Banks globally taking sustainability and ESG more seriously

25 March 2021 5 min. read

Banks around the world are charging on with their sustainability efforts, despite taking a significant financial hit from the Covid-19 crisis. A new Mazars report evaluates the global banking sector along various green metrics.

The pandemic-induced economic crisis flattened interest rates, dampened spending and pushed credit losses through the roof – all of which is set to cost the global banking sector trillions of dollars in the near future. 

Mazars studied sustainability and reporting practices at 37 banks across North America, Europe, Asia Pacific and Africa to see how the green agenda is faring amid these severe losses. The results show that 2020 and all its landmark events have only intensified the sustainability drive in finance. Mazars partner Leila Kamdem-Fotso offered an explanation.

Building sustainability driven culture and governance

“The financial world can no longer see its future as separate from the environment and climate change developments. In 2020 alone, natural hazards resulted in $210 billion of damages and the Bank of England estimates as much as $20 trillion of assets could be at risk from climate change.”

Indeed, climate change and environmental, social and governance (ESG) factors now stand a top the risk agenda, and banks are taking multidimensional action to adapt according to Mazars. The firm assessed banks based on the role of sustainability in: culture & governance, strategy, risk management, disclosure & reporting; and services & products.

The results are promising across the board. Mazars ran a similar survey last year, to find that less than half of banks were fostering a culture of sustainability and adapting their governance structure accordingly. This year, the figure stands at just under 75%.

Setting achievable log-term targets for sustainability

Measures to this end include training programmes, sustainability policies, and statements from the board on sustainability commitments – each being implemented by more than 80% of banks. And these statements are backed up by concrete sustainability targets the are specific, measurable, achievable, realistic and time-bound (SMART) in 70% of the cases.

Most targets are aligned with multilateral objectives such as the Sustainable Development Goals (SDGs) or the Paris Climate Agreement of 2015. Per the report, well over half of banks are piloting the Paris Agreement Capital Transition Assessment (PACTA) – a tool that measures the alignment of financial portfolios with stipulations in the Paris accord.

Integration of ESG and climate change in risk management

So sustainability efforts are being quantified through collaborative frameworks. Unfortunately, banks are struggling to find concrete systems that can measure climate risks. No doubt about commitment: nearly 90% of banks have produced an ESG policy at the very least, while more than half consider climate factors in broader risk management efforts.

Yet, less than a quarter can provide “quantitative data on the materiality of climate risks” according to the report. This select group has managed to crystallise clear indicators of environmental and social impact, while the rest struggle with a lack of measurable data.

Alignment with TCFD recommendations

Multilateral efforts have emerged here too, most notably the Taskforce on Climate-Related Financial Disclosures (TCFD) – a 2016 framework from the Financial Stability Board that lays out clear metrics on climate-related governance, strategy, risk management and targets. Nearly 80% of banks implement TCFD reporting standards.

That said, few have managed to match its recommendations. Just over half meet TCFD standards on governance, while around a third are up to the mark on risk management and targets. Strategy alignment with TCFD is even more woeful, hovering below 15%.

Breakdown of responsible banking products

Last on the list of Mazars’ criteria is responsible products, where corporate offerings are excelling but private customers still have few options. Nearly 80% of banks have green bonds in place for institutional investors and businesses, while sustainability bonds and green loans for individuals are only a reality at less than 40% of banks.

Regional breakdown 

All things considered, the Mazars study stretches across the globe, and distinct regional variations are visible across criteria. Sustainable culture and governance, for instance, is most prevalent in France and the UK, followed by the Americas. Other European countries, as well as banks in Africa and APAC lag way behind on this metric.

Regional breakdown of the sustainability focus in banking

A similar breakdown is visible across long-term sustainability targets; the presence of climate and ESG factors in risk-management frameworks; and alignment with ESG reporting standards. The only exception is Latin America – which tails off in performance across other metrics, while APAC banks do reasonably well along ESG-related reporting. Barring Latin America and Africa, well over 80% of banks across all regions now offer responsible services and products.

The numbers are promising, and Kamden-Fotso positions standardisation as critical to further progress. “Challenges remain, and our benchmark study reaffirms that strong sustainability practices often come hand-in-hand with consistent industry guidelines and requirements provided by local regulators and governments.