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Assessing the Sustainability practices of Banks – Mazars launches annual Study

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Much of the focus of the recent Davos Forum in Switzerland covered the topic of Sustainability practices amongst leading banks and financial services providers. The main speakers at the event included the CEOs of Bank of America and BlackRock to name but a few, many of them based out of the U.S.

Sustainability is a global issue though, and Europe traditionally has been a flag-bearer in this regard.

Yesterday a story surfaced about how the World Bank is involved in issuing the first nature-linked bonds.

The U.S., China, the UK and Germany are involved in the discussions on greening sovereign debt. Amid the rush by governments around the world to issue record levels of green bonds, one may have overlooked how Poland was one of the first to issue sovereign green notes back in 2016.

Closer to home, Mazars, the international tax, audit and advisory firm, has this week launched the 2021 edition of their annual Responsible Banking Practices Benchmarking Study. The global study assesses the sustainability practices of 37 of the world’s largest banks based in Europe, Africa, the Americas, Asia-Pacific.

Responsible Banking Practices Benchmarking Study

  • Banks in the UK are ahead culture, governance and embedding senior responsibility for sustainability
  • UK banks starting to lead the way on sustainability, helped by the UK regulatory framework
  • Most UK banks developing ambitious strategies to align targets with the Paris Agreement net-zero objective. 

UK takes a leading position

The findings show that most of the UK banks take a leading position on embedding culture and governance for sustainability as well as developing long term strategic commitments and responsible products.

Banks in the UK, which include Barclays, HSBC, Lloyds Bank, NatWest Group (RBS), and Standard Chartered, also score highly on the alignment of disclosures with ESG reporting standards and on the integration of ESG risks in risk management frameworks.  

According to the analysis, there is still room for improvement on disclosure and climate risk management, including increasing the use of scenario analysis.

Globally, the analysis shows that the banking industry now widely acknowledges opportunities and risks relating to sustainability matters. However, for all banks assessed, there is work still to be done. The full implementation of practices designed to achieve sustainability objectives remains a work in progress.

Virginie Mennesson, Mazars Head of Regulatory Affairs, said:  “It is clear that banks are increasingly committed to making their practices more sustainable, and this has led to some progress since our first study. UK banks are leading the way in many areas and we expect them to progress even more by the next reporting period, especially on climate scenario analysis and disclosures considering the Bank of England’s focus on these areas.”

The main findings from the study include:

  • Banks increasingly foster a culture of sustainability and allocate responsibility for this to senior management functions. In average, 74% of banks have now implemented measures that foster a culture of sustainability and the adaptation of their governance structure, compared to 49% last year. However, banks could further improve by taking into account ESG skills in selecting their board composition and measuring ESG performance when setting remuneration.
  • Most banks commit to SMART targets for sustainability, with climate-related targets the most prevalent. Methodologies for strategic alignment with the Paris Agreement have gained traction. Half (51%) of banks are piloting the Paris Agreement Capital Transition Assessment (PACTA) methodology to align their financial portfolios with the Paris Agreement objectives. However, this has yet to be reflected in banks’ official commitments to climate neutrality.
  • Due to current regulatory focus, risk management practices are more advanced for climate risks than for broader ESG risks, with most banks building climate scenario analysis capabilities. However only a fifth (21%) of banks provide quantitative information on the materiality of climate risks, making the financial impact of climate change on banks difficult to measure
  • Most banks implement sustainability reporting standards, with CDP and TCFD the most common relating to climate objectives. For banks disclosing under TCFD, the level of detail, especially with respect to banks’ strategy, metrics and targets remains low. In terms of metrics and targets, GHG emissions and climate risk metrics are the most reported. However, a key reporting challenge remains Scope 3 GHG emissions, where only a tenth (11%) of banks disclose in relation to their financing activities.
  • The corporate offering is more mature than the retail offering, and climate and environmental products more prevalent than economic and social products. Over three quarters (78%) of banks developed a green bond offering whereas only a third (32%) developed green products for customers. Overall, the comparability of offering between banks remains a challenge due to a lack of standardised reporting frameworks.

Improvements since last study

The research highlights progress in each of the sustainable finance dimensions Mazars assessed at the same time last year. The average number of banks developing a responsible product offering is now 82%, compared to 47% last year.

The number of banks that foster a culture of sustainability and which have updated their governance structures accordingly is up by half (51%) while there is a similar increase (45%) in the number of banks which now align their disclosures with ESG reporting standards.

This represents impressive progress, but there are still clear gaps in areas such as embedding ESG and climate criteria into risk management frameworks and implementing strategies for sustainability (22% and 20% increase respectively).

Bank of England’s role in the progress within the UK Banking sector

As was mentioned earlier in our story, there has been a significant increase in activities not only by the World Bank, but by Central Banks all over the world, and specifically the Bank of England.

We asked Virginie to tell us a little more about why the Bank of England has decided to champion sustainability:

“The Bank of England has taken a particular interest in pushing the regulatory agenda on sustainability under the leadership of Governor Carney and continues to do so. But other central banks and regulators worldwide are following suit, particularly on the issue of climate change, through initiatives such as the Network for Greening the Financial System – a forum for developing capability and sharing best practice among central banks and supervisory authorities in addressing the financial risks from climate change.”

“Our Mazars-OMFIF report: Tackling Climate Change: The role of Banking Supervision and Regulation, published in early 2020, showed that most central banks from advanced and emerging economies now identify climate change as a major threat to financial stability. This was not necessarily the case two years ago. So there is definitely some regulatory pressure on banks to make progress on this and on sustainability matters more broadly.

“However,  good progress is being made by banks in geographic areas where regulation could be deemed as not as advanced as the Bank of England’s. For example, we can see that in South America, on average 63% of banks are aligning their disclosures with ESG reporting standards.

“The Ouststanding and Leading banks in our benchmark also demonstrate genuinely innovative practices in terms of sustainability, for example innovation on some features of green bonds. It would therefore be somewhat reductive to solely attribute some banks’ progress to regulatory pressure. There will of course be commercial reasons for product innovation by banks as customers and clients increasingly ask for more sustainable products and competitors offer them.  Finally, some studies such as

“The Impact of Corporate Sustainability on Organizational Processes and Performance by Robert G. Eccles, Ioannis Ioannou, and George Serafeim have shown that ‘high sustainability companies significantly outperform their counterpart over the long term’:. So again, banks are most likely making progress for commercial reasons as well as regulatory ones.”

Glint pay gold exchange

Smaller Banks and Sustainability

While much of the study by Mazars focused on the ‘big’ banks, we asked Virginie to share a little more about how the business models of smaller banks have been able to amalgamate the need for sustainability:

“The sample of banks in our previous benchmark contained smaller banks. It showed that their implementation was somewhat slower than the larger banks’ and a proportion of them were in the follower category (57%).  

“Smaller banks will be subject to more resource constraints in terms of implementation. However, voluntary frameworks such as the UNEP-FI’s Principles for Responsible Banking, signed by a number of smaller banks, provide useful tools to impact assess a bank’s activities in terms of sustainability and recommend that targets set as a result should be proportionate to the bank’s impact.

“So there are ways in which a bank of a smaller size or more targeted business model can still make progress in implementation and many of them have implemented or are implementing dedicated governance structure to manage sustainability and / or climate-related risks with reporting at board level.“

The team at Mazars approach the topic of sustainability by helping stakeholders understand how climate topics are being implemented into the commercial practices of banks globally:

PACTA

The significance of the COP24 that took place in Katowice, Poland in 2018 is something that needs to be mentioned in more detail.

Back in 2018, Virginie reminds us, five leading global banks, namely BBVA, BNP Paribas, ING, Société Générale and Standard Chartered, all pledged to measure the climate alignment of their lending portfolios, and explore ways to progressively steer financial flows through their core lending towards the Paris Agreement’s goals.

They developed the Paris Agreement Capital Transition Assessment (PACTA) climate scenario analysis methodology for corporate lending portfolios, allowing users to measure the alignment of their lending portfolios to various climate scenarios. 

Since the Katowice Commitment, 12 other major banks from Europe, North and South America have joined the founding banks to help test and further improve the methodology, in a bid to expand its uptake across the banking sector.

Virginie continues: “One of the key findings of our benchmark is that regarding the sustainability targets set by the banks, a low proportion concerned their financed emissions (14%). This can be explained by the lack of tools and climate-related client data they could use to define and monitor their targets.

“The granular level of analysis provided by PACTA allows users to take concrete climate action based on the alignment or misalignment of the companies they finance. This methodology being free and open-source, any bank can test it and contribute to its improvement.

“It is a very good example to date of collaboration between banks, and this will be key to achieve a sustainable transition to low-carbon economy.”

Virginie concludes: “Banks are taking a turn towards sustainability. However, across the globe, it’s apparent that full implementation of relevant practices to reach sustainability objectives is yet to be achieved. Challenges remain, particularly in climate risk management and disclosures. Banks need to improve their methodologies to better quantify their incurred climate-related impacts in their next reporting.”

Supported by: Andy Samu

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About Mazars

Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, tax and legal services*. Operating in over 90 countries and territories around the world, we draw on the expertise of more than 42,000 professionals – 26,000+ in Mazars’ integrated partnership and 16,000+ via the Mazars North America Alliance – to assist clients of all sizes at every stage in their development.

*where permitted under applicable country laws.

For all national news and expert commentary, visit their website at www.mazars.co.uk

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