

Despite progress being made, banks and financial institutions are hindered by ambiguous decision rights and varying regulatory priorities across different regions. The study discovered that 65% of these institutions have not yet determined who is primarily responsible for identifying and addressing climate risks within their operations. Furthermore, 55% of respondents report unclear roles and responsibilities for managing climate risk between their companies’ business and corporate functions, while 40% state that they do not incorporate accountability within their business lines, which is considered best practice.

“Incorporating ESG strategies into banking operations requires a delicate balance of managing risk and seizing opportunities,” explained Michael Kochan, partner in Bain & Company’s Financial Services practice. “The gap between ESG aspirations and results has widened for many financial services institutions, despite increased pressure from stakeholders. Winners will focus strategy to create tangible value from climate-related products, services, and consulting.”

Globally, external pressures for more ESG activities will only intensify, with 83% of respondents expecting greater influence from regulators, compared to 67% from customers and 53% from shareholders. European and Asian respondents feel more pressure from regulators compared to their counterparts in the Americas, while shareholders have a more significant impact in the Americas.

Banks are planning to expand their green product portfolios over the next three years, introducing clean-energy project financing in commercial markets and expecting to broaden the consumer portfolio to car loans, mortgages, and deposits. They are also beginning to incorporate climate risk factors into strategic planning, credit origination, and insurance underwriting, recognizing that climate-related hazards may contribute to credit risk in ways that are not yet fully understood.

There are four critical areas for all banks and financial institutions to consider within their ESG strategies: managing stakeholders to align their views in support of decarbonization, sharpening decision-making power for transition finance priorities, defining strategies to address customer demand, and augmenting climate-risk data analytics capabilities to integrate these risk factors into core banking processes, leading to sustainable long-term value creation.