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The prodding and rhetoric designed to galvanise banks into action on ESG will soon be replaced by the threat of enforcement and the spectre of sanctions, according to a new report.

The 5th annual Global Bank Review, published today by Herbert Smith Freehills, reveals that over the next five years, the world's banks are likely to face increasing scrutiny of their climate exposures and the tools they use to identify, measure, monitor and manage them. It also suggests that, within 10 years, banks are likely to have to set capital buffers to reflect the financial risks from climate change on their balance sheets.

"For the banking community, ambitious environmental pledges are proving to place them between the proverbial rock and hard place. Whilst banks understandably face mounting pressure to develop and deliver green policies and to show their commitment to a net zero future, investors, regulators and activists are paying close attention to banks' sustainability statements and how that professed commitment is going to be achieved. Further, until disclosure and reporting standards become settled, there remains a gap in the reporting of ESG data. This means that failure to implement their climate commitments and to demonstrate their path to a net zero future leaves financial institutions exposed, both reputationally and legally," says Simon Clarke, partner and co-chair of Herbert Smith Freehills' global banks sector group.

Outlining issues facing banks in the UK, the US, Europe, Asia and Australia, the report highlights how the focus of senior bankers has shifted from accepting the need to act, towards one of establishing harmonisation of standards and an industry-wide approach, which delivers on ESG and makes sustainability part of banks' DNA.

Highlighting a number of changes which are likely to take place over the next five years, the report suggests that, as attitudes and policies change and develop, asset holders foresee systematic environmental risk will become a more important risk than financial risk. 

Tony Damian, partner and co-chair of Herbert Smith Freehills' global banks sector group adds: “Culturally, banks are inclined to get on board with ESG, but tackling such issues involves a fundamental reappraisal of their systems and processes. Banks must now view risk through a very different lens, and will rely on the transparency and accuracy of their clients’ and counterparties’ disclosures, so there is a need for uniformity across the sector.”

Titled 'ESG: creating a purposeful future', the report also identifies a number of emerging trends within the banking sector. It suggests that:

  • ESG impact investment will undergo significant standardisation, with loans likely to have sustainability metrics attached
  • with banks increasingly becoming targets for climate activists, they are rethinking their lending policies as part of broader campaigns designed to influence other industry sectors
  • human rights are increasingly forming part of banks' due diligence when they are approached by corporates seeking access to finance
  • a closer link is being forged between executive remuneration and ESG metrics, with banks being advised to consider the timeframe over which ESG factors must be measured and to find a balance between financial and ESG-led metrics.

Hannah Cassidy, partner and co-chair of Herbert Smith Freehills' global banks sector group, concludes: "The direction of travel is beyond doubt. The challenge now concerns implementation – it's about designing taxonomies, standards, policies and metrics in ways which are practical and transparent, and which avoid unnecessary complexity and divergence across different legal and regulatory regimes. Further, they need to be delivered in a timely way to meet the current imperative for action."

Key contacts

Simon Clarke photo

Simon Clarke

Partner, London

Simon Clarke
Hannah Cassidy photo

Hannah Cassidy

Partner, Head of Financial Services Regulatory, Asia, Hong Kong

Hannah Cassidy
Tony Damian photo

Tony Damian

Partner, Sydney

Tony Damian

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Sally Greig

Head of Communications, Asia

Hong Kong

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Emily Coultas

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