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Sustainability Governance Practices of the 30 largest Banks: ‘greening of the book the biggest challenge’

Many regulators expect banks to integrate sustainability risk within the core risk management framework and its key categories

Oil gas banking investments
London's Canary Wharf, the beating heart of the UK banking sector. Some banks are increasingly taking a different approach when it comes to oil and gas investments.

ESG Insight was sent a copy of a new report called ‘Governance of sustainability in the largest global banks: A study of the top 30 European and North American banks’.

The report examined the sustainability governance practices of the 30 largest European and North American banks.

Researchers at Morrow Sodali reviewed various publicly available documentation and also interviewed representatives from fifteen leading banks, including nine board chairs, other board members and senior executives.

Interviewees shed light on different practices, and why banks chose to pursue them.

The resulting Report compares the banks across several data points and analyzes these findings against a double index of sustainability and financial performance.

Discussing the report with ESG Insight, Stilpon Nestor, the leading author, explained that “sustainability is one of the big issues facing banks and their leadership.

“Shareholders and various stakeholders, including regulators, expect banks to be proactive in sustainability,” he added.

“On the strategy side, the “greening of the book” is the big challenge, especially in markets with big “brown” sectors.”

Stilpon Nestor

On the risk side, some regulators expect banks to integrate sustainability risk within the core risk management framework and its key categories, Nestor continued.

“They also expect a clear sustainability perspective in the risk appetite framework,” he stressed.

“In order to deliver in these areas, global banks have reshaped existing governance and organizational arrangements and have developed some new ones,” Nestor noted. “We came up with interesting, sometimes counterintuitive, findings.”

Board skills

Among these findings, the issue of board skills in relation to sustainability was highlighted.

All of the banks we interviewed do not see having sustainability experts on the board as a priority.

Their priority is to make their existing board members more cognizant in the sustainability area. In that sense, they emphasize the development of director skills.

How does a board structure itself to address sustainability? In many cases, this is done by setting up a new committee.

However, structure often reflects the level of maturity of the issues in a bank. One interesting finding of the Report is that banks further advanced in the “maturity spectrum” have done away with special committees and discuss sustainability as part of the general strategy and risk appetite.

Understanding sustainability

Another key finding relates to the role of management in ensuring all business functions strengthen their capabilities to understand sustainability.

This is an issue that touches upon all business areas of a bank, whether it is a corporate, retail or private bank, as well as risk, finance and internal audit functions.

That is why most global banks have created senior management committees to oversee this transversal work.

The seniority of the members of this committee is key. In 50% of the banks, the CEOs themselves are heading this senior coordinating committee.

Most banks have also included sustainability parameters in their executive remuneration approach.

Nestor concluded that in the best performing ones, sustainability considerations have a relatively significant “weight” among other factors in determining variable compensation.

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