09/09/2021 Developing innovative products and harmonised frameworks across banking activities is crucial to achieving sustainable finance objectives and contributing to global transition targets. Yet, a lack of standardised reporting frameworks means identifying and comparing sustainable products and services remains a challenge.
Most banks have a more mature corporate than retail green finance offering, according to the recent Mazars benchmark study, Responsible banking practices: benchmark study 2020. Some 78% of the banks assessed have developed a green bond offering, whereas only 32% have developed green products for individuals. Similarly, economic and social products were less prevalent across corporate and retail markets.
Overall, the comparability of offerings between banks is hampered by the lack of standardised reporting frameworks. Based on the percentage of banks assessed in the study, 95% use a different reporting format for product type and quantity.
French and UK banks lead the way
In Europe, French and UK banks are leading the development of responsible products and are also making headway in improving disclosures to give a clearer view of the type of products offered, targeted markets and the amounts provided.
While there is still room for improvement in climate scenario analysis for risk management purposes and disclosures, banks from both countries score highly on the alignment of disclosures with Environmental, Social and Governance (ESG) reporting standards and the integration of ESG risks in risk management frameworks, according to the study. This is consistent with how the Bank of England, the Banque de France and the European Central Bank are increasing their focus on these areas.
Regional initiatives set to improve climate risk management
The development of governmental initiatives, improvements in data availability and emergence of new risk management methodologies will make it easier for banks to take the necessary action to develop and report on sustainable finance objectives.
Notably, the implementation of European regulations, including the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR), will drive further improvement in the quality of disclosures in Europe. In the UK, the growing adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, along with climate stress testing in the UK in 2021 and in Europe in 2022, will encourage banks to better manage climate-related risks and bridge data gaps.
As for North America, the US re-joining the Paris Agreement, and the potential impacts this will have on local banking regulation and disclosure requirements, will likely reinforce sustainability practices on the continent.
Globally, as governments work on post Covid recovery and climate transition plans ahead of COP26 and COP15 in 2021, further financing opportunities will emerge. These should accelerate responsible product development and improve the quality of reporting across all geographies.
Aiming for a global sustainability standard
Having different reporting frameworks operating in parallel risks leading to different outcomes. However, the convergence work between the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), as well as the potential creation of a global sustainability standard by the International Financial Reporting Standards (IFRS) Foundation, should help improve the comparability of sustainability disclosures globally.
While a global sustainability standard remains work in progress, any efforts to standardise sustainability disclosures will improve transparency and ultimately foster the development of more sustainable products.