Slower progress on climate-related disclosures in leading banks’ annual reports
Latest KPMG benchmarking report highlights need for globally consistent sustainability reporting standards
Latest KPMG benchmarking report highlights need for globally consistent sustainability rep
Progress on climate-related disclosures in annual reports by some of the world’s leading banks slowed down in 2021, according to a new report from KPMG International Standards Group.
The annual benchmarking analysis, now in its second year, looked at climate-related disclosures in the most recent annual reports of 35 major banks, based in territories around the world, including five major banks in the UK – offering insight to investors, regulators, preparers and other interested key stakeholders.
Despite increasing consensus on the need for enhanced climate impact transparency, the findings reveal that, while many institutions are on a clear journey towards greater voluntary disclosure, with 100 percent of banks analysed providing some form of climate-related disclosures, more detailed progress in annual reports has slowed and varies significantly from territory to territory.
Banks based in jurisdictions that have already implemented heightened regulation on climate-related disclosures have made the biggest strides with more enhanced disclosures – with UK banks ahead of the pack. Meanwhile, some jurisdictions where the base level of disclosure in annual reports was historically lower are catching up with those that have more advanced disclosures.
The formation of the International Sustainability Standards Board (ISSBTM) marks a critical milestone in the journey towards a consistent global baseline of investor-relevant sustainability reporting – including on climate. In anticipation of new disclosure standards from the ISSB, there is some anecdotal evidence from KPMG’s analysis that some banks may have taken a wait-and-see approach until they have more clarity about the new standards.
Cath Burnet, head of audit at KPMG UK, said:
“The latest benchmarking report from KPMG International Standards Group supports calls by investors, regulators, financial and political leaders on the need for consistent global standards in climate reporting. In March, we welcomed the release of the ISSB’s first two proposed IFRS® Sustainability Disclosure Standards. This was an important step forward in connecting sustainability information with financial reporting, but it was only the first step in a long journey.
“The creation of globally consistent and transparent sustainability reporting standards will ultimately help to strengthen the capital markets by helping investors and business leaders make more informed decisions and refresh their focus on building the long-term value of their business.”
Despite slower progress, KPMG’s analysis highlights that banks are aware of climate-related risks, particularly when it comes to describing the risks they have identified and how they have set up their governance structures to manage these risks. Given banks’ traditional focus on risk management, it doesn’t come as much of a surprise that most of those analysed provide detailed disclosure in this area.
Seventy seven percent of the banks surveyed disclose that they are integrating climate-related risks into their wider risk management framework and that they are starting to follow the more ‘business as usual’ processes of identification, assessment, management and reporting of climate-related risk.
Many of the banks also acknowledge that climate-related risk is an overarching risk that affects their other risks. Their most commonly impacted other risks are credit risk, reputational risk, compliance risk and operational risk. However, while the credit risk disclosures are detailed in the front part of annual reports, very few of the banks are connecting those disclosures with impacts in the financial statements.
Karim Haji, head of financial services at KPMG UK, said:
“Users of financial statements are increasingly looking for information about the financial impact of climate-related risks. They want to understand how changes in risk appetite and business strategy filter through into the financial statements. Improving connectivity between financial statements and the front part of the annual report is key.
“However, banks continue to focus on climate-related matters in the front part of their annual reports while disclosures in the financial statements are less common. Thirty seven percent of the banks in the KPMG International Standards Group analysis mention ‘climate’ in the notes to the financial statements. Generally, the nature and extent of information disclosed by these banks is currently minimal.
“The banks have also made significant commitments to green or sustainable financing, with some earmarking billions over the coming years for such projects. However, in 2021 we have not yet seen these products impacting financial statement disclosures, such as those on accounting policies and estimation uncertainty or financial instruments.
“The focus on climate-related disclosures is not going away. In addition to the ISSB proposals, the US Securities and Exchange Commission (SEC) has issued proposed climate reporting rules and the European Financial Reporting Advisory Group (EFRAG) is also developing a suite of standards for EU companies. Now more than ever, it’s critical that institutions take a proactive approach to climate-related disclosures, providing more transparency and consistency for investors and the wider stakeholder community.”
Notes to Editors:
This report is issued as part of Phase 1 of KPMG’s analysis. The disclosures made in the other standalone reports will be the focus of KPMG International Standards Group (RC) follow-up Phase 2 analysis report.
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