European banking sector not yet adequately integrating environmental and social risks and opportunities into operations
Large European banks are not yet sufficiently aware of the business risks deriving from environmental and social developments, such as climate change, water scarcity or sustainable production, according to a KPMG survey conducted with the support of WWF.Ready or not: An assessment of sustainability integration in the European banking sector also underlines how banks have an incomplete appreciation of how major environmental and social developments and trends create risks and opportunities for their corporate clients.
“Even if banks are aware of these developments, it is mostly regarding the potential consequences for their reputation’’ says Barend van Bergen, partner at KPMG Sustainability. “Many banks lack a broader view of the financial consequences of environmental and social issues, affecting their operations and corporate clients. This is disturbing, because the impacts of these megatrends on banks’ earnings will further increase in the coming years. In addition to that, demand for banks’ corporate responsibility is growing."
The study conducted by KPMG Sustainability with the support of WWF International among 12 large European banks shows that banks are adopting a quite narrow approach to sustainability issues, focusing on whether or not they want to finance certain activities.
“The study shows that the banking sector at large does not yet have an adequate strategic response to manage material business risks linked to environmental and social realities,” said Maria Boulos, Director of Corporate Engagement at WWF International.
“Developing such an approach is what is going to enable the banking sector to move from a reactive stance to a leadership role.”
Van Bergen highlights that the financial sector in general and banks in particular have always been very valuable to society. "Banks provide capital that enables business and create jobs. However, this contribution also has a downside. Over the years, banks also financed activities which affected the natural resources of the planet and had negative impact on people and society. We have recently experienced that a number of financial institutions have been significantly compromised for having caused destruction of capital, with sometimes serious consequences for society."
Banks need to more thoroughly evaluate the extent to which environment and social issues might cause financial risks for their clients and to how they might impact their financing needs.
“For instance, companies in the energy sector are facing growing financial risks as renewable energy is becoming more competitive,” said van Bergen. “This could have a significant impact on the creditworthiness of conventional energy companies. In addition, for many of these companies, switching to cleaner energy creates a need for substantial financing. Besides, with regard to credit facilities banks pay generally insufficient attention for the initiatives of companies aimed at improving the environment and the development of new markets, products and services.”
According to Barend van Bergen, the way banks deal with the environment and society also has a growing impact on the financial profit of the bank. "This means that transparency on the societal role of banks is also becoming increasingly important. For example, analysts and investors want to understand the risks that banks face with investments that may come under pressure, such as the funding of activities linked to child labor or other human rights violations. Besides that, they want to know what measures banks take to limit and manage these risks so they can make a sound judgment about the stability of the bank's long-term profitability. Hence, it is essential that banks report on the potential risks that their responsible behavior entails. "
For more detailed information:
Ready or not: An assessment of sustainability integration in the European banking sector can be downloaded from http://assets.panda.org/downloads/survey_wwf_banking_def.pdf
Manager Sustainability Advisory and lead author of report
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