The inclusion of environmental risk into banking, participants argued, was instigated by the perceived and real risks to the business operation of the bank itself, realised after losses occurred as a result of client non-compliance with environmental regulations. According to the participants, the initial drive to include environmental risk came from the environmental regulations placed upon the clients of banks, such as the NEMA and the Sector Environmental Management Acts. Different protocols have also emerged to increase transparency of environmental risks in all companies, not just banks. Institutions and non-profit organisations began to develop IFRS for larger companies and financial institutions alike (Bimha 2020; Kannenberg & Schreck 2019) to increase transparency with regard to environmental impact. These protocols are, for example, the Equator Principles, 4th iteration (Equator Principles Association 2022), the JSE standards (JSE 2022) and the TCFD. The replacement of the TCFD by IFRS S2 in 2023 brought new standards complying with both the previous TCFD standards and the International Sustainability Standards Board (ISSB) standards (IFRS 2024). Together with the adoption of external disclosure standards, activist activities (JustShare) that track and report on banks and their environmental commitments and the proactive adoption of sustainability principles were also highlighted as additional factors leading to environmental risk considerations in the banking sector.

This past view of environmental risk inclusion as described by our participants is characteristic of coercive isomorphism (DiMaggio & Powell 1983). This results from different organisations adopting similar behaviour as a result of the regulatory oversight placed upon them by a more authoritative entity, i.e. national governments (Aerts et al. 2006). This drive to conform to regulation also forms part of the regulative pillar of Institutional Theory (Osinubi 2020; Trevino et al. 2008), which can be a powerful tool to standardise an industry in a top-down approach, laying the foundation for how environmental risk is considered within the banking industry today.

The development of these inclusions and the increase in complexity resulted in the adoption of formal Enterprise Environmental Management Frameworks (EEMFs), Environmental Management Systems (EMSs), ESGs and other tools to increase the incorporation of environmental risk management in the banking sector. However, participants have indicated their concerns about the constraints of the current consideration of environmental risk when it comes to banks reducing their own environmental impact. The participants noted that although these different sources brought environmental risk into consideration in the banking sector in the past, the continuous development, as well as the in-house application, of these principles remains important.

Institutionalisation of considerations of environmental risk in banking is often also driven by individuals within the organisations and proactive adoption of standards, according to the participants. This institutionalisation is also part of the sedimentation of characteristics, as described in Institutional Theory (Tolbert & Zucker 1996), thus indicating that it has become part of institutional culture and logic (Lammers & Barbour 2006; Lammers et al. 2014; Osinubi 2020).

Six participants expressed their opinion that board members of banks should be expanded to include environmental and climate risk expertise, whether it is by including additional members or expanding the expertise of current members, similar to Dikau and Volz’s suggestion that all institutions should incorporate environmental risk (Dikau & Volz 2021). In this regard, eight participants also felt that environmental risk management should be formalised into a profession within the standards of the South African National Qualifications Authority and that trained skills should include social, environmental and ecological science, as well as engineering and financial expertise. This added professionalisation would also be compatible with established ESG expertise (Verheyden et al. 2016; Whelan et al. 2021). This establishment of a profession would address the need for standardisation in the evaluation of environmental risk but ensure competent individuals to fill the expected future demand. All participants mentioned the lack of universal standards for environmental risk consideration and thus further necessitated the need for its standardisation, as will also be explored under the following sub-themes.

Potentially formalising environmental risk in the financial sector as a profession and including this expertise on the managing board of institutions can increase the normative isomorphism, as described by Institutional Theory (Aerts et al. 2006). The inclusion of formal education, as posited by Institutional Theory, can also establish a standard theoretical foundation for any future professional in the field and thus guide the behaviour of professionals (Kılıç et al. 2021; Lammers & Barbour 2006). Standardised approaches to environmental risk consideration within banking institutions can legitimise internal management practices, allowing potential dispersion of these methods between institutions through mimetic drivers, which will drive more transparent and comparative reporting standards in the wider industry (Kılıç et al. 2021; Osinubi 2020; Trevino et al. 2008).

Transparent and efficient reporting remains important for any banking institution, which includes the reporting on environmental risk exposures of financed companies. Participants were divided on whether this should only be done after reporting standards have been agreed upon or beforehand. Two participants indicated their intention to publish their institution’s greenhouse gas (GHG) emissions report, with the expectation that other banks would follow because of reputational pressure. This confirms the mimetic forces that are currently acting on the banking industry but also potentially on other industries (Gatzert 2015). Other environmental issues such as biodiversity impact and water use can be more transparent and reportable with improvement in means of measuring, aided by professionalisation. The option to proactively consult with clients on measures to de-risk their industries on present and future environmental risks was also suggested by the participants and can be a valuable contribution to transparency and foresight.

All participants also indicated that improving data availability and quality is necessary to improve the effectiveness of environmental risk assessment. Three participants specifically noted transactions where existing models failed to estimate environmental risk within acceptable uncertainty limits. Increasing the number of environmental risk perspectives, along with the timeframe for projected risks, decreases the ability to assess the environmental risk of a transaction, which would add complexity to any organisation’s operations and limit its effective operation (Aguinis, Ramani & Alabduljader 2018). Participant B2 added that this issue is worsened by the abundance of methods and techniques available to quantify ‘environmental’ risk, more than 200 according to the participant. This results in a cognitive uncertainty that pushes organisations to use similar approaches, mimicking industry leaders seen as successful to legitimise their own approaches (Aerts et al. 2006; Lammers & Barbour 2006). An example of this was given by Participant B3, where smaller subsidiaries of parent companies may perform better on Carbon Disclosure Project (CDP) reporting being based on year-on-year improvement. The smaller subsidiary benefitted from easy improvement, despite having significantly higher negative environmental impacts than the parent company. This created a false perception of sustainability and thus an opportunity for greenwashing, remaining a threat to the reporting of environmental risk.

Some potential actions to improve environmental risk consideration in the banking system identified were outside of the direct control of banking institutions but within their sphere of influence. This includes the dissociation between expectations of different government departments, specifically the currently contradicting requirements of the Department of Mineral Resources and Energy, the DFFE and the National Treasury (DFFE 2017; National Treasury 2021). The potential for regulation to precipitate coercive isomorphism (Aerts et al. 2006) is also exemplified by Participant B4 noting that ‘Regulation moves first’; therefore, it is not only the responsibility of the banking sector to envision this future but also that of national departments and regulators. This is further argued to be necessary, as without the regulatory guidance, the quality of reporting would be impossible to ascertain.

All participants did agree that ‘Regulation moves first’, but it would also be detrimental for one bank to enforce stricter regulations than its competitors beforehand, since it would result in the regulatory arbitrage effect and the dependence on third-party information for verification of compliance with regulations, as well as reputational risk. Participants from five of the six banking institutions did, however, indicate that they have specific programmes to consult with their clients to de-risk them from the impact that international agreements will have on their trade within carbon-intensive economies such as that of South Africa. However, although the participants had the opinion that South Africa would not be able to de-risk its industries according to the Paris Agreement and UNEP_FI (DFFE 2017; UNEP_FI 2022), these commitments guide legislation development that ultimately contributes to the future regulative forces driving environmental risk consideration (Kılıç et al. 2021; Lammers & Barbour 2006).

Environmental risk has already been included in various institutions through mimetic forces, as mentioned, but Participant F1 also quantified environmental risk management within the top 40 JSE-listed companies according to market capital. Twenty-nine of the top 40 companies had Key Performance Indicators (KPIs) for top management that were linked to ESG factors, and 38 out of 40 mapped their businesses according to 17 Sustainable Development Goals (SDGs). Twenty-five also incorporated TCFD reporting, and 35 out of 40 had net-zero emission targets. This further illustrates the mimetic transparency that is becoming apparent between institutions. This pre-emptive incorporation of environmental risk is also done to remain relevant in the near future, especially with policy and regulation updates.

Although the driving force to include environmental risk and the concurrent transparency it brings may have its foundation in mimetic isomorphism (Aerts et al. 2006), it is stated by the participants that development is still taking place in all industry markets. The uncertainty and expectation of regulations to set requirements in this regard also drive different institutions to mimic approaches even further (Aerts et al. 2006; Tolbert & Zucker 1996), potentially enabling faster dispersal of new approaches, although at varying levels depending on the institution (Han 1994).

Our participants indicated that environmental risk management also serves as a proxy for the general management approach towards risks, as Participant B1 stated: ‘a company with a handle on their environmental risk is considered good at overall risk management’. Participants also expressed that, in addition to the reputational value that good environmental risk management has, they view good ESG scores as a proxy for good financial performance. Six of the 13 participants, representing four banks, emphasised that ESG reporting is already integral to their arrangements with clients, especially based on account or transaction size, with environmental risk considered equally to financial indicators in some sectors.

Participants also raised the issue that banks have started to quantify the emissions, and, in some cases, water use, biodiversity issues and air quality that are funded by them. This was seen in four of the six included banks. Banks also include external consultants and institutions such as South Africa’s Council for Scientific and Industrial Research (CSIR) to improve internal EMSs. A major motivating force for this is the expectation that other banks would start to report on their funded environmental risk, and consequently any banks not already acting with transparency about their environmental risk would suffer reputational damage (Gatzert 2015), thus linking it to the mimetic transparency discussed earlier. Improving the quantification of the environmental risk the bank is exposed to through its lending can also help reduce the time to respond, especially in the case of natural disasters such as the droughts in the Western Cape (Pienaar & Boonzaaier 2018) or floods in KwaZulu-Natal, also mentioned by two of the participant banks. This can impact banks in two ways. Businesses directly affected may incur losses (Daily Maverick 2022), but secondary impacts can also lead to losses in companies in other provinces as well, hence the need to track exposure to environmental risk across the entire transaction chain.

The participants agreed that environmental risk management is necessary within the banking sector, but individual banks cannot influence markets, consumer behaviour or national policies. In this regard, participant C1 stated that ideological barriers, especially between traditional political and financial groups, hinder progress. Participant A1 agreed, noting that slow policy development hampers effective transition management. Other participants also added that the current framework is inadequate because insufficiently quantifiable risks prevent an accurate allocation of capital. Regulatory processes also need to become more comprehensive to remove any uncertainty about the role of banks and their role in addressing environmental risk. Participant views showed that banks recognise the need to expand environmental risk management with broader policy and regulatory guidance and also to continue operating profitably in increasingly complex environments. Ultimately, this results in a conflict between sustainability and profitability within banks. The lack of standardised methods as well as uncertainty about the development of regulatory policies also allows for the possibility of greenwashing, a risk also identified by the participants.

The adoption of standardised approaches and the changing of the environment in which banks conduct their business is grounded in rational myth according to Institutional Theory (Meyer & Rowan 1977), where rationalised institutional rules become formal structures (Lammers & Barbour 2006). Consequently, although standardisation can be done in expectation of regulatory requirement, as mentioned, it also leads to formal organisational structures pre-empting this requirement, counterproductively removing the motivation for regulatory development.

Participants expressed the increasing expectation of banks to facilitate transition strategies to mitigate and adapt to climate change. This can be done with targeted funding and the banks’ focus on the transition of the different funded industries, as well as by improving the ability to accurately determine environmental risk. Banks experience the impact of increased environmental risk awareness as an increase in the Capital Adequacy Ratios (CAR), required under the Basel III framework. The consequence of this increased awareness is that it may lead to some clients not being eligible for financing, limiting some industries slower to transition to lower environmental risk, that is, coal-fired power plants that remain necessary for the economy. However, targeted funding can drive the transition to lower environmental risk through coercive pressure, as described earlier, that banks can impose on any financed industry (Martínez-Ferrero & García-Sánchez 2017), benefitting any industry able to manage their environmental risk.

Participants, however, unanimously expressed their ideal future for environmental risk consideration as a market-based model where the price of goods and services incentivises the sustainable choice, noting that the current pricing model is not adequate. The current limits do not allow for the incorporation of societal costs; thus, neither seller nor buyer is made to carry the failure of market externalities. Most participants agreed that the current ability to assess ‘sustainability’ or ‘greenness’ is limiting but listed the determination of environmental compliance as the absolute minimum baseline requirement for any consideration of a transaction or client. However, the lack of adequate environmental risk valuation results in long-term environmental risk pricing fluctuations as new or different data become available. This increasing consideration of environmental risk, and awareness of people in the industry, signifies the change in the institutional logic driving the inclusion of environmental risk through adjustment of how the institution does its business, causing a cascading effect throughout the structure thereof (Lammers et al. 2014).

A major concern of participants is that the current reporting model is merely administrative, with indices and standards not contributing to operational outcomes as a result of ambiguity between the institutions’ reporting standards. They believe that policies should focus more on scientifically verifiable information to improve reporting and balance environmental, economic and social dimensions. Reputational pressures and competition between the different institutions may help reduce the ambiguity between institutions, but this pressure may lead to evaluations focusing on certain issues, excluding other important environmental considerations. For example, habitat loss and biodiversity protection both have significant ecological impact but do not receive the same attention owing to their differing levels of economic and social value.

Another fear mentioned by the participants is that the expansion of environmental risk consideration could lead to unequal transitions to a lower environmental risk by businesses and clients, potentially stranding assets. Four of the 13 participants specifically mentioned the use of natural gas as an alternative fuel owing to its exemption from the GHG emission regulations. However, as also noted by Participant B1, South Africa does not have an extensive gas-handling infrastructure, so large investment will be needed to create a network. Financing these developments may be risky as wind and solar energy generators are potentially being deployed faster; hence, policies must be developed to manage the transition to alternative energy sources.

The majority of participants had the view that if they were unconstrained and had absolute authority, they would enable renewable energy sources to be incorporated faster to de-risk South Africa from economic export restrictions, aided by a deregulated energy market allowing for larger development of carbon offset opportunities. The transition to renewable energy sources must also be considered as significant socioeconomic opportunities for economic growth, job creation and carbon mitigation. This would allow for a shift in the approach to environmental risk that balances risks with opportunities afforded by the transition. Participants B1 and E1 specifically mentioned the opportunity that should be leveraged within the mining and manufacturing industry to produce resources and manufacture components needed for renewable energy. The banking sector itself will also be able to take advantage of carbon offset assets as an opportunity during the transition to renewable energy.

Although ESG is integral to most companies and banks, participants showed that there is no common framework for differentiating between the different levels of sustainability. This creates the opportunity for greenwashing where certain institutions, more lenient in their environmental risk evaluation, can be targeted by at-risk borrowers. The need to standardise through professionalisation within any industry is driven by normative isomorphism that is described under mimetic forces in Institutional Theory (Kılıç et al. 2021; Lammers & Barbour 2006; Lammers et al. 2014). While this is a valuable driving force, the standardisation and professionalisation sub-themes are interrelated. Although standardisation may be needed before professionalisation can be motivated, both these sub-themes are driven by the mainstreaming of ideas and behaviours within an industry (Martínez-Ferrero & García-Sánchez 2017; Ponnert & Svensson 2018). This will only continue, as additional institutions (even outside of the banking sector) incorporate similar approaches to environmental risk to further normalise and standardise the approach throughout the value chain.

International benchmarks should form the framework for the future environmental risk evaluation by financial institutions. Therefore, the ideal envisioned future, agreed by the participants, would include a system able to measure relevant factors that determine and quantify the sustainability of any decision made. This would require first that the EMSs that banks employ be able to contextualise the client’s activities and stress-test for sustainability. Secondly, the environmental impact assessment must be based on scientifically verifiable data, which depend on the expertise of professionals in the field. Thirdly, alignment between institutions is needed because of the current non-standardised method of determining sustainability. Fourthly, future risk should be incorporated into capital pricing, providing a market-based solution and preventing short-term profit from superseding environmental risk. Lastly, national sustainability and the transition to more sustainable solutions need defined and measurable targets from the relevant national departments to allow banks to align and motivate their funding decisions.