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Financial institutions and AI: Balancing innovation with environmental stewardship

Artificial intelligence (AI) is rapidly transforming the financial services industry. While AI offers remarkable opportunities for efficiency and innovation, it also presents significant environmental challenges.

20/03/2025 · 7 minute read

Artificial intelligence (AI) is rapidly transforming the financial services industry. While AI offers remarkable opportunities for efficiency and innovation, it also presents significant environmental challenges. Directors must confront these issues if they are to ensure sustainable business practices and uphold their environmental responsibilities to stakeholders.

Understanding the environmental impact of AI in financial services

The energy consumption associated with AI is one of the most pressing environmental concerns for financial institutions. Training sophisticated AI models, and operating the necessary data centres, both require substantial computational power. This leads to significant electricity usage. If this power comes from non-renewable energy sources, the resulting carbon footprint can be considerable. This, in turn, will exacerbate climate change and cause environmental degradation.

The lifecycle of the hardware used in AI operations raises further environmental issues:

  • The extraction of raw materials for servers and data storage devices can deplete natural resources and disrupt ecosystems.
  • The rapid pace of technological advancement often results in the improper disposal of outdated hardware. This contributes to the growing problem of electronic waste (e-waste), which can cause hazardous materials to leach into the environment.

A recent study showed that even a single AI response can consume significant resources. For instance, the study calculated that generating 100 words using AI can result in the use of up to three bottles’ worth of water in a data centre’s cooling system (source: The Washington Post). This finding underscores the broad scope of AI’s environmental implications.

The role of directors in managing environmental risks

As stewards of their organisations, the directors in financial institutions should play a pivotal role in managing the environmental risks associated with AI. Here are several strategies that can help directors navigate these challenges effectively:

  1. Conduct comprehensive risk assessments: Directors should initiate a thorough assessment of the environmental risks linked to AI initiatives within their institutions. This work should include an evaluation of energy consumption and resource usage. It should also assess compliance with environmental regulations, including frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainable Finance Disclosure Regulation (SFDR). Engaging sustainability experts can help with this process. Such consultants can provide valuable insights into potential risks and mitigation strategies.
  2. Adopt sustainable practices: Implementing sustainable practices within AI operations is essential. This can involve transitioning to energy-efficient hardware, optimising algorithms for lower energy consumption, and utilising renewable energy sources to power data centres. Where possible, directors should work with their AI suppliers to implement such practices. They should also champion sustainability initiatives within their own organisations.
  3. Establish clear governance frameworks: Developing a robust governance framework for AI usage is crucial. This framework should include policies and procedures for assessing the environmental impact of AI projects, ensuring compliance with regulations, and promoting transparency in the decision-making process.
  4. Engage stakeholders: Actively engaging with stakeholders on AI’s environmental impacts ­­can enhance trust and strengthen relationships. For example, transparency in reporting on AI's environmental impact demonstrates a commitment to sustainability and accountability. Stakeholders can include employees, customers and investors.
  5. Invest in research and development: Investing in research for the development of sustainable AI technologies can position financial institutions as leaders in environmental responsibility. Exploring innovative solutions that minimise environmental harm, while maximising the benefits of AI, can create a competitive advantage.
  6. Monitor and report progress: Regularly monitoring and reporting on the environmental impacts of AI initiatives is essential for accountability. Establishing key performance indicators (KPIs) to track progress will allow directors to make informed decisions based on data-driven insights.

Consequences of inaction for financial institutions

Failure to adequately address the environmental risks associated with AI can lead to significant repercussions for directors and their organisations:

  1. Legal and regulatory repercussions: Non-compliance with environmental regulations, including TCFD and SFDR requirements, can result in regulatory bodies imposing substantial fines and penalties. Directors may also face personal liability for legal claims arising from environmental harm or governance failures.
  2. Reputational damage: Neglecting environmental risks can erode trust among customers, investors and the public. Negative publicity can severely damage an organisation's reputation, leading to customer attrition and decreased market confidence.
  3. Financial consequences: Legal battles, regulatory fines and the need for remediation can incur significant financial costs. Additionally, poor performance in environmental responsibility can deter investment and negatively affect stock prices.
  4. Operational risks: Legal challenges and regulatory investigations can disrupt normal business operations, diverting resources and attention away from core activities. This can hinder an organisation's ability to innovate and compete effectively.
  5. Increased scrutiny from stakeholders: If they do not act and report on this issue, directors may face heightened scrutiny from stakeholders, including investors and advocacy groups. This may lead to demands for greater transparency and accountability regarding environmental practices.
  6. Long-term viability risks: Failing to address environmental risks can jeopardise the long-term viability of an organisation. As the global economy increasingly shifts towards sustainability, financial institutions that do not adapt may find themselves at a competitive disadvantage.

The importance of directors and officers Insurance for financial institutions

In light of the issues set out above, it is important to put directors and officers (D&O) Insurance in place. This insurance provides coverage for claims made against directors and officers for alleged wrongful acts in their capacity as leaders.

As directors implement sustainable practices and make decisions regarding AI usage, they may face scrutiny from stakeholders, regulatory bodies and the public. D&O Insurance can help protect directors by mitigating the financial impact of legal claims arising from their decisions, including those related to environmental compliance and governance failures.

Understanding your coverage

It is essential for directors to thoroughly understand their D&O coverage, particularly in relation to AI and environmental exposures. Many directors may assume that their existing policies provide adequate protection, but this is not always the case.

Directors should engage with their insurance brokers to review the specifics of their coverage, ensuring that it explicitly addresses the unique risks associated with AI and environmental responsibilities. This proactive approach should help prevent gaps in coverage that could leave directors and their organisations vulnerable to significant liabilities.

How Marsh can help financial institutions

Financial institutions should consider contacting Marsh to ensure that their D&O and Professional Indemnity (PI) Insurance policies are fit for purpose and provide the right protections. Marsh has extensive experience in risk management and insurance solutions. Our experts can therefore assess and review existing policies to identify any gaps. We can also recommend tailored coverage that addresses the unique environmental risks associated with AI.

By partnering with Marsh, financial institutions can benefit from expert guidance on how best to navigate the complexities of insurance. This will ensure that directors understand their coverage options and the importance of risk mitigation. This proactive approach safeguards against potential liabilities. It also reinforces the organisation's commitment to responsible governance.

Conclusion

As financial companies embrace the transformative potential of AI, it is imperative that directors take a proactive stance in addressing the environmental risks associated with its use. By implementing sustainable practices and fostering a culture of environmental responsibility, directors can protect their organisations from potential liabilities while contributing to a more sustainable future.

In an era where corporate responsibility is increasingly scrutinised, embracing environmental stewardship in AI operations is not just a regulatory obligation, it is also a strategic imperative that can enhance reputations, foster stakeholder trust and drive long-term success. By acting now and consulting with Marsh, financial institutions can ensure that the benefits of AI are realised in as sustainable a way as possible, and that their leadership teams are protected with the right insurance coverage.

Marsh financial services team

The focal point for the delivery of advisory, placement, and consulting services to the financial services sector.

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Meet our authors

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Martyn Redfern

Client Executive – Financial Institutions, FINPRO

  • United Kingdom

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