May 2024

Banking on Sustainability: The Rise of Environmental Initiatives in the Finance Sector


Stuart T. Smith

Senior Vice President & Principal


Embracing ESG initiatives can help banks attract customers, derisk investments, and achieve long-term business growth.


As extreme weather events grow more frequent and severe, the perils of climate change are escalating in the banking industry. Loan default risks are increasing, new regulations are passing, and operational costs are on the rise. The rapid influx of environmental challenges has solidified the essential next step: a proactive shift to sustainable banking.


The adoption of green banking practices is no longer just a corporate responsibility. It’s a strategic imperative that will drive long-term business resilience—especially as a growing majority of leading global banks commit to achieving net-zero carbon emissions. At the helm of this movement will be visionary leaders who recognize the urgency of integrating sustainability in every product, process, and decision.


Why Modern Banks Are Going Green

On the surface, it may appear that banks are in a tight spot. In recent years, states like West Virginia and Texas have penalized banks for decreasing their support for oil and gas firms in favor of environmental, social, and governance (ESG) policies. Financing the fossil fuel industry is still a lucrative venture. However, the long-term profitability that can be achieved by embracing eco-friendly practices is undeniable. For the second year in a row, Bloomberg reports global banks are earning millions more from loans and bonds for green projects than for oil, gas, and coal activities.


In contrast, the fossil fuel industry is expected to suffer a significant devaluation of assets as climate stabilization efforts persist. This decline is certain to affect many U.S. financial institutions, including Citigroup and JP Morgan Chase, with a large stake in the field—potentially opening new opportunities for sustainable competitors to win market share and thrive.


Furthermore, turning a blind eye to ESG factors can expose banks to heightened financial risks. A recent study found that severe natural disasters consistently lead to more non-performing loans. As climate change worsens, evaluating lending decisions based on environmental criteria can help banks improve their bottom-line performance.


Evolving customer demands are also driving the movement toward sustainable banking. Today, 67% of consumers want their banks to implement more environmentally friendly initiatives, from paperless banking to large-scale carbon offset programs. A green reputation is a valuable marketing tool. Plus, it offers opportunities for banks to connect with rising Gen Z consumers, 25% of whom plan to open a new bank account within six months. This young generation highly values eco-friendly partnerships and transparency from banks.


By prioritizing corporate sustainability, financial institutions can evade the reputational risks that come with supporting carbon-intensive companies—which may be viewed as negligence—and gain loyalty from eco-conscious customers. Taking proactive measures can also help banks prepare for the strict regulations ahead.


Rising Environmental Regulations in the Finance Sector

As regulatory bodies worldwide intensify their focus on environmental issues, banks are facing growing pressure to focus on sustainability. In 2022, the U.S. Securities and Exchange Commission (SEC) fined financial institutions for deceptive greenwashing for the first time, highlighting the growing scrutiny of banking operations. Federal regulators are also pushing for transparency around carbon emissions. Stricter reporting requirements may require banks to fully disclose the environmental impact of their lending and investment portfolios—including their contributions to oil and gas companies.


New and proposed environmental regulations and guidelines will present significant compliance challenges for banks. However, they also offer opportunities for collaboration. For example, since the United Nations (UN) released its Principles for Responsible Banking framework, it has aligned over 330 global banks behind a shared vision of sustainability success. Regulators can establish clear benchmarks that steer financial institutions toward impactful eco-friendly practices.


The UN has also backed the creation of the Net-Zero Banking Alliance, which urges member banks to establish public climate targets every five years from 2030 onwards. As of April 2024, the alliance boasts 144 international banks that represent 41% of global banking assets.


Greater support and urgency from government leaders and regulators can further support collective movement toward effective ESG initiatives, as well as the innovation of new green products.


Unlocking Opportunities in Sustainable Banking

For many financial institutions, sustainable lending will be a core ESG initiative for the coming years. However, top bank leaders are also transforming their financial products to attract new business as consumer expectations evolve. According to McKinsey, 40% of Americans across income levels are interested in climate-related products. Offerings like climate-screened index funds and green checking accounts have proven particularly attractive to today’s clientele.


What’s more, the McKinsey report found that many consumers would be willing to allocate 40% more toward green savings accounts while receiving a significantly lower annual percentage yield. Offering and promoting more sustainable products can positively transform bank cash flows and bottom lines.


More innovative offerings, such as eco-friendly credit cards and green mortgages for energy-efficient homes, and initiatives like carbon offset purchases can further differentiate banks. However, bringing these strategies to life hinges on prioritization from leadership teams.


Embracing Sustainability as a Leadership Priority

Building an executive team that is invested in green initiatives is paramount to the success of sustainable banking. By treating sustainability as a C-level priority, organizations can signal their commitment—both internally and externally—to prioritizing the environment. Harvard Law School reports 83% of banks now use sustainability metrics in their executive compensation plans to promote active contributions from members of the C-suite.


To encourage progress, many financial institutions are assigning primary responsibility for sustainability initiatives to a single executive. In North America, this role typically falls to CEOs and CFOs, who can embed ESG considerations into core business decisions. However, banks are increasingly appointing dedicated Chief Sustainability Officers (CSOs) to champion environmental responsibility in every aspect of the organization—from operations to culture—and foster internal buy-in.


According to Deloitte, hiring a CSO is most critical when external changes, such as regulatory developments and customer scrutiny, intensify. CSOs—in particular, those who display strong adaptability and tech-savviness—can help banks navigate compliance and spark innovation even as markets evolve.


How will your company elevate its commitment to sustainability?