Responsible banking practices

Mazars study reveals banks set a long-term, ambitious strategy for sustainability, but governance and ESG reporting remain work in progress.

• New study of 37 banks in Africa, the Americas, Asia-Pacific and Europe identifies best practice and trends in their management of climate change risk and broader social and governance issues 

• More banks (vs 2020 study) rank as ‘leaders’, despite tighter assessment criteria to reflect the improvement of the practice and requirements 

• 25% more banks (vs 2020) now include sustainability criteria in variable remuneration (average of 66% in 2021 vs 41% in 2020)

Mazars, the international audit, tax and advisory firm, launches the third edition of its annual Responsible banking practices benchmark study. The global study assesses the sustainability practices of 37 of the world’s largest banks¹ based across all continents.

The 2021 report shows that most banks assessed have demonstrated an interest in sustainability and have already advanced significantly in their sustainability journey by implementing relevant frameworks. However, full implementation of relevant practices to achieve the transition to a socially responsible and net zero economy remains an important challenge.

Phuong Gomard, Partner, Mazars says: Banks are increasingly committing to making their practices more sustainable, and this has led to progress since our previous studies. The findings are encouraging, but they also reveal the work that remains to be done, especially in regions where ESG-related regulations and guidance are yet to be developed. We will continue our work on identifying best practices relating to governance, strategy, risk management, and disclosure. By providing financial institutions with exemplary practices and recommendations, we hope to help them progress to a more sustainable and socially responsible business model and contribute to the transition to a net zero economy. 

Global findings: banks significantly advance in their sustainability journey  

The global analysis shows that most banks: 

1.Have allocated formal responsibility for sustainability-related matters within their board and management functions, with specific oversight processes. On average, 66% of banks now include sustainability criteria in variable remuneration, compared to 41% last year. However, only 33% of banks identify clear criteria linked to both internal sustainability initiatives and financing activities.

2.Identify environmental targets for their activities, but only 24% have set net zero financed emissions targets in line with the Paris Agreement objectives. The Paris Agreement Capital Transition Assessment (PACTA) methodology is also making progress in Europe, Australia, and South America.

3.Use a variety of approaches to assess their exposure to climate change risk. While 70% of banks are building scenario analysis and stress testing capabilities, gaps in data remain a challenge for assessing climate change risk. Only 19% of banks disclose on materiality of climate risk through credit or market risk metrics.

4.Implement sustainability reporting standards, mostly focused on climate objectives. More countries consider making TCFD reporting mandatory and some 92% of banks have already aligned their sustainability reporting with the TCFD recommendations, compared to 76% last year. 

Progress made: 2021 vs 2020 

Since the 2020 assessment – published in February 2021 – the criteria in all four areas assessed were tightened. This adjustment not only better reflects the progress made in implementing sustainability practices, but also in showing that progress remains to be made as banks continue on the pathway to sustainability and making a contribution to low carbon economies. Due to the changes in criteria:

• More banks have set a long-term and ambitious strategy for sustainability (76% compared to 71% last year). Better scores were also obtained by banks in relation to risk management: 62% xxx (add detail about the risk management point) compared to 59% last year.
• Governance- and reporting-related scores decreased. Some 60% of banks have implemented measures to foster a governance for sustainability, compared to 74% last year. 77% of banks align disclosure with ESG reporting standards (vs xx% in the previous year).

French and UK banks lead on ESG risk management and more

French and UK banks still hold the leading position in all fields assessed, with the implementation of sustainability strategies being their strongest point. Banks from both countries achieved the highest scores across all geographies in ESG risk management. There is still room for improvement for European banks’ (excluding FR/UK) governance and disclosure arrangements. They are expected to bridge the gap with French and UK banks thanks to the enforced ‘EBA Report on Management and Supervision of ESG risks’.

North American banks perform well on ESG disclosures 

Though North American banks still rank among the leading institutions, they did not make significant progress this year, in comparison to their European peers. North American banks are performing well in disclosure as reporting under TCFD may become mandatory in the near future. There is still room for better integration of ESG risks into risk management frameworks, but the New York Stock Exchange ESG Guidance enforced in 2021 is expected to help banks progress in this area.

South American banks stand out for sustainability strategy  

South American banks achieved a better score than Asia-Pacific and Africa on strategy. However, the local regulatory and governmental initiatives in sustainability and climate change remain at an early stage of development given the absence of any sustainable finance taxonomy.

Asia-Pacific banks fall behind on governance and more

One Australian bank is performing well with regards to governance and risk management and is ranked as a ‘leader’. Overall scores for the region show room for improvement on governance, risk management and disclosures. In China, the Green Finance Development Regulations enforced in 2021 will oblige listed financial companies registered in Shenzhen to disclose environmental-related information from January 2023. 

-The third edition of the Responsible banking practices study shows a significant development in efforts to implement an ESG strategy. This is a great achievement considering the fact that more stringent criteria were applied in our analysis for the assessment of practices and requirements. The survey results also indicate that the banks still face a lot of challenges and have work to do, in particular in the area of corporate governance and reporting. We observe a similar trend among the Polish banks which will face new regulatory requirements in this respect in the coming years – says Małgorzata Pek-Kocik, Partner responsible for financial institutions audit and advisory at Mazars in Poland.

Author:

Mazars

Last Updated on January 12, 2022 by Anastazja Lach