An evolving sustainability governance landscape

28/01/2022 Banks have been steadily allocating formal responsibility for sustainability-related matters within their board and management functions and adopting specific oversight processes. However, those responsibilities and who is accountable can differ depending on the prevailing regulatory environment, geographic location or board and management’s preferences.

According to Mazars Responsible Banking Benchmark Study 2021*, although chief executive officers (CEOs) are often identified as accountable, 48% of European banks assessed in the study allocate this responsibility to their chief risk officers (CROs) demonstrating the prevalent risk-oriented approach from European regulators. In comparison, only 11% of non-European banks allocate responsibility for sustainability governance to the CRO.

New roles and responsibilities emerging

Increasingly, new roles, including chief sustainability officer (CSO) and head of climate risk, are seen as ways to address gaps at top management level. Reporting to the board, these new functions can play an integral role in developing the climate strategy, elevating sustainability and climate-related matters, and ensuring coordination and alignment of environmental and societal activities across the bank. While sustainability specific roles progress, we expect that more and more existing roles, such as CEO, CRO and CFO, will endorse sustainability-related responsibilities and will become accountable for sustainability matters in their scope of expertise.

A stronger link to remuneration 

This year’s study also identified that 66% of banks under review now include sustainability criteria in variable remuneration, compared to 41% last year. Nevertheless, only one-third of these banks identify clear criteria linked to both internal sustainability initiatives and financing activities. The other two-thirds have either integrated sustainability criteria into the remuneration framework but do not have detailed KPIs or only take internal sustainable initiatives into account, indicating there is further progress to be made. 

Banks can progress on this by aligning long-term remuneration incentives with performance against green financing objectives, net zero or carbon emissions reduction targets within portfolios. Some banks also use CSR targets, such as diversity and gender pay gap, ESG ratings and operational footprint reductions. However, these should not be the only criteria for evaluation as they would not make a significant impact in the transition to a lower carbon economy.

Culture is key

Banks with a robust sustainability culture foster awareness and demonstrate top-level commitment. This is generally reflected in corporate governance structures through board and management responsibilities, board composition and incentives that align with ESG delivery targets. In such an environment, expertise is often combined so that senior managers from public affairs, risk, finance, legal, operations and technology come together to address sustainability challenges.

As banks continue to address sustainability challenges through improved governance structures, we expect the quality and frequency of management information (MI) will supplement and strengthen ESG-related processes. Banks should further pursue their work linking remuneration frameworks with ESG performance, considering both sustainable initiatives and financial activities objectives.

* 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.