As a sector, banks struggle to get and maintain customer trust. The annual reports of the Royal Bank of Scotland/NatWest over the past decade have discussed the bank’s efforts to regain it. A photograph depicts large text over stairs stating: “Our future is not about us, it’s about our customers.”
Over the past decade or so, banks have been a leading sector in sustainability, or corporate responsibility reporting, seeing it as an important means of securing the best graduates and building trust. Some, such as HSBC, acknowledge that the biggest contribution they can make to sustainable development, and to address climate change, is through the activities they choose to finance. But what information do banks need to make decisions about which capital investment projects to fund, bearing in mind their troubled relationship with trust?
Trust in banks takes a battering when people believe they are making funding decisions that are not in the public interest. There have been examples of banks being boycotted and challenged in such cases. A high-profile example was bank support for Gunns, a company which was logging ancient forests in the Australian state of Tasmania. What the public took issue with was the impact of Gunns’s activities on the environment and community. Campaigns were launched in Australia and London against two of Australia’s big four banks financing the company. While the ethics of funding Gunns should have been obvious, there is a question around what type of corporate disclosure helps banks avoid reputational damage and loss of trust.
There are countless examples of companies not disclosing the negative impacts of their activities on society and the environment, and research has uncovered these hidden wrongdoings. The EU’s Corporate Sustainability Reporting Directive (CSRD) will mandate such disclosures. If these disclosures are to be trusted, there will need to be an assurance engagement that addresses the approach management takes to identifying their material impacts.
IFRS Foundation’s definition
The International Financial Reporting Standards (IFRS) Foundation’s trustees are redefining sustainability reporting as reporting on “enterprise value [from an] investor perspective”. However, the CSRD is a fundamentally different approach, including a focus on the impact of an organisation on sustainable development. This is something that banks must consider when making financing decisions if they are to avoid loss of trust, reputation damage and loss of revenue.
While the IFRS Foundation trustees have acknowledged increasing public concern about the impacts of organisations on sustainable development, they have not articulated a strategy to address this
In its most recent annual report, HSBC describes itself as a “recognised leader in sustainable finance”, noting its Euromoney award as the world’s best bank for sustainable finance. It is financing activities that support the UN Sustainable Development Goals (SDGs) and address climate change. However, it is not enough for HSBC to have excellent reports of its own activities that follow all the leading frameworks and standards — it must be confident that the companies it invests in have identified and accounted for all their material impacts on sustainable development, and have a strategy that incorporates sustainable development risks, opportunities and governance oversight thereof.
While the IFRS Foundation trustees have acknowledged increasing public concern about the impacts of organisations on sustainable development (citing biodiversity, water scarcity and pollution as examples), they have not articulated a strategy to address this. A focus on ‘enterprise value’ of the reporting organisation will not suffice.
The trustees noted in their feedback document, following their consultation paper on sustainability reporting, that “some respondents suggested the IFRS trustees consider anchoring the development of IFRS sustainability standards to the UN’s SDGs, while still ensuring a focus on the information needs of investors”. However, they have not addressed the question as to how this can be achieved if the investor perspective is considered as being about matters that are interpreted as relevant to enterprise value.
Investors have different views about what impacts on enterprise value and different time horizons, and banks setting out to fulfil net-zero or sustainable finance targets are concerned about trust. They are surely aware that lending to a project that has an unforeseen material negative impact on one of the SDGs — even while addressing another — could lose them that trust.
To facilitate achievement of the SDGs, mandatory reporting needs to cover the following:
- the material impacts of an organisation on sustainable development (performance and targets);
- sustainable development risks and opportunities;
- how sustainable development matters are incorporated into strategy and the business model; and
- other aspects of management approach and governance oversight.
The starting point for sustainability reporting needs to be engagement with a broad range of stakeholders to determine the material impacts of an organisation on sustainable development, as well as key sustainability risks and opportunities to the organisation. External assurance of that process is essential.
Carol Adams is a professor of accounting at Durham University Business School.
