Sustainable integration of frontier AI in banking: A framework for emissions accounting and regulatory alignment

Abstract

This paper examines the integration of advanced (‘Frontier’) artificial intelligence’s (AI) carbon footprint into the risk management frameworks (RMFs) of the banking sector, emphasising its importance in aligning with net zero goals and regulatory requirements. As AI becomes increasingly central to banking operations, its energy-intensive processes contribute significantly to carbon emissions, posing environmental, regulatory and reputational risks. Regulatory frameworks such as the EU AI Act, Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and the Prudential Regulation Authority’s SS1/23 are driving banks to incorporate environmental considerations into their AI model governance. Recent advancements in AI research, such as the open mixture-of-experts (OLMoE) framework and the agentic retrieval-augmented generation (RAG) framework, offered more efficient and dynamic AI models, reducing their carbon footprint without compromising performance. Using these technological examples, this paper outlines a structured approach for banks to identify, assess and mitigate AI’s carbon footprint within their RMFs, including adopting energy-efficient models, utilising green cloud computing and implementing life cycle management. This paper also emphasises the importance of cross-departmental collaboration within banks and the use of respective enabling tools such as the greenhouse gas (GHG) Protocol Toolkit for carbon accounting and Fairlearn for AI fairness assessment. Building on the experts’ opinions, such as United Nations Environment Programme - Finance Initiative (UNEP FI), this paper argues that targeting alignment with global standards and directives such as the International Financial Reporting Standards (IFRS), the European Sustainability Reporting Standards (ESRS) and the Glasgow Financial Alliance for Net Zero (GFANZ), banks can enhance their sustainability reporting and model governance, ensuring long-term resilience. By effectively integrating these practices into their RMFs, banks can proactively navigate the regulatory landscape, mitigate environmental risks and promote a sustainable future in banking, balancing innovation with environmental responsibility. This article is included in The Business and Management Collection (https://hstalks.com/business/).