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

 

February 09, 2022: Mazars, the international audit, tax and consulting firm, is launching the third edition of its annual study on responsible banking practices. The study benchmark global assessment of 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 banks assessed have shown 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.

To Pedro Jesus and Filipe Carvalho, respectively Partner and Associate Partner in the Audit & Assurance, Financial Services area at Mazars "The financial system has become aware of and recognizes its important role in the transition to a more sustainable future, aligned with shared development objectives. Faced with these new challenges and demands, the financial system seems increasingly committed to making environmental and social considerations critical pillars of its risk management structure, and its leadership is required to be efforts to support an economy that is not only more robust but also more balanced."

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

Global findings: banks make significant progress on their sustainable path

The global analysis shows that most banks:

1. Allocated formal responsibility for sustainability issues to their boards and management functions, with specific supervision processes. On average, 661 PT3T of banks now include sustainability criteria in variable remuneration, compared to 411 PT3T last year. However, only 331 PT3T of banks identify clear criteria linked to internal sustainability initiatives and financing activities.
2. It has identified environmental targets for its activities, but only 24% has established funded net zero emissions targets in line with the objectives of the Paris Agreement. 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 its exposure to climate change risk. 70% banks are developing scenario analyses and resources for testing climate change risks. stressHowever, data gaps are proving to be a challenge when it comes to assessing climate change risk. Only 19% of banks disclose, through credit or market risk metrics, how climate risk materializes.
4. It implements criteria for sustainability reporting, mainly focused on climate objectives. More and more countries are agreeing to make 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 there were 76%.

Progress made: 2021 vs 2020

Since evaluation carried out in 2020 - published in February 2021 - the 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 down the path of sustainability and contribute to neutral economies. Due to changes in the criteria:

• More banks have defined an ambitious, long-term sustainability strategy (76% against 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 decreased. 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% the previous year).

Phuong Gomard, Partner at MazarsIn a statement, he says 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 practices in governance, strategy, risk management and disclosure. 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 the way in ESG risk management, and beyond

French and British banks maintain their leadership in all the areas assessed, with the implementation of sustainability strategies being their strong point. Banks from both countries achieved the highest scores in 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 UK). The expectation is that with the mandatory "EBA Report on ESG risk management and supervision" the gap with French and British banks will narrow.

US banks perform well in ESG disclosures

Although 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 reporting 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 finance taxonomy, their regulatory and government initiatives on sustainability and climate change remain at an early stage of development.

Asia-Pacific banks lag behind in governance, and not only

There is one Australian bank, classified as a "leader", with a good performance when it comes to 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 enforced in 2021 will oblige 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.