Banking is all about risk management these days, and increasingly the risk to the environment is part of the equation in loan decisions.

The focus of so-called green lending policies is slowly shifting. Rather than simply considering whether a prospective borrower's business contributes to climate change, banks are starting to turn their attention to making sure borrowers in a variety of industries account for how climate change could affect them.

"There really has to be a huge focus on adaptation," said Courtney Lowrance, director of environmental and social risk management at Citigroup. "Companies have to account for things like drought and extreme weather, and we've been doing a lot of portfolio analysis on water and water scarcity."

For instance, many industries such as energy, power and agribusiness are highly dependent on access to water, and there is good data that shows where water shortages exist, Lowrance said. Citi wants to know how a company plans to mitigate the risk should its access to water be restricted.

The issue of climate change is on the public stage at a time when banks are still trying to improve their image as good stewards of their communities. People want to know whether their actions aggravate or mitigate climate change, said Lauren Compere, managing director and director of shareholder engagement at Boston Common Asset Management, an activist investor that focuses on social and environmental responsibility.

"This is about whether or not financial companies are really factoring climate risk into their business, because with everything, you should follow the money," Compere said.

To their credit, Compere said, many large banks are stepping up. Of course, Boston Common would like to see more work done and is actively pushing several banks to disclose more about what they do, but progress is being made.

"Green banking has not [previously] been on the agenda the way it is today. What has changed frankly the appetite for risk – for unquantifiable risk," she said. "The industry has been asked to step and demonstrate that they are committed to looking at the long term. There is a really powerful role for them in financing a low carbon future."

Of course, that role is positive only if you believe that man-made forces are causing phenomena like extreme weather, drought and rising sea levels. There are also those who worry about corporations leaving money on the table to avoid making political enemies. Green banking initiatives need to be balanced with fiduciary duties to shareholders, they say.

"Clearly some of these decisions are just greenwash, with banks trying to find friends among greens at the expense of shareholders and businesses that are out of favor with Washington," said Mark Calabria, director of financial regulation studies at the Cato Institute. "I'm not willing to go as far as saying banks should have to lend to everyone the law and risk allows. But it should be board-driven."

While there are still climate-change skeptics, things like Pope Francis' encyclical, which was released in June, make the issue harder to dispute or at least to ignore.

"Ten years ago, senior bankers were climate skeptics. Today there are no climate change skeptics," said Matt Arnold, who joined JPMorgan Chase about four years ago as the head of environmental affairs. Prior to that, he was a partner in the sustainable business solutions division of PricewaterhouseCoopers. At JPM, his team focuses on three areas: lending, business development and thought leadership.

Valerie Smith, head of corporate sustainability at Citigroup, echoed Arnold. She joined Citi in 2004.

"It feels like a different world," Smith said. "There is sophistication now in the industry, and banks are considering the ramifications of climate change."

And while Arnold and Smith can reflect on the progress made during their tenure, other banks are continuing to add people to serve in similar roles for their institutions.

For instance, in January PNC Financial Services Group hired Kristy Murray as the environmental and social risk officer of its corporate and institutional banking division. Groups like Boston Common had been pressuring PNC to improve its environmental responsibility and Murray's hiring came a few months before the company announced it would stop funding mountaintop coal removal.

Murray said getting lenders to incorporate environmental risk factors into lending decisions will take time, but she is so far pleased.

The lenders "have been quite supportive; I think they know why it is important," Murray said. "And it is an ongoing discussion as we continue to look at stress tests and it is something that is going to take time to evolve."

For now, most of the efforts revolve around monitoring activity that can contribute to climate change. Mostly, that means anything involving the extraction of fossil fuels. While most large U.S. banks are reluctant to say there is a list of no-no industries, things like mountaintop coal removal, the production of palm oil and oil sands extraction are heavily scrutinized and many banks have taken a case-by-case approach but with a negative bias. In other words, they are more or less getting out of the businesses that are considered the most damaging.

Fracking, the process of using pressure to extract natural gas from rocks, is an area where banks tread carefully. On one hand, there are worries about what the process is doing to local water supplies. Still, others see natural gas as a fuel that helps the world transition out of its dependence on fossil fuels and are cautiously supportive of it, so long as it is done with care.

Arnold said in most cases, the companies are approaching the extraction the right way and he and his team will tell a customer when they feel their methods are out of bounds.

"Most of the time, we are comfortable with our risk assessment of fracking projects, but there are a few instances where we aren't," Arnold said.

Rather than a flat-out denial of a loan, however, Arnold encourages prospective borrowers to make changes to improve the environmental risk profile. "Instead of walking away, which we've done, we'd rather lean in and be a strong biz partner and help them determine best industry practices."

It typically works. Arnold said he couldn't think of a time where the borrower declined to make changes.

Of course, banks are also eyeing climate change as an opportunity to fund new green projects. Citi announced in February that it is committed to lending, investing in and otherwise financing $100 billion in green projects. It was a doubling-down for Citi — in 2007 it set a goal of financing $50 billion worth of green projects and it met that goal three years early in 2013.

Meanwhile, earlier this month JPMorgan was announced as the lead underwriter in a plan by the Central Puget Sound Regional Transit Authority in Seattle to sell $923 million in bonds to finance environmentally friendly projects.

Although the focus on climate aggravators and green projects will likely continue, factoring in the effects of climate change is the next frontier for green banking, said Lowrance at Citi. But the adaptation piece is going to take more time, she and Arnold said.

"Factoring in the risk of storm surges and droughts is slowly evolving; we are definitely looking at things like drought frequency and the risk of a drought," Arnold said. "But those kinds of impacts are much slower than the force removal of a mountaintop."

Longer-term issues, like rising sea levels that scientists say could one day leave vast swaths of cities underwater, are really not on the radar yet. For instance, the financing of coastal real estate is typically done on a three- to five-year horizon, so banks are not focused on something that could potentially happen decades from now. If the borrower can get the project insured, banks are likely willing to lend.

They ought to be thinking about it, though, said Kenneth LaRoe, chief executive of First GREEN Bank in Mount Dora, Fla., a small community bank that aims to incorporate green principles into everything it does.

LaRoe recounted a recent trip to Miami Beach, Fla., where local leaders were talking about the plan to add 80 new storm pumps to collect seawater from "sunny day floods" and pump it back into Biscayne Bay.

"It is a massive infrastructure undertaking, but is really just a good short-term fix," LaRoe said.

To LaRoe, the industry overall is not doing enough.

"I don't know if they've come along at all…someone is financing all the dirty-energy stuff," LaRoe said. He said his community banking brethren are noticeably absent in green banking, too.

"A lot of them tell me, 'I'm proud of you and what you're doing, Ken,' but there is no attempt to do it themselves," LaRoe said. "Attending the local Rotary Club meeting is their idea of giving back to the community."

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