How banks and insurers have progressed in embedding sustainability into their businesses

Tue 27 Feb 2024

In late 2023, and to coincide with COP 28, Mazars published its latest Sustainability practices survey on the progress banks and insurers have made in embedding sustainability into their businesses, our most comprehensive and information-rich report to date covering 404 executives in banks and insurance companies in 16 countries

Despite sustainability being in the limelight and financial institutions making considerable progress since our last survey in 2021, substantial sustainability-related challenges still exist. Banks and insurers still struggle to i) comprehend fully how sustainability factors might affect them; and ii) establish reliable metrics to set targets and monitor progress.

We are still at an early stage in the roll-out of sustainability regulatory requirements and supervisory oversight of sustainability-related risks in banks and insurers. This provides financial institutions with time for improvements to be made, particularly concerning how governance and risk disclosures inform and impact a credible sustainability strategy.

Addressing sustainability questions should now be an integral part of banks’ and insurers’ operational frameworks. This is because sustainability factors impact the conventional credit and underwriting risks banking and insurance activities are exposed to, and thus potential market values.

Our key findings

This article summarises five key findings from the survey: i) how are financial institutions allocating responsibility at the C-suite level to oversee sustainability matters; ii) where are firms experiencing substantial knowledge gaps that are affecting sustainability progress; iii) what are financial institutions’ new sustainability strategic priorities and where are they experiencing the greatest challenges in monitoring strategic performance; iv) what data and risk management measures do firms see as essential to manage and monitor sustainability risks; and v) what is hampering firms ability to produce impactful sustainability disclosures.

Governance – Responsibility for sustainability

There are increasing regulatory expectations for financial institutions to explain and demonstrate how sustainability-related responsibilities are allocated. Since our last survey in 2021, financial institutions have made progress in allocating specific responsibility for sustainability matters. Almost all banks and insurers reported that responsibility for sustainability-related matters has been allocated to members of their senior management. Half of these institutions have designated one individual to hold ultimate responsibility for sustainability issues, with the remainder apportioning responsibility amongst multiple executives.

Chief Financial Officers (CFOs) and Chief Executive Officers are most frequently identified by organisations as the bearers of accountability for sustainability issues. Just over a third now have a Chief Sustainability Officer dedicated to this role. The allocation and assignment of responsibility for sustainability matters is influenced by several factors, including jurisdiction and the size and type of firm. For example, 73% of African respondents allocated responsibility to their CFO, but only 40% of North American respondents followed suit.

As we move towards mandatory sustainability disclosure standards, coupled with independent assurance of financial institutions’ sustainability information, allocation to CFOs underscores the significant role that the finance function is increasingly anticipated to perform.

Substantial knowledge gaps persist

Firms identify their most significant knowledge gaps to be in socially-related sustainability issues such as employee and human rights matters (62%), and in assessing climate risk drivers (60%). Firms’ confidence in understanding sustainability issues was generally found to be low, with more than half (55%) identifying significant knowledge gaps across all identified sustainability-related matters.

Knowledge gaps vary between different types of financial institutions. Banks report a significant knowledge gap in identifying and assessing socially related sustainability concerns compared to insurance companies. On the other hand, insurers recognise a greater knowledge gap than banks in their ability to assess drivers of climate risk.

Notable differences are also apparent depending on the size of the institution. Large banks are more confident than medium-sized banks in their knowledge regarding disclosures and socially related sustainability issues.

From a regional standpoint, Africa the Middle East, Europe, and Latin America all noted significant knowledge gaps regarding socially-related sustainability issues. Respondents in the Asia-Pacific region reported the highest knowledge gap associated with impacts assessments of climate-related factors on clients’ credit quality. North American institutions stood out for their lack of ability to assess climate risk drivers.

Institutions need to seek out knowledge gaps in their business and set out clear plans and actions that support upskilling and increase awareness around sustainability. Equally, financial institutions must ensure that Board members have the necessary understanding and skills to fulfil their sustainability-related responsibilities.

Furthermore, if the finance function is set to play a more significant role in sustainability matters then CFOs should prioritise upskilling staff, updating existing processes, and deploying appropriate technologies.

Sustainability strategies

Financial institutions are incorporating sustainability-related matters in their strategic planning with emissions reductions and the pursuit of net-zero targets as central elements of sustainability strategies.

Looking beyond emissions reduction targets to consider a broader range of sustainability strategies; banking respondents emphasise strategies that promote biodiversity and the natural environment as priorities. In contrast, insurance firms are prioritising diversity and inclusion within their sustainability strategies.

Regarding how financial institutions’ monitor strategic progress using sustainability performance metrics, most display a comprehensive approach across short-, medium-, and long-term time horizons. However, application is more limited when it comes to monitoring metrics and targets across different business lines and geographical regions. This indicates that financial firms still face considerable challenges in adapting sustainability strategies to reflect the entire value chain and monitoring progress against them.

Risk management – Evaluating risk

Financial institutions see external credit rating information on counterparties as an essential information source for evaluating climate-related, environmental, and energy-related risks.

A substantial percentage also regard energy consumption, energy performance, and greenhouse gas emissions for financed assets as other crucial data sources.

Half of the respondents believe that the establishment of governance frameworks and oversight committees, coupled with the implementation of data integrity measures and quality control checks and frameworks, are essential for managing data related to sustainability risks.

Identifying and understanding the relevant risk drivers associated with sustainability topics is crucial for determining which risk drivers could have material impacts on a financial institution’s risk profile and operations. Climate Risk Scenario Analysis continues to be integral in evaluating the comprehensive risks financial institutions face due to climate change, with a large majority saying this is important to inform business planning and strategy. Responses indicate that institutions are also going further and refining internal climate risk tools and methodologies to evaluate their investments, lending, and assets.

Disclosure trends and challenges

Financial institutions generally allocate ownership of sustainability disclosures to their finance function, particularly in North America. We also note that larger banks are more inclined to consider double materiality in their climate-related disclosures compared to medium-sized banks.

Over half of banks and exactly half of insurers obtain verification or assurance from external parties for their sustainability-related disclosures. Financial institutions in the Asia-Pacific region are more likely to seek such verification compared to their European and North American counterparts. For those financial institutions that are considering assurance of their sustainability information, first it is essential to evaluate the robustness of reporting processes to ensure that they can withstand external scrutiny.

The main challenges institutions identified in producing sustainability-related disclosures are: i) inadequate definition and delineation of roles and responsibilities; ii) the alignment of financial statements with climate-related disclosures; and iii) integrating ESG data into institutions’ systems.