11/02/2022 Sustainability disclosure and reporting standards aim to foster transparency of banks’ environmental, societal and governance (ESG) risks, opportunities and impacts. Disclosures seek to explain the implications of ESG matters on banks’ business performance and risks, enhance portfolio transparency and overall exposure for external stakeholders, and describe how ESG is managed.
Yet while a lack of standardisation was previously a cause for slow progress, Mazars Responsible Banking Benchmark Study 2021 suggests methodologies and tools used to disclose and report on sustainability are beginning to show alignment. This trend is mainly supported by local regulatory developments which progressively require mandatory sustainability disclosures at legal operating entity and product level.
Alignment with sustainability disclosure regulations
Some 92% of banks reviewed now make disclosures that align with the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), compared to 76% last year. Notably, the fact that several governments are making TCFD reporting mandatory is having an impact. Indeed, UK, Brazilian as well as Australian Banks will have to comply with the TCFD framework by 2025 at the latest. Also, North American banks are performing well in disclosure as reporting under TCFD is anticipated to become mandatory in the near future. In May 2021, the Monetary Authority of Singapore issued a detailed implementation guide for climate-related disclosures by financial institutions, which sets out best practices aligned with the TCFD recommendations.
In Europe, the Sustainable Finance Disclosure Regulation (SFDR) entered into force in March 2021 and requires financial services firms to report on their sustainability governance, policies and impacts at entity level, as well as on sustainability-related products, regardless of whether they align or not with the EU Taxonomy Regulation. The actual application of these rules will materialise by 2023 and we therefore expect that EU Banks will further lead the way on sustainability-related disclosure in our next benchmark study.
Voluntary standards retain relevance
While we expect these developments on mandatory reporting to reduce the discrepancies between banks on their ESG reporting, voluntary sustainability reporting standards remain relevant2. For example, the Partnership for Carbon Accounting Financials (PCAF) standards are used by 43% of banks for disclosing greenhouse gas emissions (GHG) associated with their loans and investments. Also, 59% of banks use Sustainability Accounting Standards Board (SASB) disclosure measures, compared to 32% last year. In addition, CDP and Global Reporting Initiative (GRI) standards remain largely used by banks around the world.
Different metrics and tools used
Regarding metrics and tools used, financed emissions metrics are disclosed by 62% of banks, but methodologies differ, with 57% of those banks reporting on physical emissions and 52% referring to total GHG emissions. In addition, only 13% of banks currently use the Weighted Average Carbon Intensity (WACI) metric, which measures a portfolio’s exposure to carbon-intensive companies by revenue and has been applied to financial markets as the leading metric to assess the carbon exposure for a company or portfolio. Some 38% of banks reviewed still use no financed emissions metrics or do not disclose such information.
Engaging with leading industry and academic groups on common approaches can help tackle the challenge of reporting on climate change risk. Plus, implementing metrics and targets that combine generally accepted indicators specific to the bank’s business model can improve disclosure quality. Monitoring should include evaluating performance against climate objectives set, measuring Scope 1, 2 and 3 emissions, assessing energy consumption and other governance, social and environmental impacts.
As we move forward, banks should now evaluate their financed emissions in a more thorough and robust manner, focusing on their main income-generating activities and medium to high carbon-intensive portfolios and not only expand their sustainability reporting in line with regulations, but also with voluntary standards such as TCFD or PCAF.
1 The Mazars benchmark assesses the sustainability practices of a sample of 37 banks. We have focused our analysis on banks based in Africa, the Americas, Asia-Pacific and Europe. The banks selected are the largest in their respective geographies by total assets.
2 Based on 2021 GRI reporting made