Under the pressure from investors and regulators, climate-related disclosures have become an increasingly important topic for banks, with a lot of progress observed during 2020.
In our benchmark conducted in April 2021, we observed that the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) were emerging as the leading disclosure framework. Based on a sample of 25 large banks active globally, we observed that all banks were referring to these guidelines. As a reminder, TCFD (established by the FSB in 2015) aims at developing recommendations to improve the effectiveness of climate-related disclosures and make these more consistent across organizations. In 2017, TCFD released its report (“TCFD Recommendations for climate related disclosures), containing 11 recommendations structured around 4 pillars.
In a second benchmark (our “global benchmark”), we analyzed the maturity of the sample of banks in the implementation of the TCFD recommendations in their sustainability reports. Our review of these reports showed four major trends:
- Banks have overhauled their governance structures and risk frameworks to deal with climate-related risks.
- Banks are aware of the risks that climate change poses to them and to their customers and they are adapting their strategy to deal with these risks.
- Although most surveyed banks have set a net zero target for 2050 that includes financed emissions, it is not yet clear how these emissions will be measured – or how these can be measured.
- UK banks are leading the peer group when it comes to the nature and level of detail of their disclosures.
The following caption summarizes the key outcomes from the global benchmark (with references to pages of the benchmark for further details).
Status of Belgian banks: how do they compare to global peers?
In this third benchmark, we looked at how banks in Belgium compare with the global peers in terms of disclosures. Based on publicly available 2020 disclosures, we compared the maturity of a panel of Belgian banks with the observations from our global sample*.
The main outcomes of our analysis are the following:
- The Belgian market is very fragmented in terms of climate-related disclosures, with large differences existing across Belgian banks. These differences materialize both in format and extensiveness of the disclosures.
- A clear relationship between the thoroughness of the disclosures and the size of the banks can be drawn, as smaller banks in our panel tend to disclose a lower volume of information. Banks which are part of a larger group tend to provide limited (or no) information at Belgian entity level and refer to group reporting, suggesting that climate-related initiatives are primarily managed at group level.
- The majority of banks disclose climate-related information in their annual report, with different levels of granularity (from 5 to 60 pages). This information is typically presented in a dedicated section of the annual report, with a varying scope across banks (e.g. focus on own operations, description of actions taken on society). The information contained in the annual report is typically (for all but one bank) further elaborated in a dedicated report, either in the form of a dedicated sustainability/climate/TCFD report or part of other existing reports (such as non financial or risk report). The size and structure of these reports vary from one bank to another, ranging from a few to hundreds of pages.
- Only three banks explicitly mention they follow the TCFD structure in their disclosures per 2020 . One bank is in the process of implementing the framework.
- Governance and risk management topics are typically the most advanced areas of the disclosures. A majority of banks describe the governance they put in place to tackle climate (or ESG) related risks (or at least mention the ownership of the Board, from a high-level perspective). In addition, banks often describe how climate risks can impact their activities and the overall process in place to manage these risks.
- The quantification of exposures to climate risks and the definition of robust metrics and targets remains an area for improvement, as the analyses provided often remain qualitative. A limited number of banks provide detailed information on the quantitative analyses conducted.
Comparing these results to our global benchmark, we observe that Belgian banks tend to make a lesser use of the TCFD framework, which can partially be explained by the fact that our global benchmark consists of larger banks. More harmonization is expected in the Belgian landscape in the future, because more actors adopt TCFD (or another standard framework) as guiding principles. In addition, we observe that several banks in our sample still only provide high level information on climate-related risks. These banks will have to catch up in the coming months, in order to ensure compliance with regulatory and stakeholders expectations. In particular, the ECB published a set of expectations on how climate and environmental risks should be integrated by banks in its ECB guide (applicable as from November 2020). The expectation #13 of the guide explicitly refers to disclosures for banks and the TCFD framework.
We detail in the next paragraph the status of Belgian banks in terms of disclosures for each of the four dimensions of the TCFD framework.
Governance appears to be the most mature dimension of the TCFD framework, with a majority of banks disclosing the role of the (senior) management and Board in the management/oversight of climate or (more broadly) ESG-risks. Overall, these observations are in line with our global benchmark, which assessed the TCFD recommended disclosure as ‘relatively advanced’ for 100% of the banks in our sample as all the banks have disclosed details on the Board’s oversight of climate-related risks and opportunities. Banks part of larger groups typically only describe the governance structure around climate / ESG in group reporting. We observed that around 35% of the banks still do not provide details on the governance structure in place (in particular smaller banks) and/or these descriptions remain vague.
Governance structures in place
A number of new functions / committees emerged in relation with climate / ESG. Banks disclosing granular information on their governance structure for sustainability and climate-related topics typically refer to overarching “ESG / Climate committees” at Board level in place to oversee the actions taken towards sustainability. On a management level, sustainability / ESG is often in the scope of the CEO, who is typically assisted by a Head of ESG / sustainability. On a more operational level, climate-related working groups are in place. In particular, from a risk perspective, climate risk working groups are generally in place to coordinate exercises associated with climate risk (and relationship with the regulator on that matter). Given the importance of ESG at a strategic level, the CRO plays a key role in the assessment and management of climate risk, which is supervised by the audit & risk committees (incl. the achievement of strategic objectives and adequacy of the risk profile vs. appetite defined by the Board).
A majority of banks in our sample provide information on their general strategy towards climate & environmental topics (ESG in general). The description of the strategy remains typically qualitative, most of which is oriented around net-zero ambitions. Only a minority of banks disclose quantitative information on how ESG impacts their business and how scenario analyses are used in the strategic decision making. In particular, less than half of the banks explain how their portfolios might be affected in transition scenario’s and the resilience of their activities / balance sheets in these scenario’s. In line with the observations in our global benchmark, the scarcity of reliable ESG / climate data and the absence of commonly adopted approaches for scenario analysis are the main reasons explaining the limited use of quantitative metrics. Once again, important differences exist between banks in that field, as around 15% of the banks do not provide any quantitative metrics while others (typically larger banks) provide results from quantitative analyses (often in the form of pilot projects). As a leading practice, we observe that around 50% of banks provide detailed explanations on their climate commitments per sector and their actions to comply with climate ambitions and achieve the EU action plan on sustainable finance. On the other hand, some (smaller) banks do not provide information on their strategy towards climate.
Similar to what was observed in our global benchmark, Belgian banks are generally more advanced in the description of climate-related risks than in the description of opportunities (such as opportunities emerging in new markets, innovative product types that can support the transition, positive impact of investments made in resilience and efficiency), most probably driven by regulatory requirements in terms of climate risk management. Yet, some banks provide detailed analysis on a sectoral level on opportunities for the deployment of green products.
Climate strategies observed
In most cases, banks describe their climate strategies as part of broader sustainability strategies, detailing how they position themselves in the Sustainable Development Goals. The strategy is often explained in the form of commitments / priority actions (typically via qualitative statements, to which quantitative goals are attached banks). In addition, an increasing number of banks disclose their commitment to Principles for Responsible Banking / Investors, or other initiatives.
From a climate perspective, several banks describe their ambitions in terms of positive impact they can have in the transition to low carbon economies – including their approach to divest from carbon-intensive industries and their plan to green their portfolio. Strategies generally reflect the “double materiality” perspective, considering the impact on own activities and positive impact banks can have in the transition (the latter being mainly disclosed by large banks, with smaller banks focusing on the impact of their own operations). A number of banks also explain their ambition to strengthen the resilience of their business activities to climate transition. Training programs to improve internal awareness are also commonly described.
About half of the banks in our survey provide information on how climate & environmental (and ESG in general) risks are characterized in the internal risk taxonomies, and the processes to manage these risks. These banks also describe from a high level perspective to what extent ESG risks are integrated into the overall risk management frameworks. Looking at the annual disclosures, however, it is observed that all banks in our benchmark still disclose climate & environmental information in “silo’s” (i.e. separate from other risk categories).
In our global benchmark, we observed that all banks in the sample were disclosing how climate related risks were integrated in their risk management frameworks (suggesting that the level of maturity of the overall Belgian market is lower, even though large differences exist between banks). These banks typically classified climate risks as financial risks and divide climate risk into physical and transition risks, which is also observed in Belgium for banks disclosing information on climate risks.
Risk management practices observed
Risk management practices associated with climate risk are generally described from a high-level perspective in the annual report and drilled down in the risk report (or in the dedicated climate-risk/TCFD report).
Using different levels of granularity, banks disclosing risk management practices provide details on how climate risks (transition and physical) affect their activities (using for instance materiality assessments), and the impact on the “traditional” risk categories. Around 50% of the banks indicate the use of scenario analysis to describe how climate risk drivers could affect their existing risk categories. These descriptions are often conducted on a product or sectoral level. Some banks disclose the (high level) process in place to identify, measure, manage and report on these risks.
Methods and sources of data used to measure / quantify these risks are disclosed by 75% of the banks, typically per asset class (e.g. impact of physical risks on real estate portfolio). Only around 50% of the banks provide information on current exposure to sectors at risk, however only a few banks provide information on their sensitivity to climate risk (in particular over a longer horizon). Since methodologies are rapidly evolving and still under construction, several banks provide the results of proof of concepts used to quantify the impact of the risks on selected portfolios. Large differences exist in the methods deployed by banks in that field and in the scenario’s used, which can partially explain why these banks do not describe the comprehensive results of their analyses. In light of the upcoming ECB climate stress test, it is likely that convergence increases and more harmonized results will be disclosed in the future.
Around 75% disclose some metrics related to climate, with different levels of complexity and granularity. In these cases, at a minimum, banks disclose the GHG emission associated with their own operations. As in our global benchmark, most banks limit the GHG measurement to scope 1 and 2 emissions, as methods to quantify financed emission are still evolving. At this stage, only a few banks make use of forward looking metrics on financed emissions and/or risk metrics, while one bank in the sample does not provide yet any information on the metrics used.
This observation is likely to evolve in the future, with the development of quantification methods for these emissions and the increase in data available from customers, and under the pressure from the regulator (c.f. ECB Expectation 13.4 addressing explicitly the disclosure of financed emissions).
Finally, while banks tend to disclose a number of metrics used, showing the current state of their climate impact, only limited disclosure is made in terms of targets defined (besides net zero targets for GHG emissions). These observations are relatively in line with our global benchmark, which showed that this TCFD dimension was the area in which the maturity was assessed as the lowest.
Types of metrics used
Banks in our sample use a variety of metrics to measure and monitor their climate impact and associated risks. When looking at climate-related metrics disclosed, one can distinguish between metrics associated with the running of banks own operations, and metrics associated with the investments made (“financed emissions”).
In terms of own operations, a large majority of banks provide a description on their own (scope 1 & 2) emissions, and actions taken to reduce these emissions. Multiple metrics associated with the reduction of their environmental footprint are disclosed by banks. The most commonly used metrics are the own greenhouse gases (GHG) emissions, which is reported by 75% of the banks in the sample, followed by alternative direct footprint metrics (e.g. volume of waste) and volume of green investments and funds.
Metrics and targets defined on the financed emissions are more challenging, as they require a deep understanding of clients’ own emissions and an understanding on how these emissions must evolve to meet specific climate targets. However, defining robust targets for financed emission is an absolute need to deploy the EU Action plan on sustainable finance, and ensure financial flows can be allocated to actors / activities which promote the climate transition. With reference to quantification metrics defined by the EBA, we observed the following:
Way forward: an evolving disclosures landscape
Important improvements were made in the disclosures of banks in 2020, as all banks refer to climate-related topics in their public disclosures and around 50% of them provide granular information on their governance, strategy and how associated risks are managed.
It is expected that the disclosures keep evolving in the course of 2021. Areas for improvement formulated in our global benchmark remain applicable in the Belgian market, in which we observe a certain degree of alignment for larger banks in our sample, while smaller banks in our sample seem to be less mature and will have to catch up in the future.
These observations are aligned with those formulated by the ECB in its recent article on the level of implementation of ECB expectations, suggesting that banks are still far from meeting expectations in terms of disclosures and significant work is expected in the coming months /years.
Banks which are lagging behind in terms of disclosures will have to enhance those, in light of upcoming regulatory pressure (such as the expectation # 13 from the ECB Guide on climate & environmental risks). We expect that, with the implementation of the roadmaps defined in the “ECB Questionnaires” answered in the course of H1 2021, banks will enhance their disclosures in 2021.
In parallel, as more disclosures from bank customers tend to emerge, it is expected that data available will increase in the coming months, helping to overcome the data barriers currently affecting the information disclosed by banks.
The entry into force of several regulations affecting disclosures is also likely to cause significant changes in the type of information reported by banks in the coming months, and expected to bring harmonization in this information (such as the EU taxonomy regulation, EBA Pillar 3 reporting on ESG, etc.).
Finally, it is likely that disclosures will harmonize in the future, with a broader adoption of common reporting principles (such as those suggested by TCFD, incorporated in the EBA consultation paper on Pillar 3 disclosures and the Corporate Sustainability Reporting Directive) and the development of harmonized definitions / metrics (e.g. as part of the EU taxonomy screening criteria).
Next steps for banks to enhance their disclosures
Clear actions exist for banks which do not disclose enough information, including
- Providing a description on the organizational set-up established to manage climate related risks, the committees / working group in place and their responsibilities and authority. Banks already advanced in that dimension can further improve the disclosures with descriptions of more operational details on the organizational set-up, such as the frequency of the meetings and the reporting tools in place to monitor the climate-related risks and targets;
- Describing the vision and overall strategy of the bank in terms of sustainability / climate-related topics, serving as basis to coordinate all actions towards climate-related topics. This strategy should then be further elaborated per sector / product, and rely on different scenarios to evaluate how opportunities and risks can emerge from these scenarios. The actions taken to improve the resilience of the business model and activities to climate scenarios should be used to improve transparency to external stakeholders. Finally, impact of these analyses and strategy on business planning should be explained;
- Providing a description of the approach to identify, measure and manage risks caused by the climate transition. Banks which currently do not disclose this approach should start with qualitative descriptions of how climate-related risks affect their business activities and existing risks, and how the management of these risks is integrated in the risk framework. Banks more advanced should continue to enhance and disclose their progress in the quantification of these risks, leveraging on the results of the pilot project.
- Detailing the set of metrics used for climate risk management, as well as the targets identified by the bank to achieve its objectives. These targets are key elements to allow external stakeholders to identify whether the bank is on track with its action plan.
And now: over to you!
Disclosures is definitely a key focus area for both customers and the regulator, hence is expected to be a hot topic in the coming years. Leading practices are evolving rapidly, with the development of new / revised reporting standards (such as the “TNFD” - Taskforce on Nature-related Financial Disclosures, complementing TCFD and expending its scope to broader nature-related risks).
In this context, it is important to ensure that you are disclosing adequate qualitative and quantitative information, reflecting your climate ambitions and strategy, and in line with regulatory expectations and evolving market practices. Indeed, the information disclosed directly impacts the market perception of your climate-related activities, and can affect (for instance) your ESG rating.
How do you evaluate the current level of your disclosures compared to peers? Have you observed areas for improvement based in your current disclosures?
We are ready to help you in this journey!
Climate-related risks and disclosures is a new topic which is constantly evolving and requires continuous monitoring. KPMG is a leading consultant in the field of risk management and climate risks, with important market presence in the European banking sector. Thanks to our network, we have deep insights on market leading practices in Europe and can guide your in this strategic journey.
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(*) The sample includes the banks located in Belgium (or subsidiaries of foreign banks established in Belgium) which are under the direct supervision of the ECB. This article has been produced according to the disclosures available as per August 2021.
Author: Julien Thiry