Integrating AI's Carbon Footprint into Risk Management Frameworks: Strategies and Tools for Sustainable Compliance in Banking Sector

Abstract: This paper examines the integration of AI's carbon footprint into the risk management frameworks (RMFs) of the banking sector, emphasising its importance in aligning with sustainability 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, like the Open Mixture-of-Experts (OLMoE) framework and the Agentic RAG framework, offer more efficient and dynamic AI models, reducing their carbon footprint without compromising performance. Using these technological examples, the 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 lifecycle management.