To further rebuild stakeholder confidence, financial institutions may need to broaden their governance and disclosure policies.
William (Bill) Murphy
Advisory Partner and National Leader, Climate Change & Sustainability Services
Senior Manager, Climate Change & Sustainability Services
Although the worst of the global financial crisis is past, its legacy continues to place new demands on financial institutions around the world.
Decreased customer and stakeholder loyalty has been one of the prime ripple effects. A 2010 survey by AllixPartners showed a nearly 36% increase in customer distrust of banks between 2008 and 2009. This trend, although perhaps more muted in Canada, is not without its consequences. The same survey showed that a full 33% are changing their investment behaviour and 31% are changing their current banking relationship.
These trends indicate that financial institutions face growing challenges in rebuilding stakeholder confidence and restoring customer loyalty. Gone are the days when stakeholders believed that financial reports alone could tell a complete story about enterprise performance. Today, investors and customers expect more comprehensive management of, and broader disclosure of results related to, a full range of both economic and sustainability-related issues including ethics, corporate governance, risk management and environmental performance.
The Need for More Comprehensive Initiatives
Given the increased expectation of transparency and responsible business practices, many financial institutions are realizing the value of integrating the principles of corporate responsibility and sustainability into core business activities. Responsibility programs traditionally founded in philanthropic commitments are now extending far beyond donation and sponsorship based activities, and are helping drive service excellence and innovation that reflects the changing demands of customers.
Innovative financial institutions are introducing new products, services and programs specifically geared towards advancing sustainability, such as paperless accounts and loans for solar homes. Moreover, new investment and lending policies that demonstrate adherence to sustainable practices are becoming more common—even when this means re-examining historical investments. The rationale for these changes stems from societal pressures, but can contribute to both sustainable growth and improved business performance.
The Rewards: Pursuing Mutual Benefit
Companies cannot create a sustainable enterprise and build social capital overnight. Yet, organizations that commit to sustainable business practices typically find that the rewards outweigh the risks and costs. Organizations taking sustainability into account when making strategic decisions often uncover new stores of innovation that position them to access new markets, introduce new products and services, and reduce costs.
Canada’s financial institutions are beginning to benefit in similar ways. For example, financial institutions that capitalize on emerging emissions trading schemes and carbon funds can create new service revenue streams. Likewise, financial institutions that adopt innovative lending practices supporting marginalized communities and populations with limited access to financial services tap underserved markets. Cost reduction is possible through enhancing resource efficiencies, rationalizing assets and suppliers and reducing waste. Sustainable business practices also improve risk management by broadening regulatory compliance and ensuring business partners and suppliers adhere to minimum environmental and safety standards. A competitive advantage can be realized by incorporating ethical and sustainable evaluation criteria into investment analysis and decision-making processes.
In order to drive these types of organizational change, financial institutions are paying increasing attention to the information and tools available to guide strategic decision making.
Voluntary Disclosure, Regulatory Compliance and Risk Management
In an environment of increased stakeholder interest in non-traditional performance measures, the activities encompassed by sustainability reporting are on the rise. Voluntary initiatives—like the UN Global Compact and the Carbon Disclosure Project —require signatories to disclose their performance across a wide range of categories. Other initiatives focus specifically on financial industry practices, such as the UN Principles for Responsible Investment and The Equator Principles, which encourage institutional investors to adhere to key principles designed to minimize the negative effects that environmental, social and corporate governance issues can have on investment portfolio performance.
While many of these sustainability reporting frameworks remain voluntary, their adoption is growing and the tide is turning. In countries such as Denmark, France and South Africa, publicly listed companies are already required to report comprehensive sustainability information. While there are no similar requirements in Canada, the Canadian Securities Administrators (CSA) released guidance in October 2010 designed to help report issuers understand their existing environmental disclosure requirements. A global drive towards an integrated framework for financial and sustainability reporting by public companies is well underway.
In the meantime, private and institutional investors are increasingly relying on voluntary environmental, social and governance disclosures when making investment decisions. This is compelling companies in the capital markets to step up their commitment to sustainability reporting, and work towards continuous performance improvement.
Enhanced Reporting Practices
Financial institutions are recognizing the need to implement well-controlled information systems and monitor their sustainability initiatives in a way that allows them to report on their progress in a timely, comprehensive and credible manner. Equally importantly, they are beginning to use this information to enhance management decision making.
This may explain why sustainability reporting—which has long been the domain of environmental, health and safety, and even marketing departments—is increasingly coming under the purview of the CFO. This trend is set to expand as rating agencies and investors increasingly incorporate sustainability measures and disclosures in their financial decision-making.
Making this transition to expanded non-traditional management information and public disclosures is no easy task, but there are initiatives that lead the way. The Global Reporting Initiative (GRI), for instance, provides Financial Services Sector specific guidance for the disclosure of economic, social and environmental information.
To achieve a GRI A level declaration—indicating the highest level of transparency—a financial institution’s sustainability report must follow the guidelines set out in the GRI Financial Services Sector Supplement. Financial institutions declaring a ”+” after their declaration level must have had the report assured by an independent third party, using a systematic process that allows the assurance provider to draw conclusions on the veracity of the report and its data and claims. Most major Canadian banks declared a GRI C level in their 2009 reports, implying that not all indicators were included nor third party assurance obtained. None have yet achieved A+ level status—the benchmark reporting level established by a select group of their international counterparts.
GRI Reporting Levels: A Sustainability Blind Spot for Financial Services?
The financial sector has taken up the sustainability challenge; offering new “green” products, and financing and occupying LEED-certified buildings. But are these efforts enough to project a “sustainable brand”? Research into GRI reporting across all sectors of Canadian economic sectors shows that multiple Canadian companies are reporting at Level A, while the majority of the Canadian financial sector reports at Level C. Although formal sustainability performance reporting at any level is a sound step toward strengthening stakeholder confidence, higher levels of disclosure would further help financial institutions credibly build their reputations as “sustainable” organizations.
Global Reporting Initiative (GRI) Financial Services Sector Supplement (FSSS)
The GRI FSSS was created through a multi-stakeholder process which included the broad global participation of industry, academics and NGO’s, among others. The FSSS provides additional interpretation of the existing cross-industry GRI G3 guidelines and indicator content, and also introduces a number of new sector-specific performance indicators. The FSSS was created to ensure that sustainability reports produced by financial services companies address all key sector issues.
In the FSSS, the coverage of the G3 guidelines is expanded in the areas of:
- Product portfolio
- Active ownership
- Economic performance
- Emissions, effluents and waste
- Investment and procurement practices
- Product and service labelling
Adopting Sustainability Reporting Best Practices
Canadian banks will need to further evolve their approach to sustainability reporting to remain competitive on the global stage. To achieve this goal, financial institutions must:
- Determine materiality in the context of sustainability reporting. As this concept is broader than financial statement materiality, financial institutions need to consider whether issues like brand management, stakeholder engagement, supplier standards and climate change risks require inclusion in ongoing sustainability disclosures.
- Strengthen their reporting processes and controls by expanding their enterprise risk assessments, business practices, information systems and internal controls to address sustainability issues.
- Ensure that independent third parties can assure the accuracy of information included in their sustainability reports.
- Continually adopt innovative corporate responsibility practices that enable them to create value—both for the enterprise in particular and for society in general.
Ultimately, financial institutions that best understand how their operations affect society and in turn work towards building stronger communities, while minimizing their direct and indirect impact on the environment, will be those best positioned to expand their market share in the years to come.