Banks have been warned that “greenwashing”—empty statements about the climate credentials of financial products—remains high on the agenda of regulators.
Banks are also alerted to concerns that differential loan terms offered to companies for green projects, or fulfilling green targets, are not attractive enough to incentivise the corporate world.
The red flag was offered by Polly Tsang, head of the ESG and financial services working party at accountancy body ICAEW, during a special panel discussion hosted in London by Board Agenda and board solutions firm Diligent to explore issues raised by banks coming to terms with ESG (environmental, social and governance) concerns.
Currently, banks will need to comply with demands in mandatory TCFD (Taskforce for Climate-related Financial Disclosures) reporting, new regulations coming from the EU and US, as well as fresh sustainability reporting requirements set out in a new version of the UK’s Corporate Governance Code.
“The overarching issue for regulators,” said Tsang, “particularly the Financial Conduct Authority (FCA) at the moment, is greenwashing.” She pointed out that the watchdog has written to banks saying that sustainability linked loans were under close observation.
“The FCA’s point,” she added, “is those rates are not big enough to make any difference. And, in a way, allowing companies to greenwash.”
Tsang said banks should be paying close attention to TCFD reporting requirements and publication of climate transition plans.
“They have targets but they [banks] don’t actually say how they’re going to reach those targets,” Tsang said.
Required reading
Iain Hamilton, associate director with the Law Debenture Group, warned boards could be suffering from a lack of boardroom skills in dealing with the wave of ESG regulation and reporting requirements now confronting banks.
“We find there are a lot of challenges, particularly for non-executive directors, to keep up to speed with what is happening.
“It’s very easy to say, ‘This is a requirement,’ and a lot of companies are ultimately putting it in the hands of the CEO to be responsible.
“But what you’re seeing…is a lot more emphasis on the board as a whole taking responsibility for some of the regulations that come through.
“And one of the risks there is it actually blurring the lines between non-executive and executive and how they manage some of these risks.”
Banks, particularly those with operations in the European Union, also face implementing a vast new piece of reporting regulation: the Corporate Sustainability Reporting Directive (CSRD). Rickesh Samani, director of ESG reporting and assurance at Deloitte, said banks were seeking advice on the appropriate data needed to satisfy rule makers, and the systems needed to produce it.
“We’re seeing a lot of clients say there is a lot to do just on the reporting side and, behind all that, they’re also embedding ESG into the organisation’s risk, products and services…and then also trying to meet all the ambitious targets, such as net zero by 2050.”
According to Richard Winder, head of sustainability at Handelsbanken in the UK, banks need to take a “holistic” approach to avoid superficial compliance with ESG regulation.
“If you take a holistic view, then you start to think about what the regulator is asking for in a different way. And that will drive you towards substantive planning and substantive solutions, even if…it is inevitably the case for some years to come that we’re building the plane as we’re flying it.”
ESG assurance
Currently, banks and companies are assessing the impact of new proposals on ESG reporting in the UK Corporate Governance Code.
Regulators at the Financial Reporting Council (FRC) are currently considering responses to proposals that annual reports set out “significant issues” considered by audit committees relating to narrative reporting, “including sustainability matters”. The new code also asks annual reports to describe any assurance conducted on ESG metrics and “other sustainability” topics.
Audit committees are newly tasked with overseeing the integrity of sustainability reporting.
Joining the panel, Emily Duncan, head of stakeholder engagement at the FRC, said the regulator wanted ESG to be part of a company’s strategy because it is a “significant risk”.
“If you’re not assessing ESG issues as part of your strategy, if it’s not embedded, it’s all pointless.”
However, Duncan said the code was issued on a “comply or explain” basis. “We don’t want tick box, we don’t want boilerplate. We don’t want to tell you how your company should do things. We just want you to display transparently for investors how you are doing things, and also to highlight best practice.”
Movement in the code and, in parallel, the introduction of other reporting measures, raises a key question for banks about how they organise their disclosure efforts.
Iain Hamilton underlined that the starting place for financial institutions would be a “materiality assessment”. He added good reporting would need two components: a description of how the issues being reported integrate into an organisation’s strategy, followed by a statement of how each issue is material to the organisation.
Tony Greenham, ESG director at the British Business Bank, said the bank’s own TCFD and UN Global Compact reporting exercise has “driven change in the organisation”.
“It sounds a bit counterintuitive, like the tail is wagging the dog, but our commitment to report has required that we are now on this journey to measure stuff that we weren’t measuring.
“As I try to explain to colleagues, the purpose of measuring is threefold: to better manage our risk; to help inform our strategy; and to report. And the first two are really the most important things.”
Making judgments about materiality will remain at the centre of ESG reporting, and there will be consideration of the “sensitivities” involved, not because some issues are bound to cause unanticipated shocks among stakeholders.
Risk and double materiality
A complicating factor will be banks meeting the demands of European legislation, the CSRD, which used a concept of “double materiality”: companies not only report on the impact of risks on their financial business models and strategies, but also the company’s impact on the environment and society.
“I’ll be very surprised,” said Rickesh Samani,” to see a bank saying only climate is at risk when most banks are people businesses. So we expect to see some social metrics and social areas defined as material.”
He added that banks would have to consult with a wider set of stakeholders to understand what could be material socially.
Banks in the UK untouched by the CSRD may face double materiality reporting expectations nevertheless. Tony Greenham pointed out that the “transition plans” required by TCFD reporting asks banks to report on how they are “contributing to economic change”. “That’s the double materiality point,” said Greenham. He adds: “It’s not expecting commercial firms to turn into charities, or anything like that. But it is making you think and articulate what the impact is.”
A key issue at the heart of any materiality judgment will be data gathering. For some issues—such as scope 3 emissions, those caused by indirect activities throughout the value chain—data gathering, particularly from clients, is notoriously difficult.
Richard Winder said it will require banks to collaborate among themselves and consult with representative client groups, particularly SMEs where data gathering is usually poor, on key questions, such as setting consistent data standards and how they can be facilitated.
In some ways, that returns the discussion to compliance and the difficulties involved. Emily Duncan, however, has a word of reassurance when it comes to addressing governance code requirements.
“It’s totally fair to say, ‘We can’t fully comply because we’re still working out some of this stuff. In a year’s time, we hope we’ll be in a much better position, but we’re not there yet’.
“That provides the information that an investor needs to know that this company is looking at it [ESG], they’ve considered it as a risk and they’re proactively going to work to change it.”
ESG reporting is still evolving. Though TCFD guidelines have been in play for some time, requirements from the EU are still to be cleared and the final version of the UK Corporate Governance Code is not expected until before Christmas, possibly even the new year. Banks remain on a journey. One thing certain, however, is that disclosing more on key ESG topics is here to stay.