The shift toward a climate-smart banking system will be a learning-by-doing process. It needs to happen everywhere, at every scale, starting now.

Climate disruption is advancing around the world, causing practical challenges, rising costs, and economic fallout. US financial regulators project unchecked climate change will collapse the financial system and undermine its ability to support the everyday economy.

Climate intelligence is already a measurable characteristic of any given decision. While there is no one universally accepted metric, or even method, for quantifying this climate value, financial institutions that fail to account for it are gambling against a complex, rapidly evolving threat landscape, for no good reason. Even fossil fuel operators need to plan around worsening climate impacts, so why ignore this essential operational information? At the very least, find ways to make more good and less bad happen against climate goals.

Conventional macroeconomics discounts harm that is not an immediate measurable cost. The further removed the harm, or the harder to quantify, the easier it is to discount. The problem with climate costs is that they proliferate through many interacting systems; they are nonlinear and begin to appear beyond geographical and time horizons, but they are real, and they are getting harder and harder to avoid.

The COP29 round of UN Climate Change negotiations which concluded on Sunday in Baku, Azerbaijan, set new finance goals of $300 billion per year in public finance and $1.3 trillion per year from “all actors”, by 2035. Even though this is far less than the amount needed to achieve successful climate-resilient development, there is still great uncertainty about how this money will be mobilized.

One major issue is the question of where the money will sit as it moves through developing country economies and scales down to local and individual levels. Even the world’s leading commercial banks are not equipped to properly account for the climate value of all of the money they hold. Small, local banks that could do this at the right scale, in real time, are a missing link everywhere.

Because money that generates climate damage undermines the value of all other money, climate intelligence will eventually be a core imperative for all financial institutions. In many cases, the critical insights will likely come from service providers—whether in government or the private sector—who are trusted to provide the relevant data translation. Again, this layer of the global climate response is extremely thin; it needs to be built out.

Climate-smart banking will measure climate value as a segment of each transaction, and will keep that information linked to specific holdings, even in basic currency. The provenance tracking is becoming available for this, through advanced distributed ledger technologies that are more energy efficient and less prone to mischief. These will not need to be integrated formally into banking operations or financial transactions; they can be a layer of additional insight linked through common data points.

Attribution methods are being refinded and improved that will allow for tracing climate forcing causes that lead to unprecedented impacts in terms of harm and cost. Think of the risks banks will face when their lending arrangements and client holdings are tied up in clearly defined traceable climate liability cases. Avoiding that problem will be big business, with large and small-scale actors looking to stay on the right side of costs and benefits.

As reliable provenance tracking attaches to everyday expenditures across whole economies, banks will need to be skilled at weighing the wisdom of specific choices and aiding their clients in choosing better. The benefit will be increased measurable value for both the customer and the bank. Competitive dynamics will make this practice more mainstream.

Until then, commercial banks have a range of choices to make:

• Do they ignore this future of competitive layered value-building, and risk falling behind?
• Do they focus on specific new financial instruments tailored to climate benefits?
• Do they begin developing new business practices and new data services, to ensure they are more competitive later on?
• Do they ask outside vendors, possibly insurers, to play this role now, and make deals to achieve competitive pricing?

Banks also need to think about differing priorities at different scales of operation:

• Is there a national regulatory plan that would be most conducive to a solid future climate banking business for a specific type of institution?
• Are regional climate differences going to create significantly different kinds of climate risk and related business opportunities?
• Do local governments have policies and practices in place that can optimize the transition to climate-smart banking?
• Do prevailing local industries face unique challenges, and is the bank prepared to provide assistance or optimize the flow of climate-related resources?

Not only will the rise of climate-smart banking make it much easier to identify, mobilize, track, and build on the “all actors” money slated to reach at least $1.3 trillion by 2035; if climate banking reaches mainstream status, the funding allocated to climate solutions will reach far beyond that level, with or without an increase in the stated goal. Most of that money is already held by financial institutions now; it just needs to be realigned to support climate-resilient everyday economics.

The Principles for Responsible Banking provide something of a thought framework for developing a climate-smart banking strategy. We paraphrase the principles here, for context: 

1. Align business strategies with the needs of clients, society, and overall sustainability, including global climate goals.
2. Reduce negative impacts and improve performance through public target-setting informed by science.
3. Support clients and customers shifting to more sustainable practices that create shared prosperity for current and future generations.
4. Consult, engage, and partner with stakeholders to achieve social, sustainability, and climate goals.
5. Enact governance and culture change to embody these principles in ongoing institutional practice.
6. Offer transparent reporting of and be accountable for progress, or lack of progress, on social, sustainability, and climate goals.

One of the key outcomes from Baku was the commitment to invest some of the new climate finance in locally led initiatives, including those that reduce vulnerability and build resilience, which are cost-saving measures. For this to happen, the institutional capability needs to be in place locally.

That means climate-smart banking practices will be needed, with related data translation services. Some of these will need to be provided by micro-scale enterprises with one or two high-performing local professionals earning by getting the numbers right and making climate finance reliably transparent. Banking needs to reach billions of people it does not yet reach, and it needs to reach them in the right way, with local assistance in accounting for vulnerability and climate contributions, without imposing new costs on those who already have too little.

What Baku did not give us was sufficient funding or certainty about modes of delivery. What it does provide, however, is an implicit call to action for everyone hoping to avoid climate chaos. Even as all actors work to sift through the signals, it is clear that climate-smart banking points to massive opportunity coming over the horizon, for economies large and small.

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