Silvie Koppes and Dimi Kumarasinghe | 26 April 2023
Banks are on a journey. Those reporting their climate-related disclosures under heightened regulation are powering ahead, leaving behind those in jurisdictions with less of a climate-related regulatory focus. As the forthcoming sustainability disclosure requirements draw near, there’s still significant ground to cover by all banks.
With the expected publication of the first two IFRS® Sustainability Disclosure Standards in June 2023, together with the development of standards in specific jurisdictions like the EU and the US, sustainability reporting including climate-related disclosures is high on the agenda as it rapidly evolves and formalises.
It’s therefore the right time to look at the climate-related disclosures made by 35 major banks around the world as part of their 2022 annual reports.
In 2022, some banks published other standalone reports that include climate-related disclosures ‘at the same time’1 as their annual report. Where these have been cross-referenced in the banks’ 2022 annual reports, we have also reviewed these in this first phase of our analysis.
Our analysis of these banks’ latest annual reports has highlighted three key findings.
- Location and timing of climate-related disclosures make it challenging to understand the big picture – improving connectivity with the financial statements and information in sustainability-related disclosures remains key.
- Data challenges including availability, reliability and time lags are impacting the scope and extent of scenario analysis and the disclosures on metrics and targets.
- Credit risk remains the focus – many banks disclose the integration of climate-related factors in their credit risk acceptance and monitoring processes.
So how are climate-related disclosures being made as part of the 2022 annual reports?
Location, timing and connectivity
Currently, the location and timing of climate-related disclosures make it challenging to understand the big picture: these are often provided in multiple documents, in different sections of reports and published on different dates.
Banks also generally provide separate disclosures for each TCFD2 pillar in their annual reports. However, it is less clear how the four pillars interact – there is room to enhance the linkage between the pillars.
More positively, we note that banks in the UK, and some in Australia and Europe, published their more extensive climate-related disclosures at the same time as their financial statements – either in the front part of their annual report or in another standalone report (with cross-referencing). Some of these banks have provided reconciliation tables in the annual report, with cross-references in or between documents to help users navigate the disclosures, which will be a requirement under the forthcoming standards.
More mentions of climate in financial statements
The word ‘climate’ is starting to appear more frequently in the financial statements – however, the disclosures are limited. Many of the banks that mention climate in their financial statements do so in the context of disclosing climate-related impacts on their financial statements. In most cases, these banks note that the quantitative impact on the financial statements is not considered material at this time or in the short to medium term.
Credit risk is the most common note in the financial statements in which banks mention climate-related impacts. Some banks disclose how these risks are managed, and whether and/or how these are factored into their measurement of expected credit losses (ECLs). Notably, in the 2022 annual reports, there are a few banks that disclose judgemental adjustments to their ECLs due to extreme weather events or country-specific regulation.
The quality and sophistication of sustainability-related disclosures outside the financial statements should improve under the forthcoming reporting standards, enhancing the ability of companies to make connections and identify climate-related impacts in the financial statements.
New sustainability reporting requirements will put more rigour into the location and timing of climate-related disclosures. Also, the focus on connectivity between climate-related disclosures in and outside the financial statements will become more prominent. For example, the International Accounting Standards Board recently started its project on climate-related risks in the financial statements and the European Financial Reporting Advisory Group will embark on a research project on the connectivity between financial and sustainability reporting.
Data challenges – including availability, reliability and time lags – are impacting the scope and extent of banks’ climate-related scenario analysis and the disclosures provided on metrics and targets. Some banks manage this by explaining their use of estimates.
Some banks disclose as part of their 2022 annual reports that more granular climate-related data is needed to produce meaningful scenario analysis – e.g. data at company or customer level, rather than at a portfolio or industry level.
Financed and facilitated emissions are also impacted by data challenges. These are generally based on emissions data from customers. Currently, such data is either not readily available on a real-time basis or available only for specific customers in certain sectors of a bank’s loan portfolio. Going forward, banks will need to improve their data collation or estimation methodologies (and the accompanying systems, processes and controls) to enable them to report this information at the same time and for the same period as the financial statements.
Some banks disclose quantitative details on financed and facilitated emissions, which are then provided for a section (or sub-section) of a bank’s loan portfolio. This means it’s generally not easy to understand how much of the banks’ total operations are captured – i.e. whether a bank is on track to achieve its net-zero targets in 2050 – or to make comparisons between banks. Also, in many cases it is challenging to understand how absolute or intensity-based financed and facilitated emissions metrics are calculated (if these are quantified). Under the forthcoming requirements, banks will need to report across their entire portfolio. This would require them to apply their learnings from specific sections of their portfolio much more widely, and expand the related systems, processes and controls developed.
We also note that some banks use climate-related or ESG factors to set variable remuneration. However, financed and facilitated emissions often do not yet feed into the specific climate-related or sustainability metrics and targets used to determine variable remuneration.
Credit risk remains the focus
As in 2021, many banks classify climate-related risks as a principal risk with both financial and non-financial impacts. Credit risk remains the focus when it comes to the area most impacted by climate-related risks, followed by reputation and operational risks. In 2022, notably, more banks identify litigation or liability risk as an area impacted by climate-related risks – sometimes mentioned together with greenwashing.
Many banks disclose their integration of climate-related factors into credit risk acceptance and monitoring processes of borrowers. However, it is less clear what the quantitative impact will be on future ECLs.
And what about auditors' reports?
Climate features more prominently in some banks’ auditors’ reports – a trend generally observed in the UK, Europe and Australia.
23 percent of the auditors’ reports acknowledge climate in 2022. If climate is mentioned in the auditors’ report, generally what is included is the involvement of climate-related risk specialists, the impact on the going concern assessment and the assessment of climate-related disclosures in the financial statements.
Find out more
To find out more, read our Phase 1 report of the benchmarking analysis on how banks reported on climate-related matters in 2022. This includes our more detailed findings based on climate-related disclosures forming part of the banks’ 2022 annual reports.
In June, we will publish our follow-on Phase 2 report on how banks align with the TCFD framework, which will complete our benchmarking of banks’ 2022 climate-related disclosures.
1 For Phase 1 of our benchmarking analysis, in determining ‘at the same time’, we reviewed the 2022 other standalone reports where these were released no later than one week after the release of the 2022 financial statements. We made this change compared to our analysis in the previous year because, under the sustainability reporting proposals of the International Sustainability Standards Board, information can be included outside the annual report via cross-referencing to other documents where these are released at the same time as the financial statements.
2 Task Force on Climate-related Financial Disclosures.
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