REVIEW OF FINANCIAL MARKETS


climate-related information from a range of sources, consulting with external experts including academics and scientists and internal (bank) resources. Internal risk specialists, strategists, and meteorologists from the bank’s insurance division are consulted, as are other directors on the board with expertise in diverse industries, leveraging social capital (Adner & Helfat, 2003) and supporting Huse’s (2007) finding that board members know and use each other’s competences. In addition, one chair spoke of having deliberately recruited energy experts to the board to “broaden the range of perspectives and knowledge”. All directors expressed seeing value


in hearing employees’ views on issues relating to climate, although there was strong disagreement over whether directors should engage directly with employees. This appears to be part of a broader issue of relationship between board and CEO. One commercial bank chair warned that directly engaging with employees “can erode trust” between the board and the CEO, but an investment bank director strongly disagreed, recommending directors engage with those closest to customers, it being “the only way to overcome confirmation bias stemming from the asymmetry of information that management has versus the board”. By engaging directly with employees, they said: “you come back to the board with a clearly different mindset”. This was echoed by other investment bank directors who said it is important to know as many people as you can within the organisation and at all levels. This supports Roberts et al.’s (2005) observation that informal engagement with employees helps build non- executive directors’ knowledge of the firm and signals their commitment. This could also boost feelings of employee empowerment, a behaviour associated with an active mindset. All directors noted that their roles on


the boards of other entities, known as board interlock, provided a rich source of knowledge and information, supporting Wincent et al.’s (2010)


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argument that interlock positively influences innovation and performance (Geletkanycz & Hambrick, 1997), and is an example of the mediating effect of social capital. Particularly useful are “companies further along the climate journey than we are”, providing opportunities for learning and mastery, as advocated by Senge (1990) and Vygotski (2004). As an example, one director spoke of recently having joined the board of an energy company “because I really wanted to deeply understand [climate] issues”. Interestingly, experience on not-for- profit boards and small social networks is also viewed as useful, providing a social lens on climate change.


// EXPERIENCE ON NOT-FOR-PROFIT BOARDS AND SMALL SOCIAL NETWORKS IS VIEWED AS USEFUL, PROVIDING A SOCIAL LENS ON CLIMATE CHANGE //


Recognise opportunities All directors spoke of the need for innovative and pioneering practices. “Seeing climate in a broader context, as an opportunity for advantage, just completely changes the whole dialogue,” one director remarked. What constituted innovative and pioneering practices appeared to differ by type of bank the director serves. Interestingly, although there was clear appetite for product innovation in the accounts of investment bank directors, commercial bank directors largely focused on innovation around efficiencies and engagement with customers, apparently reflecting regulatory concerns following a mis-selling scandal. The


divergent responses by type of bank are discussed elsewhere in the paper. Directors agreed that leveraging


technology provides an opportunity to enhance climate response. Many directors spoke of opportunities afforded by technology, such as artificial intelligence to better measure customer risk, apps to help customers make sustainable energy decisions, and crowdfunding platforms to enable customers to fund sustainable projects. This innovative approach to use of


technology is a key component of dynamic capabilities (Teece, 2021). Interestingly, commentary appears to focus on technology as a tool rather than on the opportunities to invest or lend to new types of technology that could facilitate the transition to a low- carbon economy. There was also agreement on the opportunity to leverage frontline bankers as part of the climate response, strengthening capabilities in order to deepen customer relationships during the transition, resourcing and upskilling bankers with “more than just the ability to write a loan”, including climate expertise, and relocating bankers away from head office to better serve local communities, because “if you stay in the banking bubble, you’ll miss 90% of what’s going on”. Viewing bankers as a resource for climate response rather than as an overhead that can be reduced to boost short-term earnings marks a real shift in thinking and can empower employees.


Anticipate threats Awareness of several types of threat were apparent in the directors’ accounts: the threat of becoming irrelevant to customers; the threat from competition; and the risk to personal reputation of an inadequate or, conversely, an extreme climate response. The threat of becoming irrelevant to


customers who expect a shift to sustainable banking was mentioned by many directors. There is a need to “be seen to lend to innovative projects” – “if you’re not seen to be in a position … on this, there will be customers and entities that won’t deal with you”. The threats from not adequately understanding risk in customers’ portfolios, from inadequate probing of the lending book, and from not catering to the different needs of customers were also mentioned. Having customers that are capable of transitioning to a low-carbon economy is associated with an active mindset and reflects the need for a transition in thinking away from a shareholder-centric focus, as advocated by Hurth and Kravatzky (2019). Regarding the threat from


competition, only one director discussed commissioning analysis of competitors’ climate response. Other


THE REVIEW SEPTEMBER 2022


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