The United Nations Environment Program Finance Initiative (UNEP FI) published a report summarizing the progress of banks that have signed the Principles for Responsible Banking. The signatories have committed to aligning their business strategies with the Sustainable Development Goals and the Paris Climate Agreement. The report finds that signatories are showing early signs of collective progress and building the foundations to transform sustainable banking; however, momentum needs to accelerate in some key areas. The suggested improvement areas of improvement include enhancing the availability and quality of data, setting targets in line with improved impact analysis, and increasing action on critical sustainability issues such as biodiversity loss, equality, and human rights.
According to the report, 94% of banks identify sustainability as a strategic priority for their organization, 93% are analyzing the environmental and social impact of their activities, and 30% are setting targets, with a strong collective focus on climate and financial inclusion. Many banks are making considerable progress setting targets and engaging with clients in three main areas—climate mitigation, climate adaptation, and financial inclusion. Where impact measurement approaches and action are less advanced, there is increasing evidence of collaboration among signatories to develop resources that support target-setting and implementation. In areas such as climate change, where data and methodologies are more advanced, banks are establishing impact measurement systems and setting targets to drive impact. They are also developing the associated customer engagements strategies, products, and services needed for the climate transition. As they move forward, banks must continue to improve their impact analysis, refine their target setting, and strengthen their data management. Signatories must accelerate their commitments to address key challenges, notably:
- Improve the availability and quality of data. Many banks lack the ability to track and measure progress due to the limited availability and quality of internal and external data. They must, therefore, work with each other and with stakeholders to increase the availability of shared knowledge sources and agree on approaches where data is not available, such as using national averages or appropriate proxies. Banks must also improve corporate disclosure and management of available data to address this challenge.
- Strengthen impact analysis. Banks need to gain technical knowledge and expertise to deepen their understanding of how to review the impact, both positive and negative, of their activities, products, and services across their portfolios.
- Increase action on further critical sustainability issues. Some sustainability themes that have been identified by science and the international community as critical are underrepresented. For example, currently only 15% of banks identified biodiversity as an area of significant impact and 23% identified human rights as significant, despite the research and stakeholders indicating that both are important risks and impacts to be addressed by the sector.
- Sufficiently link all targets to the outcomes of impact analyses. Targets should be in line with the banks’ Principles for Responsible Banking commitments and encompass activities financed by the organization. Too many banks are setting targets linked to internal operational activities such as head office electricity consumption rather than portfolios. Additionally, some of the existing targets do not show compelling links to identified significant impact or fulfil the commitment of setting specific, measurable, achievable, relevant, and timebound (SMART) targets.
Insights from the report will be used by the UNEP FI Banking Board and Secretariat to further develop the work program to support banks in scaling up their progress and addressing these key challenges. Under the framework, banks must publish their individual progress within 18 months of signing the Principles and annually thereafter. The next progress report at a collective level is scheduled for 2023.
Keywords: International, Banking, Principles of Responsible Banking, ESG, Climate Change Risk, Paris Agreement, Sustainable Finance, Financial Inclusion, UN, Biodiversity Loss, UNEP FI
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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