How far along the journey to sustainability is the banking sector

The Sustainable Finance Index covers more than 800 banks worldwide. This initial analysis focuses on 68 banks in seven key European markets: France, Germany, Italy, the Netherlands, Spain, Switzerland and the UK. When it comes to green finance, this group includes some of the world’s most ambitious institutions – during 2020 alone, the 10 largest European banks made commitments to provide or arrange $1.48tn of green finance over the coming decade³.

Our analysis of this group reveals four key high-level findings:

1. Overall, European banks outperform their global banking peers across the world on disclosure rates across each of the three ESG components. Disclosure is a strong indicator of progress as it suggests that firms are acting to meet ESG goals, are willing for their efforts to be scrutinized and are committed to making further improvements. The 68 banks disclose against 60% of the Index’s parameters on average, compared with 48% for banks globally. Regulation and shared standards are a major driver of disclosure rates, with banks scoring particularly well in areas where regulation is at its clearest, such as data protection. European regulators’ focus on sustainability is one key reason for this outperformance. As global efforts to establish common frameworks continue, banks in other regions are likely to begin closing the gap with their European counterparts.
   
   
2. Larger banks tend to outperform their smaller rivals, even when the data is adjusted for scale. For instance, all 8 of the largest European banks (> $1tn in assets) have externally audited sustainability reports, but that falls to 52% among smaller banks (<$250bn in assets). Disclosure rates also vary widely depending on size. One example comes from Germany, where banks with assets above $250bn have an average disclosure rate of 70% while those below $250bn have a disclosure rate of 45%. The UK provides another case, with larger banks reporting against 72% of environmental parameters compared with just 25% among smaller banks. Even more telling is the fact that many smaller European banks are absent from the Index since they disclose no ESG-related data.
   
   
3. There are significant variations between European markets. On average, French banks score highest, with a consolidated disclosure rate of 75% and an ESG score of 6.6 out of a possible 10. In contrast, Swiss banks average a disclosure rate of 54% and a score of 4.9, and UK banks are mid-ranked with a consolidated disclosure rate of 62% and score of 5.6. However, the performance gap between larger and smaller banks mean that these figures only tell half the story. Among larger banks (those with over $250bn in assets), performance is much more closely aligned across our seven chosen markets. Average disclosure rates for this group fall within a tight range; UK banks come out top with an average 79% overall and even the lowest performer, Germany, has a rate of 70%.
   
   
4. Environmental, social and governance performance is far from consistent. Looking across the 68 banks in our selected markets we note that:
   
   • Environmental disclosure rates and ESG scores are the lowest of the three key ESG components, averaging 44% and 4.6 respectively. This may seem surprising given the level of public concern over climate change, but it reflects the persistent challenges around environmental disclosures. Examples of hard to quantify environmental themes for which the Index awards scores include emissions, energy efficiency, water usage, waste management and recycling. Even so, on average the 68 European banks in this dataset strongly outperform the global aggregate of 23%. French banks have the highest average environmental disclosure rate (75%) but among Europe’s 20 largest banks it’s the Italian banks that lead the field with an environmental disclosure rate of 83%.
     
     
   • Social disclosure rates are stronger than environmental ones. Disclosure rates for the 68 banks average 55% across the Index’s 66 social parameters, compared with a global figure of 40%. Once again there are significant national contrasts, but European performance is high by global standards reflecting strong performance in a number of areas including data protection, diversity and inclusion and fair business practices. French banks have the highest average disclosure rate (71%), but among larger firms it’s UK banks again that lead (75%); in contrast the large Dutch banks average 62%. Country variations are also evident across specific parameters. For example, scores for whistle-blower protection range from a “perfect 10” among Netherlands banks to an average of 4.3 for German banks.
     
     
   • Governance performance is the strongest ESG component, with an overall European disclosure rate of 70% compared with 65% worldwide. UK banks are global leaders in this area; even smaller UK banks have an average governance disclosure rate of 78%. This strong performance reflects regulatory efforts over several decades, with board effectiveness and independence, shareholder protection and transparency among the UK’s particular areas of strength. Not all markets are so consistent. For example, large Italian banks, which have a strong environmental score of 7.9, record an average governance score of just 6.2.

More granular analysis of the data in The Sustainable Finance Index highlights potential blind spots and areas for improvement. There are three specific areas where the Index shows that many European banks could accelerate their progress on sustainability.

1. Developing effective green products

One subset of the Index’s environmental parameters assesses the development of “green” products and solutions. The Index shows that this is an area where many European banks could do better. That might involve launching more green products, evaluating investments and collateral against environmental risks, or incorporating climate change and other environmental factors into risk management frameworks. French banks set the highest average score across our seven chosen markets. This is outperformed by large UK banks, which score a strong 9.5, however smaller UK banks score just 1.6.

For banks that need to improve, setting out a clear policy is the obvious starting point. But if green finance is to materially improve sustainability, banks need to design and promote products or services with material, measurable impacts on ESG factors. EY analysis shows that while most sustainable finance is designed to deliver tangible improvements, some of the 68 banks in this data set are applying this concept loosely – for example, to initiatives aimed at increasing the adoption of digital banking.

2. Going further on diversity & inclusion

On staffing matters, many European banks perform comparatively well across areas such as employee wellness and having clear policies on human rights. But there is a clear need for further progress on diversity and inclusion. 

On average, European banks have female board representation of 32%, but what is more concerning is that the diversity focus is limited in scope, with 14% of banks in the 7 market’s focused on not reporting gender diversity below board level. In addition, EY analysis of European banks reveals limited reporting of other forms of diversity such as ethnicity, sexual orientation or disability. There is clear scope for banks to do more to demonstrate that they are diverse and inclusive workplaces, by improving transparency and reporting levels.

3. Focusing more on supply chains

Suppliers, partners and other third parties have become a major focus of risk management and governance across every industry in recent years. In banking, the growing use of technology vendors has increased third-party risks around the use of personal data. Despite increased focus on mitigation, the Index identifies clear scope for many European banks to strengthen their supply chain policies. 

In the environmental arena, only 44% of banks across our seven chosen markets report that they conduct surveys of their suppliers’ environmental performance, and just 16% report or show readiness to end a partnership if environmental criteria were not met. Meanwhile just 21% of banks in this group set out policies focused on avoiding human rights breaches by contractors, a finding that compares unfavourably with disclosure rates in some developing banking markets, such as Brazil and Turkey. However, it is important to note that while not disclosed, this does not imply such policies are not in place, but flags that greater transparency and standardized reporting is required.

The Sustainable Finance Index shows that individual firms’ progress on sustainability typically follows a sequence of issue identification, policy setting, disclosure and standardization before consistent, meaningful reporting can be achieved. 

In 2020, increased investor expectations, sustainability-themed supervisory stress tests, the COP26 summit, the EU Action Plan on sustainable finance, the growth and strength of public opinion are all driving increased attention from management on sustainability. As a result of this, and the impact of new regulation and legislation, like the UK’s new plan to make TCFD disclosures mandatory by 2025, we expect Index scores for banks in Europe to improve this year.

However, this is an industry benchmark, and today’s high standards will be tomorrow’s minimum expectations. Financial institutions need to be watching the market leaders and setting ambitious strategies now to make sure they stay ahead of the curve. 

Will global initiatives such as WEF-IBC drive greater convergence between banks in Europe and those in the rest of the world? Will smaller banks make up ground on their larger rivals? Will insurers and asset managers perform better than banks? We look forward to finding out.