Social factors such as diversity and inclusion (D&I), as well as ensuring customers have access to cash, could become important areas in bank credit analysis as new regulatory proposals are beefed up, according to a report by Scope Ratings.
The report, ‘European banking: social factors material for credit analysis as regulatory pressure mounts’, outlines regulatory efforts in the UK and the EU that could push social concerns up the list of banks’ reputational concerns, alongside environmental factors, and affect their operating models.
“So much focus has been on the ‘E’ in ESG [environmental, social and governance]. But attention is increasingly turning to social factors too, as they can also impact the long-term sustainability of banks,” says Pauline Lambert, executive director for financial institutions at Scope Ratings.
“Banks are very confidence-sensitive entities. A poor reputation can weigh on a banks’ credit profile. If a bank commits to net-zero emissions, for example, and does not follow through, this will be viewed negatively by customers and other stakeholders. Social commitments made by banks can also influence their reputation.”
Diversity and inclusion
In the UK, the Bank of England and the Financial Conduct Authority (FCA) are holding a consultation on improving D&I in the financial sector. The discussion paper suggests diversity could be incorporated among the threshold conditions that firms must meet to continue operating.
“These issues will become part of how the FCA regulates conduct in the UK financial sector, particularly around the treatment of customers,” Ms Lambert says.
The UK regulators have also proposed D&I metrics for diagnosing, tracking progress and measuring return on investment.
In the EU, authorities are also looking to improve diversity in the banking sector.
In June, the European Central Bank (ECB) launched a consultation on a revised and more comprehensive guide to fit and proper assessments, including additional considerations for assessing the suitability of bank boards, taking in gender diversity.
Diversity shortcomings are now included in governance assessments of the annual supervisory review and evaluation process. In the future, where targets are not met, the ECB will issue recommendations to remedy them and could require banks to comply.
“Regulators are giving these issues greater importance and banks will need to keep up with these changes in supervisory expectations,” Ms Lambert adds.
Access to cash
Financial accessibility concerns are also coming to the fore for governments, as banks continue to reduce their branch networks. In the UK, around 90% of neighbourhoods are within one kilometre of a free ATM and the government considers this an appropriate basis for setting initial geographic requirements to ensure reasonable access to withdrawal and deposit facilities.
Proposals under review include giving the FCA powers to enforce cash access requirements, including the ability to halt branch closures if necessary.
Governments are increasingly likely to realise that banks still need to provide a base level of cash access
In response, several leading banks are piloting shared bank hubs, providing counter services operated by the UK Post Office alongside face-to-face access to the largest local lenders on different weekdays.
“Banks have a unique role in society. We cannot view them as purely for-profit organisations because they are integral players in the economy. During the pandemic, banks were a key channel for governments to implement supportive fiscal measures,” Ms Lambert says.
“In this regard, they have a role to play to ensure cash is available as it remains important to many people. Banks in many countries are trying to reduce costs by downsizing their branch networks. But governments are increasingly likely to realise that banks still need to provide a base level of cash access.”
The discussions regarding access to cash in the UK follow developments in Sweden. Since January, Sweden’s six largest banks are required by law to provide cash withdrawal and deposit services throughout the country.
An ECB study, conducted in December 2020, highlighted the importance of access to cash for many people in Europe. Just under a third of people surveyed across the eurozone said having the option to pay with cash was ‘very important’, as did more than half of respondents in Germany and Austria.
Social taxonomy
The EU’s Taxonomy Regulation, which came into force in July 2020, has largely focused on environmental issues, but policymakers are recognising that work needs to be done to support the social aspects of the EU’s sustainable finance strategy, according to the Scope report.
In July, the European Commission also published a draft for a social taxonomy, acknowledging the need for investment in social sustainability, with a focus on promoting adequate living standards and meeting basic human needs.
The proposal also covers sustainable corporate governance and transparent and non-aggressive tax planning.
The social taxonomy will seek to identify socially sustainable sectors and activities, which may prove tricky in the absence of accepted definitions and measurements in the context of investment. ‘Social washing’ may, over time, become an even greater issue than greenwashing, the report warns.
“Companies will have to report on these social standards in the future and investment products labelled as sustainable will need to meet the requirements of the [social] taxonomy,” Ms Lambert adds.
In-depth insight into global regulation can be found in The Banker’s sister publication Global Risk Regulator.
