BOSTON – May 8, 2023 – A Bain & Company survey of 55 banks and financial services institutions, representing more than $40 trillion in assets, reveals a divide in how banks are responding to ESG pressures from regulators, shareholders, and customers.

The global survey of International Association of Credit Portfolio Managers (IACPM) members shows them split nearly down the middle on whether ESG pillars primarily represent downside risks to be managed or upside opportunities to be captured, with European respondents most bullish on opportunities.

While institutions are making progress, they’re hampered by unclear decision rights and different regulatory priorities across regions. The survey found 65% of banks and financial institutions have yet to define who has primary accountability for identifying and addressing climate risks within their operations. Similarly, 55% of respondents say there are still unclear roles and responsibilities for managing climate risk between their companies’ business and corporate functions. And 40% report that they do not embed accountability within their business line, which is considered best practice, instead coordinating ESG initiatives through centralised teams.

“Incorporating ESG strategies into banking operations requires a delicate balance of managing risk and seizing opportunities,” said 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.”

Regional differences and lessons from Europe

Globally, external pressures for more ESG activities will only increase, with 83% of respondents expecting more influence from regulators, compared to 67% from customers and 53% from shareholders.

European and Asian respondents feel more influence from regulators than their counterparts in the Americas, and shareholders have greater sway in the Americas. While regulatory expectations differ markedly between Europe and the Americas, Europe can serve as a robust source of insights in supporting the transition to manage climate risks.

How banks are responding

Banks are expecting to broaden their green product portfolios over the next three years, launching clean-energy project financing in commercial markets and expecting to expand the consumer portfolio to car loans, mortgages, and deposits. Recognizing that climate-related perils may contribute to credit risk across their portfolios in ways that aren’t yet fully understood, they are also starting to incorporate climate risk factors into strategic planning, credit origination, and insurance underwriting.

European banks have made the most progress on incorporating climate metrics into credit underwriting, with other regions expected to follow. Overall, 64% of respondents have yet to incorporate climate data and metrics into credit underwriting, with most banks from the Americas planning to do so in the next three years. However, 46% of respondents expect to limit credit underwriting to low-carbon, ESG-aligned customers by 2050.

Four areas that merit attention and resources

There are four critical areas for all banks and financial institutions to consider within their ESG strategies:

1. Manage stakeholders to align their views in support of decarbonisation, coordinating expectations for value creation closely.
2. Sharpen decision-making power for transition finance priorities, working together with boards to inform strategic priorities and provide risk oversight.
3. Define strategies to address customer demand, considering both commercial opportunities and investor requirements.
4. Augment climate-risk data analytics capabilities to integrate these risk factors into core banking processes, leading to sustainable long-term value creation.

Media contacts

To arrange an interview or for any questions, please contact:

Gary Duncan (London) — Email: gary.duncan@bain.com

Katie Ware (New York) — Email: katie.ware@bain.com

About IACPM

The IACPM is an industry association established to further the practice of credit exposure management by providing an active forum for its member institutions to exchange ideas on topics of common interest. The Association represents its members before regulatory and administrative bodies in the US and internationally, holds biannual conferences and regional meetings, conducts research on the credit portfolio management field, and works with other organizations on issues of mutual interest relating to the measurement and management of portfolio risk. Currently, there are over 130 financial institutions based in 30 countries that are members of the IACPM. More information is available at www.iacpm.org.