ESG Trends in the Banking Sector - Swiss Sustainable Finance€¦ · Overall ESG score Environment Social Governance Average score Top 10 Banks Company Country MCap (USD m) Score

ESG Trends in the Banking Sector

PRI & SSF Networking Lunch on Sustainable Investment Zurich, 25 November 2014

Claudia Volk, Associate Director, Financials

Report Parameters

Authors: Sustainalytics Financials Research team in collaboration with Thematic Research team

Reference Universe:

Weight Matrix: Default Weight Matrix Banks

Update financial & ESG data: 11 June 2014

Publication date: 24 July 2014

Additional publications: Summary report + 3 Key Issue Reports

2

Sustainalytics’ global universe of Banks + 10 selected peers

from Diversified Financial Services

Developed Markets:138 companies

BRICS:37 companies

Emerging Markets:84 companies

Non-listed Banks:72 companies

Banks

RegulatoryChange

Legacy Risk

Loss ofTrust

Talent Retention

IncreasedDemand

for RF Products

Banks

Society

InvestorsEnvironment

Industry Trends – At the crossroads

Industry trends - main drivers

3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Implementation of new regulatory requirements

Economic environment

Business policy related challenges due toregulatory changes

Margin pressure

Optimization of Risk Management

Changes in customer behaviour

New accounting/disclosure requirements

Very high Medium to high Low NegligibleRespondent rate

Regulatory Changes - A key driver for business

Direct and indirect costs due to regulatory changes amongst German banks (2010-15): about EUR 9bn; RoE: -2.4%-points (KPMG survey)

4Source: KPMG (Dec 2013)

Challenges for mid-term business success (2013-15)

Key ESG issues for the Banking sector

5Source: Sustainalytics

Materiality Matrix Banks

HighLow

(Po

ten

tial

) Su

stai

nab

ility

Imp

act

Low

Hig

h

Medium

Me

diu

m

(Potential) Business Impact

Business Ethics

Resilience

Human Capital

Responsible Finance

Financial Product Governance

0

5

10

15

20

25

30

35

BusinessEthics

Accountingand Taxation

Bribery andCorruption

Category 1 Category 2 Category 3

# of events

Business Ethics – Mind the gap

Multiple ethical controversies – affecting business partners, customers and the society –have raised significant legal and reputational costs

Examples: Key interest rate (Libor, etc.) and commodity price manipulations, money laundering, tax evasion, conflict of interest, corruption

Controversies overview

Source: Sustainalytics

6

0%

20%

40%

60%

80%

100%

G.1.1 Bribery &Corruption Policy

G.1.2WhistleblowerProgrammes

G.1.4.1 MoneyLaundering Policy

G.1.5 BusinessEthics Incidents*

high medium low

Business Ethics (cont’d)

7

Sector performance


Preparedness Controversies

Corporate culture as the deeper rooted challenge

Leaders: several development banks (World Bank, IADB), SEB, NAB

Laggards: especially large global players with complex operations

177164

154 150

10292

86 80

4527 22

125 5 4 2 1

020406080

100120140160180200

Capital Support

Liquidity Support

EUR bn

Resilience – Finding the right balance

Severe impact on various stakeholders, incl. tax payers and societies

Significant regulatory changes a key driver for reducing vulnerability

Soft factors – corporate culture, incentive system – also important8

Source: European Commission

EU - state aid used by member countries (2008 – 2012)

Resilience (cont’d)

Most severe controversies: Banca Monte dei Paschi, Bankia, Dexia(recent cases: Banco Espirito Santo, Corporate Commercial Bank)

9


0

5

10

15

20

Corporate GovernanceCategory 1 Category 2 Category 3

Category 4 Category 5

# companies


020406080

100

EnvironmentalImpact of Products

Complicity inHuman Rights

Violations

Sanctions Non-Compliance

CommunityRelations

Social Impact ofProducts

Category 1 Category 2 Category 3 Category 4 Category 5

# events

Responsible Finance –Acknowledging stewardship


10


“The cold heart” of the economy

Exposure: very broad, but mostly indirect

0%

20%

40%

60%

80%

100%

G.1.3.3UNEPFI

Signatory

E.1.5 CDPParticipation

S.4.1Activities in

SensitiveCountries

S.4.3 Society&

CommunityIncidents*

E.3.2 Product& ServiceIncidents*

G.1.3.1 PRISignatory

G.1.3.2ResponsibleInvestment

Policy

G.2.5.1ResponsibleInvestment

Team

E.3.1.11Responsible

AssetManagement

G.1.3.5Equator

PrinciplesSignatory

E.3.1.10Credit & Loan

Standards

E.3.1.15Sustainable

FinancialServices

S.4.2.3FinancialInclusion

high medium low

Responsible Finance (cont’d)

Trend: Continually gaining traction: mainly risk, but also opportunity considerations; promoting sustainable development; fiduciary duty

Performance: Still room for improvement

Sector performance

Source: Sustainalytics 11

Responsible Finance, general Responsible Investment Resp. Lending Sust. P&S

Access to Finance

Responsible Finance (cont’d)

Leaders

Distribution of scores

12

Top 5 companies: Responsible Finance (RF)

Leaders Country MCap (USD m)

KfW Germany n.a.

Banco Santander (Brasil) S.A. Brazil 26,669

DNB ASA Norway 31,877

Westpac Banking Corporation Australia 100,029

Skandinaviska Enskilda Banken AB Sweden 30,294

020406080

100120140

11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100

# of companies

Brackets score


Spotlight: Syndicated Loans

Background: Banks’ credit books are black boxes Syndicated loan market a ‘test’ to assess banks’ ESG attitudes & responsibility

Two ideas: ‘Stranded assets’ and ‘ESG sub-prime’ (poor quality loans)

13

3% 3%

3%5%

5%

6%

6%

6%8%

8%

47%

Mitsubishi UFJ ANZTD Securities BarclaysBNP Paribas Royal Bank of CanadaBank of America CitigroupJPMorgan Chase & Co. Wells Fargo & CompanyOther

Deals with issuers from O&G sector Market share of underwriters in “ESG sub-prime” market

Source: Sustainalytics, based on Bloomberg data

Financial Product Governance –The paradox of trust & loyalty

Severe impact on customers and communities due to irresponsible behavior

Most significant cases include undisclosed product risks, fraud and misconduct (e.g. for mortgage-related products), excessive fees, predatory lending, conflicts of interest, and price manipulations



0

5

10

15

20

25

30

Anti-Competitive Practices Marketing Practices Quality


# events

14

Financial Product Governance (cont’d)

American Customer Satisfaction Index

15

Source: ASCI, 2013

60

62

64

66

68

70

72

74

76

78

80

2006 2007 2008 2009 2010 2011 2012 2013

US Banks Bank of America JPMorgan Chase Citigroup

Index

General trust in banks has been hit but customer loyalty remained high

Regulatory changes directed towards customer protection

0%

20%

40%

60%

80%

100%

S.1.2Discrimination

Policy

S.1.3 DiversityProgrammes

S.1.1 Freedomof Association

Policy

S.1.4CollectiveBargaining

Agreements

S.1.5Employee

Turnover Rate

S.1.6 TopEmployer

Recognition

S.1.7EmployeeIncidents*

high medium low

Human Capital – Hiring capacity

Key for a bank’s profitability and long-term survival

Steering the corporate culture and the way employees act an increasingly important task for HR managers


Sector performancePreparedness Quant. Performance

Human Capital – Hiring capacity

17


Distribution of scores

0

20

40

60

80

100

120

21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100

# of companies

Brackets score

25

0

108

200 0 1

0

5

10

15

20

25

30

LabourRelations

Health andSafety

BasicLabour

Standards

Category 1 Category 2 Category 3

# companies


Leaders Country MCap (USD m)

Cif Euromortgage SA France n.a.

Intesa Sanpaolo S.p.A. Italy 58,526

Caisse centrale Desjardins Canada n.a.

Skandinaviska Enskilda Banken AB Sweden 30,294

ABN AMRO Group N.V. Netherlands n.a.

Human Capital: Leaders

45

50

55

60

65

-3y(129 companies)

-2y(135 companies)

-1y(136 companies)

current(138 companies)

Overall ESG score Environment Social Governance

Average score

Top 10 Banks

Company Country MCap (USD m) Score

National Austra l ia Bank Limited Austra l ia 71,817 83.7

Skandinaviska Enski lda Banken AB Sweden 30,294 83.6

CaixaBank, S.A. Spain 34,800 83.2

Westpac Banking Corporation Austra l ia 100,029 83.0

KfW Germany n.a. 82.3

DNB ASA Norway 31,877 81.7

Banco Santander (Bras i l ) S.A. Brazi l 26,669 79.5

Banco Bi lbao Vizcaya Argentaria , S.A. Spain 77,828 78.2

Nedbank Group Ltd. South Africa 10,003 78.2

Inter-American Development Bank United States n.a. 77.7

Momentum

Bottom-Up-Analysis

18

Industry Leaders (total universe)


Bottom-Up-Analysis (cont’d)


Breakdown by ESG Theme

0

10

20

30

40

50

60

21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100

Overall Environment Social Governance

# of companies

Brackets score

Overall scoreMaximum: 84Average: 58Median: 56Minimum: 36



Geographical Breakdown

010203040506070

31-40 41-50 51-60 61-70 71-80 81-90 91-100

North America Europe Asia-Pacific Rest of World

# of companies

Brackets overall score



Breakdown by market cap

0

20

40

60

21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100

Overall Upper MCap bracket (> USD 10bn) Lower MCap bracket (< USD 10bn)

# of companies

Brackets score



Controversies - overview

0 20 40 60 80 100

Public Policy

Corporate Governance

Business Ethics

Society & Community

Customers

Supply Chain - Social

Employees

Products & Services

Supply Chain - Env.

Operations


# of events

Wrap-up: Impact areas of Banks


Key ESG Issue

GH

G L

evel

s

Air

Qu

alit

y

Lan

d

Wat

er Q

ual

ity

Wat

er A

vaila

bili

ty

Bio

div

ersi

ty

An

imal

Wel

fare

Loca

l Co

mm

un

itie

s

Cu

sto

mer

s

Emp

loye

e H

ealt

h &

Safe

ty

Lab

ou

r R

igh

ts &

Co

nd

itio

ns

Co

ntr

acto

rs &

Su

pp

ly

Ch

ain

Hu

man

Rig

hts

Soci

ety

Business Ethics

Resilience

Responsible Finance ### ### ### ### ### ### ### ### ### ### ###


Human Capital

Areas of Sustainability Impact

no major impact major impact severe impact ### mostly indirect impact

Wrap-up: Impact areas of Banks

24

no major impact major impact severe impact ### mostly indirect impact


Key ESG IssueR

egu

lato

ry

Envi

ron

men

t

Liti

gati

on

Ris

ks

Rep

uta

tio

nal

risk

s

Clie

nt

Dem

and

Ass

et R

isks

Op

erat

ion

al R

isks

Emp

loye

e

Mo

tiva

tio

n

Hir

ing

Cap

abili

ty

Business Ethics

Resilience

Responsible Finance


Human Capital

Areas of Business Impact

Wrap-up: Outlook

Key ESG issues: High exposure, significant management gaps

Business Ethics: High risks are here to stay – regardless of reforms; the litmus test is whether banks are prepared to forego lucrative business opportunities.

Resilience: Regulatory pressure will remain high; but stability of banks is also related to “soft factors” that are typically only partly addressed by regulators.

Responsible Finance: Lots of room for improvement yet; however, we expect RF practices to gain traction in the banking industry and – in the long-run - become the norm rather than the exception.

Financial Product Governance: The pendulum is swinging back to more regulation – and higher costs; banks, thus, have begun to reposition themselves; one key factor for a changing culture will be incentives.

Human Capital: More stringent regulations expected, weakening the attractiveness of the industry further; thus, a shift towards a more strategic approach in HR management appears pivotal.

25

Thank you!

26

Thank you for listening and please feel free to ask your questions!

Claudia VolkAssociate Director, Research Products

Disclaimer

27

Copyright © 2014 Sustainalytics. All rights reserved.

No portion of this material may be reproduced in any form without the

expressed, written permission of Sustainalytics.

Amsterdam | Bogotá | Boston | Brussels | Bucharest | Copenhagen | Frankfurt | London | New York City | Paris | Singapore | Timisoara | Toronto

For more information please contact:

Claudia VolkAssociate Director, Research Products

Phone: +49 (0)69 9675 9097Email: [email protected]: www.sustainalytics.com

Documents

ESG Trends in the Banking Sector - Swiss Sustainable Finance€¦ · Overall ESG score Environment Social Governance Average score Top 10 Banks Company Country MCap (USD m) Score