sustainable banking

Sustainable Banking – Between Aspiration and Inconvenient Truth

The idea of sustainability has attracted exponential attention in the last decade. But in many sectors, the concept is sometimes reduced to an amalgamation of catchphrases and token gestures rather than real efforts to promote collective best interests and environmental protection. How can the banking industry pivot toward true sustainability and deal with the challenges that it faces along the way?

Sustainability is one of the many ideas that have enjoyed exponential attention in the last decade. Corporate Social Responsibility (CSR), Sustainable Development Goals (SDGs), Environmental, Social, Governance Approach (ESG), Triple Bottom Line (People, Planet, Profit), plus thousands of reporting standards: An endless list of catchphrases and prospective corporate values has been devised to guide businesses and industries towards promoting collective best interests and environmental protection.

On everybody’s radar, from politicians and futurists to corporatists, environmentalists, NGOs, scientists, and human rights activists, sustainability is still a broad, loosely defined concept, a buzzword or an alphabet soup of acronym-heavy measurement and reporting standards that gained momentum once climate change became a globally recognized issue.

Despite the lack of a shared understanding and commonly agreed standards regarding this concept, publicly listed companies with over 500 employees or €40 million turnover must disclose annual sustainability reports showing their performance concerning environmental, social, and corporate governance goals.

Lately, an increasing concern from the investors’ side has led to even more criteria and evaluation models. Currently, the sustainability reporting system is very fragmented, with 307 reporting instruments that are mandatory and 230 that can be applied voluntarily under the so-called “comply or explain the approach.” The UK is leading in terms of the number of provisions, followed by Spain and Colombia.

sustainable banking
Figure 1: Number of reporting provisions in 20 countries and EU (Source: Carrots&Sticks, 2021)

Organizations that must comply with these regulations are state-owned companies, large corporations, and publicly listed companies. This situation raises numerous challenges for businesses in general and requires them to invest a huge amount of resources into gathering data, agreeing on materiality topics and targets, and working towards their implementation. These obligations are even more complex for multinational companies that must meet the reporting requirements of different countries.

How does the banking sector keep up?

An analysis published on Statista regarding sustainability reporting on a global level in 2020 shows that the financial and banking sector ranks fifth in terms of disclosures regarding ESG targets. However, a more detailed report conducted by KPMG shows that only 57% of the companies in this sector disclose carbon reduction targets, which is significantly less than in other industries such as Automotive (80%), Mining (72%), Oil and Gas (69%), and others.

Figure 2: Sustainability reporting rate worldwide, 2020 (Source: Statista)

A benchmark analysis conducted by KPMG and published in July 2022 points out that the nature and extent of climate-related disclosures in the banking sector is currently minimal. Most institutions in this sector approach sustainability-related issues from a risk perspective, trying to mitigate any issues that might prevent them from achieving their business targets. Acknowledging the impact climate-related risks have on their credit operations, reputation, image, and compliance makes banks more inclined to address them.

A global research project undertaken by East & Partners ranked the most important providers of banking services based on perceptions regarding their sustainability. According to the study, BNP Paribas was perceived as the best “Stand out” ESG/Sustainable Finance provider globally, followed by Standard Chartered, Citi, HSBC, JPMorgan, Barclays, and BAML/Bank of America.

What actions could banks undertake to achieve sustainability goals?

Various organizations state that the general hallmarks of sustainable banking should include transparent operations and policies, community support, as well as bank policies and products that favor and promote responsibility in the production and distribution of goods and services.

The Initiative for Responsible Investment, an applied research center at Harvard University’s Kennedy School, has gone a step further and defined a series of Key Performance Indicators for sustainability in the banking sector, taking into consideration factors such as the percentage of investments evaluated for climate change risk, the percentage of branches located in low- and moderate-income communities, gender distribution and minority inclusion at board level and senior management, and CO2e emissions in kg per square foot, to name just a few metrics. GRI (The Global Reporting Initiative) is another international independent standards organization that advocates for transparency in sustainability reporting and makes available specific standards for each industry.

“Profit at all costs ceases to be the primary objective of sustainable banking. While a healthy bottom line continues to be a goal, other objectives that will encompass environmental and social criteria start being significant considerations in selecting investments and formulating policies.”, an aggregator of financial services

In practice, banks can “mix and match” various standards and apply those that match their own goals and interests. For example, UBS, a multinational investment bank and financial services company founded and based in Switzerland, plans to release 100 green, social, or sustainability-linked bond mandates in 2022, initiate a task force to research climate-related financial disclosures recommendations and direct US$175 million towards philanthropy projects. By 2025, it aims to invest US$400 billion in assets in sustainable investments and adapt its operations to achieve zero energy emissions.

However, a sustainability benchmark in this sector is difficult to achieve, given the myriad of evaluators and analysts. Depending on which instance performs the evaluation, the same company can rank differently, making benchmarking challenging to follow.

The bottom line

Even though significant progress has been made in terms of defining sustainability goals and raising awareness around this issue at the consumer, business, and governmental levels, there is still a long way to go until this goal is implemented according to its true meaning. Changes in mentality, banking values, and operations could propel sustainability from a simple PR exercise to a core value within the organization. However, most of the current efforts in this direction strive to recast actions that are already being performed to reduce risk, maximize profit, and improve company performance as efforts aimed at meeting sustainability and CSR goals.

Rishi Bhattacharya, CEO of the communications consultancy Impact & Influence, explains: “Many banks are in a ‘place race’ when it comes to showcasing their ESG credentials and expertise, through marketing and communications, but also through their actions.” Therefore, the greatest danger comes from the fact that, because it is so loosely defined, sustainability measures in the banking industry can be easily touted and marketed, even if they are not carried out properly.

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Catalina Sparleanu

Working with top experts to identify how the latest innovations and disruptive technologies will impact businesses, industries, and society. I have an academic background in social science (Ph.D. in Sociology), an MBA degree, and experience in private companies and NGOs.

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