Slower progress on climate-related disclosures in leading banks’ annual reports: KPMG

Latest KPMG benchmarking report highlights need for globally consistent sustainability reporting standards. Progress on climate-related disclosures in annual reports by some of the world’s leading banks slowed down in 2021, according to a new report from KPMG International Standards Group.

The 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, preparers and other interested key stakeholders.

Despite increasing consensus on the need for enhanced climate impact transparency, the findings reveal that, while many institutions are on a clear journey towards greater voluntary disclosure, with 100 percent of banks analysed providing some form of climate-related disclosures, more detailed progress in annual reports has slowed and varies significantly from territory to territory.

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 (ISSB^TM) marks a critical milestone in the journey towards a consistent global baseline of investor-relevant sustainability reporting – including on climate. In anticipation of new disclosure standards from the ISSB, there is some anecdotal evidence from KPMG’s analysis that some banks may have taken a wait-and-see approach until they have more clarity about the new standards.

Despite slower progress, KPMG’s analysis highlights that 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 analysed 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.

As Monica Dragoi, Director in KPMG in Romania’s Audit Department and specialist in sustainability reporting comments: “Sustainability reporting is becoming an increasingly important part of the reporting cycle of businesses and banks are no exception. We see from this report that banks understand the need for climate related disclosures and that a lot of voluntary reporting is taking place. Nevertheless, the growing emphasis on regulation is welcome, because it will lead to greater consistency and establish clear standards. Romanian banks need to prepare for greater regulation at global and European level, in particular for expected new European Sustainability Reporting Standards (ESRSs), which will apply to many companies throughout the EU.”

As Angela Manolache, Head of Financial Services for KPMG in Romania adds: “This survey makes for interesting reading, because it illustrates just how important sustainability is to the future of the banking industry. All banks need to be aware that climate change and the drive for sustainability can affect them in several ways. Of course, they firstly need to keep their own operational emissions as low as possible and work to achieve net zero. In terms of their investments, banks need to take into account potential risks to their portfolios caused by climate change (for example natural disasters affecting the ability of creditors to repay loans). Moreover, the drive for sustainability will affect the viability of investments in certain sectors (such as fossil fuels), and there could also be reputational issues. A key point mentioned in the survey is the concept of financed emissions- i.e. the idea of measuring the effect of a bank’s investments on climate change. Most banks in the survey are committed to achieving net zero financed (and operational) emissions by 2050 (or earlier). The survey also shows that the drive to sustainability generates many opportunities for banks to develop their business, for instance by investing in the growing green energy sector, and hence play their part in combating climate change. I would encourage banking executives to read this report and I hope it will be useful in promoting the sustainable development of the sector.”