At least 95% of a bank's overall carbon footprint comes from financed emissions, or emissions associated with their lending or investment activity. While the world's banks are accelerating their carbon transition, they will certainly face challenges to reaching net-zero emissions by 2050, according to new research from Bain & Company.

Bain’s study shows that many banks can build a more accurate baseline of emissions in their lending and other financed portfolios with an increased granularity in the data they use. There is a risk of over- or under-estimating financed emissions (by up to double) when using data that is not granular enough, making it difficult to know when and where value will emerge during the carbon transition and how best to capitalize on it.

Bain believes that “pioneer banks”—banks that tackle emissions challenges head on—will see their profits grow by between 25% and 30%. Conversely, banks that delay their responses or adopt a passive approach in which they simply follow regulatory requirements will see their profits erode by between 10% and 20%.

"Banks have a pivotal role to play in limiting global warming to 1.5 degrees Celsius, and industry-wide initiatives, such as the Glasgow Financial Alliance for Net Zero, are critical," said Camille Goossens, Bain & Company's Global Lead for Sustainability and Responsibility in Financial Services. "We see positive momentum on both commitments by 2050 and 2030 as well as on disclosures that are increasingly transparent and precise. However, this critical topic requires banks to invest in reliable granular data and to increasingly adopt longer-term adaptable strategic thinking. Each bank will also need to decide on the posture it wants to take in order to unlock value, asking themselves 'Are you willing to be a pioneer?'"

Pioneer banks will be able to actively guide their portfolios based on both financial indicators and carbon footprints by investing in high-caliber emissions tracking, which will help their clients transition and make smarter strategic decisions. By acting early and with speed, they will be able to shift a much larger percentage of their portfolios to green assets—up to 85% by 2050. As a result, their cost of funding and risk will be much lower than those of their slower competitors, who will be increasingly penalized by markets and investors for their higher exposure to traditional industries and projects.