Responsible banking practices must integrate ESG factors

International audit and advisory firm Mazars recently shared a global assessment of how banks are embedding sustainability into their commercial practices. The findings show that environmental, social and governance criteria (ESG) are not yet fully integrated into banks’ strategies around the world, and advise that more responsible banking practices can be achieved if banks make the criteria part of their risk management frameworks and measure this more effectively.

Presented in the report “Responsible banking practices: benchmark study 2020” (download here), the findings reveal just three out of the 30 banks assessed demonstrate best practice across a wide range of sustainability factors, with ten banks showing a sustainable approach across some factors and more than half (17) the number of banks showing limited evidence of a sustainable approach across most factors.

After assessing banks such as Barclays, BBVA, Citi, Credit Suisse, Santander, UBS, and Standard Bank, Mazars found no banks to be ‘outstanding’ – a scoring reserved for banks with a positive score in more than 90% of the criteria. Benchmark criteria included culture and governance, risk management, reporting, targets and more.

The report comes at a time when banks are reflecting on their purpose and values as the rise of social movements reshape how financial actors ensure what they invest in is not just environmentally sustainable but also socially inclusive.

The international assessment, undertaken by Mazars’ London office, focused on European banks and included African, Southeast Asian, and American banks for illustration purposes.

South Africa’s Standard Bank was included because it has “demonstrated a significant interest in sustainability by participating in the United Nations Environment Programme Finance Initiative and being a signatory to the Principles for Responsible Banking. It is also a good illustration of the current state of play of practices in the region because it is the leading bank in term of total assets,” said Leila Kamdem- Fotso, Partner at Mazars.

Although Mazars will not be revealing detail of each bank’s individual score, Standard Bank was found to have demonstrated a sustainable approach to four key criteria, including:

1. Embedding ESG responsibilities into its governance structure through measures such as its social and ethics committee, client and supplier risk committees;
2. Implementing ESG monitoring into its risk management framework;
3. Making disclosures according to sustainability reporting standards such as Global Reporting Initiative (GRI); and
4. Developing social and environmental products and services addressing its impacts (such as loans, investment and bonds).

“Covid-19 has reaffirmed the positive role the banking sector can play by working with governments and regulators to keep the economy going. These findings should remind banks that the crisis is an opportunity to look beyond immediate priorities, re-assess their purpose and values and use some of the best practice outlined in our report to truly embed ESG factors in their decision-making on investments for the good of the business, their clients and society,” said Kamdem-Fotso.

Partner for Advisory Services Mazars South Africa, Bongiwe Mbunge, says, “This report is an important industry benchmark for a relatively new – but extremely important – way of looking at corporate citizenship. Integrating ESG into one’s reporting may seem like a simple or obvious thing to do in today’s business world, but the report reminds us that the stark reality is that no bank is perfect in this regard – yet. There has been much progress made in recent years, but there is still a significant amount of work to do to ensure that ESG is truly at the heart of our banking system.”

BANKS STARTING TO FOCUS ON SOCIO-ECONOMIC ISSUES

The benchmark finds most banks have adopted or are implementing voluntary ESG reporting standards, but the majority (57%) have yet to fully integrate ESG factors into their Risk Management Framework using both qualitative and quantitative approaches.

Similarly, most banks support sustainability frameworks and have launched corporate social responsibility programmes but the definition and disclosure of sustainability targets is not yet common practice. And while all banks assessed offer environmentally responsible products, only 43% of them have developed a product offering that fully addresses socio-economic issues.

TARGETS AND INCENTIVES

The benchmark report finds that the introduction of explicit targets could help banks increase their ESG achievements. Only 27% have set specific and measurable socio-economic targets in line with sustainability frameworks. On the other hand, just 13% of the banks assessed have sustainability-related financial incentives for the board and top management.

A BROADER RANGE OF COMMITMENTS

The report cites recent examples of banks ensuring they meet societal goals. For example, Barclays is working to embed human rights considerations into its client due diligence process. Also, Citi will develop an environmental and social action plan as a condition of financing when there are gaps between international standards and a client’s environmental and social practices. The report also references Goldman Sachs (which was not one of the banks assessed) and who will now only advise companies on IPOs where there is at least one diverse board member as an example of increasing action on diversity.

ABOUT THE BENCHMARK

The analysis is based on 30 banks’ publicly available information only (2018/2019 CSR and annual reports.) Mazars used an assessment matrix that covered: culture and governance; risk management; disclosure and reporting standards; frameworks, initiatives and targets and products and services. The analysis is focused on European banks, with the inclusion of some Southeast Asian, African and America banks for illustration purposes. The banks selected have demonstrated a significant interest in sustainability by participating in the UNEP FI initiatives and/or being signatories to the Principles for Responsible Banking. Banks assessed include Barclays, BBVA, Citi, Credit Suisse, Santander, Standard Chartered and UBS. 

Read the full report and more below.  

Authored by Mazars Thought Leadership Teams