At a glance
- While financial institutions have made progress in upholding sustainability-linked standards, a sizeable knowledge gap still prevents them from reaching their full potential
- Regional discrepancies and the size of an institution play a role in defining the volume of the knowledge gap, as does resource allocation
- Data sharing and accountability are important tools that can help reduce the knowledge gap, while CSOs and CFOs can bring valuable expertise
Financial institutions globally play a pivotal role in helping shape a more sustainable future. But how confident are they in the progress they are making? A new sustainability practice stocktake published by international consulting group Mazars concludes that significant knowledge gaps persist and vary by region, institution type and size.
The study, which analysed data from a sample of 404 survey respondents, including 324 banks and 80 insurers, found that almost all banks and insurers (99%) have allocated responsibility for sustainability-related matters to members of senior management. Almost half of all respondents had also factored in sustainability considerations when “reassessing their business models”, and 53% revealed sustainability-related information through disclosures related to sustainable and ESG financial products.
But more than half (55%) of the firms surveyed acknowledged significant knowledge gaps across a range of sustainability issues, with the biggest gaps in socially related sustainability issues, including employee and human rights matters (62%), and assessing climate risk drivers (60%). Broken down by institution type, 64% of banks reported a significant knowledge gap in identifying and assessing socially related sustainability issues, compared to 56% of insurers.
Phuong Gomard, sustainable finance practice leader at Mazars, says that firms still find it hard to stay on top of regulatory changes, largely because of a gap in data accessibility. Some of the social metrics that Mazars considers when assessing a bank’s sustainability performance include its ability to cater to unbanked or underbanked individuals, their efforts to support small and medium-sized businesses, and how they value and empower their employees.
“What makes it difficult for banks to assess their performance is that there isn’t a set of standardised social metrics that is universally accepted,” says Ms Gomard, which makes it extremely difficult to compare performances. “The social impact is another thing that is difficult to assess because of the lack of data, as it requires sophisticated modelling techniques.”
Additionally, Ms Gomard points out that a firm’s inability to deal with sustainable matters can also hinder its ability to pinpoint core issues in its modus operandi and decision-making processes, while a lack of integration in its overall organisational structure may isolate social responsibility practices within specific teams or departments.
What dictates the size of the knowledge gap?
According to Mazars’ study, knowledge gaps vary depending on organisation size, with medium-sized banks reporting bigger knowledge gaps than larger ones. These areas span socially related sustainability issues, impact assessments of climate-related and environmental (C&E) factors on clients’ credit quality and collateral valuation, disclosures, integration of C&E factors into customer due diligence forms, and stress testing and scenario analysis.
“Bigger institutions have more resources that they can allocate to socially related sustainable matters and, with a greater number of customers, it is also important for them to preserve their reputational integrity,” Ms Gomard explains.
Location also plays an important role, with Africa and the Middle East (76%), Latin America (67%), Asia-Pacific (61%) and Europe (55%) all showing significant gaps in socially related sustainability issues. In the Asia-Pacific region, the largest knowledge gap involves clients’ credit quality (73%), and in North America, climate risk drivers (65%).
“The main reasons for different regional gaps are regulatory and stakeholder pressure,” says Ms Gomard. “For example, in Europe, there are a number of disclosure requirements that firms need to follow, and there are a multitude of social indicators that companies are required to abide by, which definitely pushes institutions to progress on this agenda,” she adds.
What can banks do to close the gap?
Transparency plays a pivotal role in changing the narrative around sustainable business and making data more available. According to Mazars’ study, only 54% of banks are willing to disclose sustainability-related information in conjunction with financial products, while 59% of them rely on external parties for verification of their sustainability-related disclosures.
According to the study, the main challenge for financial institutions in producing sustainability-related disclosures is caused by a lack of clarity around roles and responsibilities (77%), as well as the alignment of financial statements with climate-related disclosures (75%).
Ms Gomard says that social impact goes beyond words written in a report, and that regulators and customers alike now want to see more “tangible things” from financial institutions. “Targets and goals are important, but if there isn’t a plan to support them, they remain wishful thinking,” she says, adding that progress will be made when data becomes more readily available.
Additionally, the absence of a chief sustainability officer (CSO) can also cause a lack of sustainability-linked expertise. According to the report, a portion of banking institutions (42%) have entrusted the responsibility for sustainable matters to CSOs, while a large group of small and medium-sized firms (60%) have assigned this responsibility to their chief financial officer.
