Sustainability reporting and trust in banks

As a sector banks struggle to get and maintain customer trust.  The annual reports of the Royal Bank of Scotland over the last decade discussed their 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 last decade or two 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 chose 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? 

What information do banks need to make decisions about which capital investment projects to fund bearing in mind their troubled relationship with trust? 

Trust matters

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 logging of ancient forests in Tasmania by a company called Gunns for woodchipping and sawmilling. What the public took issue with was the impact of Gunns’ activities on the environment and community. Campaigns were launched in Australia and London against two of Australia’s big four banks that financed Gunns.  Whilst 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. 

The media is full of examples of companies not disclosing the negative impacts of their activities on society and the environment and research has delved into hidden wrong doings. The EU’s Corporate Sustainability Reporting Directive will mandate such disclosures.  If these disclosures are to be trusted there will need to be an assurance engagement that addresses the approach management take to identifying their material impacts. 

In contrast to the EU approach, the IFRS Foundation Trustees are redefining “sustainability reporting” as reporting on “enterprise value” from “investor perspective”.  The EU’s fundamentally different approach includes a focus on the impact of an organisation on sustainable development.  This something that banks must consider when making financing decisions if they are to avoid loss of trust, reputation damage and loss of revenue. 

In their most recent annual report HSBC describe themselves as a “recognised leader in sustainable finance” noting their Euromoney awards as the World’s Best Bank for Sustainable Finance.  They are financing activities that support the UN Sustainable Development Goals and address climate change.  It is not enough for HSBC to have excellent reports of its own activities that follow all the leading frameworks and Standards.  They must be confident that the companies they invest in have identified and account for all their material impacts on sustainable development, have a strategy that incorporates sustainable development risks and opportunities and governance oversight thereof.  That is, if they take their commitment to sustainable finance seriously.

IFRS Foundation and sustainable development

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.  The Trustees noted in their Feedback document following their Consultation Paper on Sustainability Reporting that:  “… some respondents suggested the 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”.  They have not addressed the question as to how this can be achieved if the investor perspective is considered as being matters that are interpreted now 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. 

Trust and mandatory sustainability reporting requirements

To facilitate achievement of the SDGs, mandatory reporting needs to cover:

  • 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;
  • 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 and organisation on sustainable development and key sustainability risks and opportunities to the organisation.  External assurance of that process is essential.

This article was first published by The Banker

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