u've got mail

Feb 9, 2022

Mazars study reveals that banks have defined ambitious and long-term strategy for sustainability, but still have to work on governance and ESG disclosure

  • New study of 37 banks in Africa, the Americas, Asia-Pacific and Europe identifies best practices and trends in risk management associated with climate change and broader social and governance issues
  • More banks (vs 2020 study) are rated 'leaders' despite stricter assessment criteria to reflect improved practice and requirements
  • 25% more banks (vs 2020) now include sustainability criteria in variable remuneration (66% average in 2021 vs 41% in 2020)

 

February 09, 2022: Mazars, an international audit, tax and consultancy company, launches the third edition of its annual study on responsible banking practices. The study benchmarking global assesses the sustainability-related activities of 37 of the largest banks[1] of the world on all continents.

The 2021 report shows that most of the evaluated banks showed an interest in the topic of sustainability and have already made significant progress on this path, which has an increasingly important framework. However, the full implementation of relevant practices to achieve the transition to a neutral and socially responsible economy remains a challenge.

For, Pedro Jesus and Filipe Carvalho, respectively Partner and Associate Partner of the Audit & Assurance area, Financial Services at Mazars “The financial system has become aware of and recognizes its important role in the transition to a more sustainable future, in line with shared development goals. Faced with these new challenges and requirements, the financial system seems increasingly committed to making environmental and social considerations critical pillars of its risk management structure, requiring, from its leadership, a effort to support an economy that is not only more robust but more balanced.”

"To the stakeholders and more attentive decision-makers, a proactive approach to issues related to sustainability and social issues can increase an organization's competitive advantage, enhancing corporate reputation and its role in the financial ecosystem”, they conclude.

Global breakthroughs: banks make significant progress on their sustainable path

Global analysis shows that most banks:

  1. It allocated formal responsibility for sustainability issues to its directorates and management functions, with specific oversight processes. On average, 66% of banks started to include sustainability criteria in their variable remuneration, against 41% last year. However, only 33% of banks identify clear criteria linked to internal sustainability initiatives and financing activities.
  2. Identified environmental targets for their activities, but only 24% set net zero emissions financed targets in line with the Paris Agreement goals. The “Paris Agreement Capital Transition Assessment” (PACTA) methodology is also advancing in Europe, Australia and South America.
  3. It uses a variety of approaches to assess your exposure to climate change risk. 70% of banks are developing scenario analysis and testing capabilities stress, but data gaps prove to be a challenge for climate change risk assessment. Only 19% of banks disclose, through credit or market risk metrics, how climate risk materializes.
  4. Implements criteria for sustainability reporting, mainly focused on climate objectives. More and more countries admit making TCFD (Task Force on Climate-related Financial Disclosures) reports mandatory and around 92% of banks have already aligned their sustainability reports with the TCFD recommendations. Last year it was 76%.

Progress achieved: 2021 vs 2020

Since evaluation carried out in 2020 – published in February 2021 – criteria in all four areas assessed have been tightened. This adjustment not only better reflects progress in implementing sustainable practices, but also shows that there are still improvements to be made as banks continue the sustainability path and contribute to neutral economies. Due to changes in criteria:

  • More banks have defined an ambitious, long-term sustainability strategy (76% versus 71% last year). Banks also scored better in terms of risk management: 62% of banks integrate ESG and climate risks into their risk management framework. Last year it was 59%.
  • Scores related to governance and disclosure declined. Some 60% of banks have implemented measures to promote governance for sustainability, compared to 74% in 2021. 77% of banks align disclosure with ESG reporting standards (vs. 82% a year ago).

Phuong Gomard, Partner at Mazars, states that “banks are increasingly committed to making their activities more sustainable, and there is progress compared to our previous studies. The results are encouraging, but they also reveal the work that still needs to be done, especially in regions where ESG-related regulations and guidelines still need to be developed. We will continue our work to identify best governance, strategy, risk management and information disclosure practices. By providing financial institutions with exemplary procedures and recommendations, we hope to help them evolve towards a more sustainable and socially responsible business model and contribute to the transition to a neutral economy.”

French and British banks lead in ESG risk management, and beyond

French and British banks maintain leadership in all areas evaluated, with the implementation of sustainability strategies being their strong point. Banks in both countries achieved the highest scores on ESG risk management across all geographies. There is still room for improvement in the governance and disclosure mechanisms of European banks (excluding France and the United Kingdom). The expectation is that with the mandatory “EBA Report on management and supervision of ESG risks” the distance in relation to French and British banks will decrease.

US banks perform well on ESG disclosures

While US banks are still among the leading institutions, their progress compared to European peers has been negligible this year. US banks show a good performance in disclosure, as TCFD reports 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's ESG guidance, implemented in 2021, is expected to help banks evolve in this area.

South American banks stand out for their sustainability strategy

In terms of strategy, South American banks scored better than those in Asia-Pacific and Africa. However, given the absence of any sustainable financial taxonomy, its regulatory and government initiatives on sustainability and climate change remain at an early stage of development.

Asia-Pacific banks lag behind in governance, and beyond

There is one Australian bank, rated “Leader”, with a good performance in terms of governance and risk management. The region's overall scores show room for improvement in governance, risk management and disclosure. In China, the Green Finance Development Regulations applied in 2021 will require listed financial companies registered in Shenzhen to disclose information related to the environment from January 2023.

Click here to download the full report.

[1] The selected banks are the largest in their respective geographies, by total assets.

NEWSLETTER

LISBON
Rua Sampaio e Pina n.º 58, 2nd D
1070 - 250 Lisbon

© 2022 SayU Consulting