Sustainability Reporting by Banks

Editor's Notes

1. All four Australian banks address sustainability in their Annual Report, while also publishing a separate Sustainability Report. The data shows that most banks publish a separate Sustainability Report, while simultaneously including sustainability information alongside financial information in Annual Reports, which indicates increased integrated reporting. Integrated reporting is defined as “[...] a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.” Its proponents argue: “[...] the irresistible force of transparency has met the immovable object of an outdated and even dangerous model of reporting,” the example of this outdated model being the near collapse of the global financial system. Integrated reporting, “[...] provides a single version of the truth to all concerned parties, inside and out.
2. The majority of banks are transparent about environmental performance, in addition to establishing quantifiable performance targets. Banks from Australia, Europe and North America seem to outperform their Asian counterparts. Levels of transparency and the existence of environmental targets are commendable, yet it is important to note that transparency is often mistakenly understood to be a straightforward concept. In reality, transparency has many dimensions, namely who discloses to whom, and what is disclosed to meet what ends ? Research finds that corporate environmental performance is often pursued and disclosed opportunistically. For example, a decrease in environmental costs positively affects financial erformance, in part mediated through enhanced corporate reputation. Opportunistic use of environmental information can be hazardous, as it can potentially erode instead of building corporate legitimacy: feigning or exaggerating environmental performance can backfire and harm a company’s image. Reputation incentives can also result in uninspired action, allowing banks to maintain risk levels while meeting stakeholder demands by copying practices of peers, or by applying non-aspirational industry standards. In the sample, environmental transparency most commonly manifests in carbon emissions disclosures, specifically through participation in the Carbon Disclosure Project (CDP). While participation is high, doubts exist whether CDP disclosures are valuable for investors, civil society, and policy makers, as they are associated with uncertainty about organisational boundaries. For example, a 2013 study found that the Royal Bank of Scotland’s fossil fuel deals led to a carbon footprint of up to 1,200 times the reported emissions, 1.6 times as high as the emissions of the UK in 2012. For Australian banks, the scope of emissions reporting does not include the $AUD 36.7 billion invested in the fossil fuel industry since 2008.
3. Corporate governance provides the system by which companies are directed and controlled, to ensure that duties are exercised according to laws, regulation and codes of conduct. Company leadership, specifically the board of directors and the executive management team, are progressively held responsible for the design, implementation and monitoring of sustainability objectives and performance. This is no different for banks. It is crucially important that the leadership drives social and environmental causes, as they create a precedent for the entire firm. However, the governance of sustainability is still at an early stage, as there are few directors with direct responsibility for sustainability
4. For example, CBA lists eleven codes of conduct on its website, of which only five have been made public. Despite the description in the ASX Corporate Governance Principles and Recommendations, it is unclear which of the codes describes “[...] the practices necessary to maintain confidence in the company’s integrity, to take into account their legal obligations and the reasonable expectations of their stakeholders, and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.” WBC’s code “[...] describes the standards of conduct expected of our people, both employees and contractors [...] to help us make the right decision every time.” It is unclear whether the code applies to directors as well. Another document, called the “Principles for Doing Business”, sets out WBC’s “[...] commitment to sustainable business practice.” Similar to the code of conduct, the Principles do not seem to apply to directors: “[...] employees and contractors who breach the Code of Conduct or Our Principles may face disciplinary action including termination of employment or termination of their contracts.” ANZ has codes of conduct for its staff and its directors. In the codes, the bank states that it “[...] aims to deliver superior long-term total shareholder return, taking proper account of employees, customers and others with whom we do business as well as the communities and environments in which ANZ operates. In striving to achieve these aims, we should not compromise our ethics or principles.” While the codes apply to staff and directors, they suffer from the shareholder primacy paradox: what happens when the focus on maximising shareholder profits conflicts with community and environmental factors? This paradox is also present in NAB’s code of conduct, in which the bank states it is “[...] committed to achieving sustainable performance and delivering value to our customers and shareholders while maintaining our beliefs, behaviours and trusted reputation.” Yet, the bank does not explicitly mention what sustainable performance means. While the code mentions “community and respects human rights”, it does not mention the environment. Overall, it is unclear which codes of conduct apply to whom, while the principles in the codes are often vaguely formulated and can at times be contradictory
5. Short-termism, performance rewards, and maximising shareholder value have long been the norm in the financial sector. Yet the focus on immediate returns while neglecting long-term risks is increasingly criticised. While performance rewards and shareholder value creation are not harmful, they become damaging when disproportionally focused on the short-term, which can incite unethical conduct and risk-taking for the sake of instant rewards. Conversely, a sustainable bank would equally consider financial, environmental and social factors, while aligning its own interests with that of the community through long-term financial and non-financial value creation, for shareholders and stakeholders alike