ESG reporting in banking: still a long way to go

Despite increasing consensus on the need for enhanced climate impact transparency, banks provide climate-related disclosures but the degree of detail varies significantly. The aim should be to achieve a consistent global standard in climate reporting as called for by external stakeholders.

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.

Phase one and phase two of our 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 – offering insight to investors, regulators and other interested key stakeholders. The key findings of the report are:

• 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.
• 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 analyzed 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.
• 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 March, the ISSB’s released first two proposed IFRS® Sustainability Disclosure Standards. This was an important step forward in connecting sustainability information with financial reporting since it supports calls by investors, regulators, financial and political leaders on the need for consistent global standards in climate reporting.

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.