BY KATIE - MYGREENPOD, 28 June '15

European banks don’t fully grasp the financial consequences of environmental and social issues

Large European banks aren’t yet sufficiently aware of the business risks posed by environmental and social developments, such as climate change, water scarcity or sustainable production, according to a KPMG survey conducted with the support of WWF.

Social investment – the future of banking lies in people and profit

Are banks relevant?

For KPMG, banks face a fundamental question about how they can remain relevant to customers, employees, business partners and wider society in the transparent and interconnected world of today and tomorrow.

Our growing global population, the increasing scarcity of water and other resources and changing weather patterns will only bring this question into sharper focus.

Impact of megatrends

Ready or not: An assessment of sustainability integration in the European banking sector shows that banks have an incomplete appreciation of how major environmental and social developments and trends create risks and opportunities for their corporate clients.

‘Even if banks are aware of these developments, it is mostly regarding the potential consequences for their reputation.

‘Many banks lack a broader view of the financial consequences of environmental and social issues, affecting their operations and corporate clients. This is disturbing, because the impacts of these megatrends on banks’ earnings will further increase in the coming years. In addition to that, demand for banks’ corporate responsibility is growing.’

Barend van Bergen, partner at KPMG Sustainability

A narrow approach

The study of 12 large European banks shows that banks are adopting a quite narrow approach to sustainability issues, focusing solely on whether or not they want to finance certain activities.
 
The study shows that the banking sector at large does not yet have an adequate strategic response to manage material business risks linked to environmental and social realities.

‘Developing such an approach is what is going to enable the banking sector to move from a reactive stance to a leadership role.’

Maria Boulos, Director of Corporate Engagement at WWF International

The dark side of banking

Barend van Bergen, partner at KPMG Sustainability, commented that while the financial sector in general – and banks in particular – have always been very valuable to society, they also have a less positive side.

‘Banks provide capital that enables business and create jobs. However, this contribution also has a downside. Over the years, banks also financed activities which affected the natural resources of the planet and had a negative impact on people and society.

‘We have recently experienced that a number of financial institutions have been significantly compromised for having caused destruction of capital, with sometimes serious consequences for society.’

Barend van Bergen, partner at KPMG Sustainability

Understanding risk

According to the report, banks need to be more thorough when they evaluate the extent to which environmental and social issues might cause financial risks for their clients.
 
For example, companies in the energy sector are facing growing financial risks as renewable energy becomes more competitive. This could have a significant impact on the creditworthiness of conventional energy companies.

‘In addition, for many of these companies, switching to cleaner energy creates a need for substantial financing. Besides, with regard to credit facilities banks pay generally insufficient attention for the initiatives of companies aimed at improving the environment and the development of new markets, products and services.’

Barend van Bergen, partner at KPMG Sustainability

CSR and profits

According to Barend van Bergen, the way banks deal with the environment and society also has a growing impact on the financial profit of the bank, as transparency on the societal role of banks becomes increasingly important.

‘Analysts and investors want to understand the risks that banks face with investments that may come under pressure, such as the funding of activities linked to child labour or other human rights violations.

‘Besides that, they want to know what measures banks take to limit and manage these risks so they can make a sound judgment about the stability of the bank’s long-term profitability. Hence, it is essential that banks report on the potential risks that their responsible behaviour entails.’

Barend van Bergen, partner at KPMG Sustainability

Click here to view the full report, Ready or not: An assessment of sustainability integration in the European banking sector.