Responsible banking practices benchmark study finds progress on sustainable finance but full implementation remains work in progress

Tax, audit and advisory firm Mazars launched the 2021 edition of its annual Responsible banking practices benchmark study. „Climate risk and ESG risks are critical global and economic issues and need to be treated as such. Locally, there is an increasing awareness among banking institutions of the implications of climate change to the stability of the financial system and overall economy, however improvements are still to be done in respect of implementing measures that foster a culture of sustainability and adapt the governance structure, promoting products and services that support climate and environmental sustainability or consider climate and ESG risk factors into governance frameworks, risk assessment processes, reporting and overall business strategies.”, mentioned Răzvan Butucaru, Partner, Financial Services & Advisory Leader, Mazars Romania.

The global study assesses the sustainability practices of 37 of the world’s largest banks based in Europe, Africa, the Americas, Asia-Pacific. The analysis shows that the banking industry now widely acknowledges opportunities and risks relating to sustainability matters. However, full implementation of practices designed to achieve sustainability objectives remains a work in progress. 

Global findings: banks make notable progress on sustainability   

The global analysis shows that most banks assessed: 

1. Foster a culture of sustainability and allocate responsibility for this to senior management functions. On average, 74% of banks have implemented measures that foster a culture of sustainability and adapted their governance structure, compared to 49% last year. However, integration of Environmental, Social and Governance (ESG) skills in selecting board composition, and the measurement of ESG performance when setting remuneration, remain infrequent practices. 

2. Commit to SMART targets for sustainability, with climate-related targets the most prevalent. Methodologies for strategic alignment with the Paris Agreement have gained traction: some 51% of banks are piloting the PACTA (Paris Agreement Capital Transition Assessment) methodology to align their financial portfolios with the Paris Agreement objectives. However, this has yet to be reflected in banks’ official commitments to climate neutrality. 

3. Have risk management practices that are more advanced for climate risks than for broader ESG risks – with most building climate scenario analysis capabilities. However, the financial impact of climate change on banks remains challenging to measure due to a lack of quantitative information. Only 22% of banks provide quantitative data on the materiality of climate risks. 

4. Implement sustainability reporting standards, mostly focused on climate objectives, with CDP (Climate Disclosure Standards Board) and TCFD (Task Force on Climate-related Financial Disclosures) recommendations the most common. In terms of metrics and targets, GHG emissions are the most reported. A key reporting challenge remains Scope 3 GHG emissions; only 11% of banks disclose matters in relation to their financing activities. 

5. Have a corporate offering that is more mature than the offering for individuals, and climate and environmental products are more prevalent than economic and social products. For example, 78% of banks have developed a green bond offering, whereas only 32% have developed green products for individuals. Comparing banks’ offerings remains a challenge due to a lack of standardised reporting frameworks. 

Leila Kamdem-Fotso, Partner, Mazars says: “It is clear that banks are increasingly committed to making their practices more sustainable, and this has led to progress since our first study. The findings are encouraging, but they also reveal the work that remains to be done. Banks need to fully implement relevant practices, particularly in climate risk management and disclosures, if they are to meet sustainability objectives. One way of doing this is to improve methodologies and better quantify incurred climate-related impacts in their reporting. Positive developments in this area could allow banks to fully play their role in shaping a more sustainable future for the global economy.” 

Improvements across all areas: 2021 vs 2020

Comparing the recent results with our 2020 assessment, banks have made progress across all of the sustainable finance dimensions analysed:  

• The average percentage of banks developing a responsible product offering is now 82%, compared to 47% last year. 
• Banks that foster a culture of sustainability and have updated their governance structures accordingly is up by half (51%) while there is a similar increase (45%) in the percentage of banks that align their disclosures with ESG reporting standards.  
• There are clear lags in areas such as embedding ESG and climate criteria into risk management frameworks and implementing strategies for sustainability (22% and 20% increase, respectively). 

„The banking industry plays an important role in the proper functioning of economic and financial mechanisms, with an impact on macroeconomic developments and improving the degree of economic prosperity in Romania. Similar to the global plan, one of the challenges that banks have is to ensure, through responsible banking practices, the involvement in sustainable and enduring projects that can accelerate economic efficiency, social equity, and environmental preservation through risk management practices.", mentioned Florin Dănescu, Executive President of the Romanian Banking Association.