Today’s bank boards are addressing climate change right at the top of their organizations, with more empowering their CEOs to take direct responsibility and including climate strategy targets in reward structures.
Disclosures in the most recent financial reports of 25 major global banks clearly show how climate change is becoming embedded in their business strategies. Two years ago, a search for the word “climate” in those banks’ annual reports (2018) yielded 36 results; the same search in 2020 provided 99 – a threefold increase.
Our review of those banks’ latest annual reports shows three major trends.
- More and better disclosures – a significant increase in disclosures about climate change, in line with recognition that it’s a board-level issue.
- Introduction of metrics and targets – the majority of banks have identified and disclosed objectives to increase funding for greener projects and acknowledge their role in shaping and financing a more sustainable future.
- More information in the management commentary, but not (yet) in the financial statements – the banks focus on climate issues in the front half of their annual reports, but there is still little detail on how climate risk will impact existing financial statement disclosures, such as expected credit losses, fair value measurement or impairment.
So, what are banks disclosing in their annual reports and what is the impact on their financial statements?
More and better disclosures
Climate change is a board matter now
We see that in most of the banks’ annual reports there is a clear, outlined responsibility for the board of directors to drive forward the climate strategy of the bank.
Responding to climate change will affect the business of a bank in its entirety: deciding which clients to lend to in the future, assessing which businesses to support through investments, determining what type of financial instruments to offer and even deciding how to remunerate staff. A business strategy that addresses climate risk will have real impacts.
So, it’s not surprising that the majority of the banks in our benchmarking exercise have said that they see climate change as a matter to be overseen by the board. Indeed, some banks noted that they will review the composition of their boards to consider whether they have the appropriate levels of skills and experience in the area of climate change.
The board committees are involved in the more specific aspects, with the risk committee being the one most frequently mentioned as being responsible for assessing and amending the banks’ risk frameworks in light of increasing climate-related risks.
And what about management level?
Many banks have created new management roles with responsibility for sustainability and climate change, with titles ranging from global head of climate change to global head of sustainability and a third of the banks in our sample have disclosed that they explicitly made climate change a key responsibility of the CEO.
More and more banks are linking particularly the long-term remuneration of key management to achieving targets in their climate strategy. Our review shows that more than a third of banks have disclosed that targets such as reducing financed emissions (e.g. through reduced lending exposure to high carbon sectors) and sustainable financing are metrics used to assess remuneration.
The excerpt was taken from KPMG International ISG Audit Quality Leader - Financial Services Andrea Schriber’s blog post entitled Climate risk is financial risk – For banks it’s a board-level issue.