Protesters from Extinction Rebellion descended on London's financial district in August to highlight the economic system's impact on climate change

David Creighton, journalist

A series of extreme weather and business disruption has hit hard across the globe throughout 2021. Coincidentally, earlier in the year, the European Commission (EC) invited asset manager BlackRock to produce a report on environmental, social and governance (ESG) factors at European banks.

Crucially, the study found, among other things, that banks must do more to address ESG issues in their approach to risk management. But many finance professionals are more optimistic about how the banks are faring, arguing that financial institutions are already making progress in addressing these existential risks.

ESG risks mean different things to different sectors, and in many ways even the companies within them

Europe steps forward

‘My perception is that ESG is quite advanced in Europe, compared to other parts in the world. I see an enormous interest among financial institutions,’ says Tjeerd Krumpelman, global head of advisory reporting and engagement at Dutch-based bank ABN AMRO.

Rachael Johnson, ACCA’s head of risk management and corporate governance, shares this view, noting that the European banking sector is among the most developed worldwide in adopting ESG.

‘The European Central Bank recently released a relatively comprehensive action plan in comparison to other central banks, with an ambitious roadmap to further incorporate climate change considerations into its policy framework,’ she explains. ‘Meanwhile, the European Commission is putting in sustainable corporate governance legislation for listed companies as part of its Green Deal.’

What is risk?

Among the key findings was that when integrating ESG factors into bank risk, the financial institutions surveyed were hampered by a common definition.

‘ESG risks mean different things to different sectors, and in many ways even the companies within them,’ says Johnson. 'That is why there is never going to be a one-size-fits-all solution or template for addressing them.'

‘This is a relatively new space,' says Krumpelman. 'I believe banks in general have a good sense of different ESG risks, and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures framework is supporting the development as well.’

The availability of good and reliable and granular data on ESG is definitely a challenge that needs further development

The EC study observed that most banks ‘mentioned that they have refined their governance to define ESG risk responsibilities at the board, executive or management level’. However, it noted that a small number have actually adopted an ‘explicit and comprehensive ESG risk strategy’.

Analysts also believe that banks are doing more. ‘I would say that almost all banks have some form of ESG strategy in place, says Krumpelman.

Data challenges

The report also highlighted that ‘data challenges and a lack of common standards continue to be seen as the most prevalent challenges facing banks and supervisors alike’. Although Krumpelman tends to agree with this finding, he is hopeful about progress. ‘The availability of good and reliable and granular data on ESG is definitely a challenge that needs further development,’ he says. ‘Standard setters are working on this, and I see more convergence in the market happening already.’

Finance professionals believe that ensuring good and reliable granular data is where they can provide invaluable support. ‘Accountancy professionals can come in to create the relevant key performance indicators and key risk indicators that matter most to their organisations,’ explains Johnson. ‘These will be key in analysing the risks and opportunities, and embedding them into all decision-making at the core of the organisation’s strategy.’

Johnson suggests that finance professionals can additionally play a monitoring role, observing how banks are fulfilling their responsibilities. ‘The question now should be about what banks are doing to ensure the integrity of their ESG disclosures and how they are assessing their stakeholders, such as borrowers and third parties, in proving that these entities are also progressing or not, and in getting them to meet the relevant ESG criteria,’ she says.

Such a monitoring role raises questions about the varying standards between different institutions. Johnson notes that controversy arose in the European Central Bank’s assessment of the banks’ climate-related risks and, from ACCA’s point of view, aligning it with other central bank models and internationally accepted standards. ‘Collaboration is therefore key,’ she says.

Better partnership

Collaboration between banks and the public sector is required, too. ​‘Public policy is critical, and that is why ACCA is working more with the public sector to help connect the dots and build more trust in society. We all have a role to play when it comes to preventing harm to people and the planet,’ notes Johnson.

‘We also need more collaboration between companies, governments, trade bodies and investors to combat global warming and inequalities. The UN’s Sustainable Development Goal 17 on collaboration is vital.’

Krumpelman concurs. ‘The EU and all member states have expressed high ambitions about ESG, which is definitely helpful in this space,’ he says, arguing that broad support for ESG exists among politicians and the wider business community.

And such support and collaboration are required more than ever before, as demands grow to decarbonise and as banks address the conflicting demands of investors and environmental activists. ‘The relevance of ESG will increase going forward, in my view, as the urgency increases,’ Krumpelman says. ‘Regulations will also play a key role.’

Further information

The study, Development of tools and mechanisms for the integration of ESG factors into the EU banking prudential framework and into banks' business strategies and investment policies, collected and aggregated data from stakeholders, including banks, supervisors, regulators, international organisations, civil society organisations and academics. The aim was ‘to enhance the understanding of ESG risks and their relevance within the financial system’ and consider ‘current practices for integrating environmental, social and governance (ESG) factors into the EU banking prudential framework as well as into banks’ risk management, business strategies and investment policies’.