“Sustainability reporting touches every part of a bank. It will be part of the story of how you run the bank. It impacts strategy, products, distribution channels, balance sheet, capital allocation, return on equity and risk profile. A siloed and compliance-focused approach to reporting that relies on spreadsheets and creating a summary for the annual report is not going to cut it.“
Mark Batten
Banking and Capital Markets Leader, PwC UK
It has taken centuries to develop the sophisticated financial reporting now so central to how businesses are run and convey their performance and potential. Yet the urgency of the climate challenge means we have just a few years to do the same for sustainability reporting. And this is in addition to broader reporting requirements around social and other environmental issues.
Many banks have made public pledges about net zero commitments, including plans around sustainable finance and financing the energy transition. But, for some, there will be work to do to align between headline commitments and what is included in detailed disclosures.
Minimum is not enough
There is no doubting the technical challenges thrown up by the array of new and expanding sustainability reporting frameworks stretching from TCFD and ISSB to EU CSRD. And the impact of these disclosures on the objectives and operations of the business is why it needs a strategic approach instead of addressing them piecemeal. In practice that means taking an integrated approach encompassing all regulatory requirements and voluntary commitments. It should be firm-led, rather than regulation-led, and aligned to the organisation’s own narrative, strategy and ambitions.
As banks face growing pressure from regulators, society and customers for increased transparency about their role in climate change and other sustainability-related issues, they will need to source and verify investor-grade data about their own operations in auditable-detail, as well as the third-party Scope 3 emissions of the businesses they lend to and invest in.
Disclosure as a lever for change
The key aim of these disclosure demands is to inject fresh urgency into a transition to net zero that is falling dangerously behind schedule. Banking and capital markets organisations can play a critical role in channelling the investment needed to decarbonise the economy and enable communities and businesses to adapt to climate change.
Yes, this is a responsibility, which goes to the heart of an organisation’s purpose. But it’s also an opportunity to tap into the $130 trillion of private capital that’s been committed to transforming the economy.
We know from our work with the Transition Plan Taskforce, which includes specific guidance for banks, how important disclosure and reporting is in enabling transformation, by helping to frame net zero strategies, accelerate execution and track progress.
From a management and investor relations perspective, this is an opportunity to create a new language of performance and value creation – an enterprise resource planning (ERP) framework for sustainability.
Living up to your promises
The immediate focus of scrutiny will be progress on meeting those net zero pledges. The risk of being called out for greenwashing is highlighted in our latest UK Investor Survey, with more than 90% of respondents saying they believe corporate sustainability reporting contains at least some level of unsupported claims.
As analysts and investors become more accustomed to the disclosures, their questions are likely to delve deeper into areas such as stranded assets, counterparty exposures and the impact on capital allocation. They’re also going to be assessing a bank’s ability to capitalise on the opportunities as the sustainable finance market expands and ESG-focused funds look to put their capital to work.
There are bound to be some tough discussions and decisions ahead – but these can no longer be put off. How will the sector approach lending to carbon-intensive businesses that are making limited progress on net zero transition, for example? How can banks help and incentivise those organisations to change? At the very least, it’s important to map the way forward and the milestones they’ll need to meet if they are to meet sustainability targets and build trust. The big risk is being forced to scale back publicly stated net zero commitments, which may undermine credibility and harm reputation.
“Banks can’t afford to do what might have worked in the past, taking a narrow approach and delivering the regulatory minimum. Only by embracing the purpose of sustainability regulation can you get the business value and engagement.“
Mark Batten
Banking and Capital Markets Leader, PwC UK
Three key actions for banking and capital markets organisations
How can banks position their business to overcome these challenges, move beyond compliance and deliver transformation? Three key priorities are:
Articulate and drive the business value
To secure buy-in from within the organisation, banks need to be able to articulate and drive value from reporting-enabled transformation. Otherwise it will be just another skin-deep regulatory exercise.
Yes, some doors will close. But others will open – from new sustainable finance opportunities and the ability to attract investment to identifying, nurturing and backing the next multi-trillion-pound climate tech enterprise. The transition to a net zero economy will need huge amounts of capital and investment. That in turn needs bankers who understand its potential and how to capitalise on it.
Engage the whole organisation
Reporting can be a catalyst for transformation that touches every part of the organisation and its value chain. This demands full buy-in, collaboration and accountability from across the business and its leadership, including division heads and chief finance, risk, sustainability, data and innovation officers.
Strategy, planning and execution should be closely aligned with parallel developments including workforce diversity, social inclusion and support for the real economy. From an operational perspective, it’s also important to align sustainability with digital transformation to ensure it’s embedded into day-to-day operations, decision making and performance management.
Transform your operating model to match your ambitions
The starting point is a clear and realisable set of objectives. These can no longer be vague aspirations. Execution is going to affect every part of the bank, from strategy and products to risk profile, capital demands and more. Banks will need to transform their target operating model, their processes, and their data if they are to deliver.
