Former Manager, BSR
According to a 2016 study by the Brunswick Group, only 27 percent of Americans trust banks. It has been almost a decade since the financial crisis of 2008, and while the financial services sector has made progress, it is still in many ways working to earn back stakeholder trust. Sustainability efforts offer a major opportunity for banks to demonstrate their commitment to operating responsibly and making a positive impact.
Banks in particular play a major role in our economy, as they provide vast amounts of capital and have the ability to influence other companies and customers across sectors through their products and services. Yet the industry continues to be in the headlines for various environmental, social, and governance (ESG) issues, such as ethics violations or potential human rights implications of project finance decisions.
How has sustainability, or corporate responsibility, in banks changed since the crisis, especially in the context of the Paris Agreement, the Sustainable Development Goals (SDGs), and investor-focused and sustainability disclosure initiatives? What more could be done?
To explore these questions, BSR completed a short research study, assessing leading banks across the U.S. and Europe across a few key areas. Here are four of our key findings.
- Materiality assessments are being conducted to prioritize corporate responsibility issues but could be leveraged to play a greater role in internal engagement and sustainability strategy development. Banks can also more closely align their efforts with the SDGs.
While it is commonplace for banks to spend the time and resources to go through a formal materiality process and publish the results online, in many cases the process seems to be more of a ‘check-the-box’ exercise for reporting than a determinant of strategy and business activities.
The materiality process can be a powerful mechanism to engage and educate senior leaders and get valuable input from external stakeholders. There is a risk that the feedback it provides will be lost if it is not integrated into company strategy.
The SDGs haven’t yet played a major role in informing corporate responsibility priorities, although banks understand that the sector will play a critical role in achieving them. While all of the SDGs can be inspirational for organizations, focusing on those that align best with the business strategy and existing corporate responsibility priorities will likely be most impactful for the industry. As a first step, banks are mapping business activities to key SDGs. BNP Paribas has created a formal SDG metric, which measures the share of the bank’s loans to companies that contribute exclusively to the SDGs.
- Increasingly, banks are communicating major long-term sustainable financing commitments, which provide an opportunity to link products and services to corporate responsibility; however, they will increasingly need to be transparent about these initiatives.
Bank of America and Citigroup both have 10-year sustainable financing commitments of US$100 billion or more. While these big commitments create internal momentum and demonstrate both business and ESG value, the definitions of what qualifies for this type of funding and how impacts are measured likely varies across banks. Transparency about the methodology and criteria for funding and calculating impacts will help banks add credibility to these initiatives.
Additionally, creating a corporate strategy and mission linked to sustainability, such as ING’s purpose-driven Think Forward corporate strategy and Bank of America’s Responsible Growth strategy, is key in integrating efforts across the business. Our recent report, Redefining Sustainable Business: Management for a Rapidly Changing World, explores this and many other aspects of how to create a resilient business strategy.
- Banks can better establish and communicate focused ESG metrics and targets aligned to their identified material issues.
While banks are providing detailed ESG information in multiple reports and using the GRI standard, the key strategic metric and associated target that is often integrated with company performance results so far has been sustainable financing performance. Hopefully we will continue to see more, new ESG metrics integrated in standard company results, internally and externally.
Some banks, such as Barclays, have moved toward publishing an integrated annual report that includes ESG data. While doing this would seem to imply more streamlined reporting, these banks have still been producing supplemental reports to provide the additional detailed ESG disclosures that some stakeholders require.
- Governance structures continue to play a key role in engaging employees and driving corporate responsibility and business integration—executive ownership and engagement with the environmental and social risk management teams remain critical.
It is now common for banks to have board oversight over ESG issues, i.e. via a committee. Additionally, cross-functional senior executive committees and other internal councils (for example on sustainable products, human rights, etc.) are critical in integrating ESG across the business and engaging subject matter experts. While it requires more internal coordination, core sustainability teams at banks are seeing positive outcomes from these internal working groups and networks of ‘ESG champions’ dedicated to achieving ESG goals.
One area that needs more consideration is compensation tied to ESG performance. It is encouraging to see BNP Paribas link nine of its 13 corporate responsibility indicators to its variable incentive plan for its 5,000 top managers. More banks should embrace this type of approach.
While banks have clearly made progress in better integrating corporate responsibility, studies show that the industry reputation continues to suffer. There is an opportunity for the sector to do more to engage its leadership, employees, customers, and investors on the powerful role it can play in creating a more sustainable world. Doing so could go a long way toward rebuilding trust.