European banks failing to adequately integrate environmental and social risks, says study

Large European banks are failing to factor in the potential risks and opportunities of sustainability issues and the financial impacts, according to a study from KPMG and WWF. The report notes that the lack of awareness is despite growing pressure from investors to be informed of potential risks.

The report – Ready or not – An assessment of sustainability integration in the European banking sector – concludes that European banks are “not yet sufficiently aware” of their business risks from environmental and social developments, ranging from climate change to water scarcity.

The study looked at 12 large European banks, including UK bank’s Barclays, HSBC and Royal Bank of Scotland, and found that they are adopting “a quite narrow approach to sustainability issues”, focussing on whether or not they want to finance certain activities.

Barend van Bergen, partner at KPMG Sustainability, commented, “Even if banks are aware of these development, it is mostly regarding the potential consequences for their reputation.

“Many banks lack a broader view of the financial consequences of environmental and social issues, affecting their operations and corporate clients. This is disturbing, because the impacts of these megatrends on bank’s earnings will further increase in the coming years. In addition to that, demand for banks’ corporate responsibility is growing.”

The report argues that banks need to consider how environment and social issues might causes financial risks for their clients. For instance, companies in the energy sector are facing growing risks as renewable become more competitive, potentially impacts on the creditworthiness of fossil fuel companies.

In addition to this, Bergen explained that the way banks deal with the environment and society is having a growing impact on their financial profits, with transparency becoming increasingly important to investors.

He said, “For example, analysts and investors want to understand the risks that banks face with investment that may come under pressure, such as the funding of activities linked to child labour or other human rights violations.

“Besides that they want to know what measures banks take to limit and manage these risks so they can make a sound judgement about the stability of the bank’s long-term profitability. Hence, it is essential that banks report on the potential risks that their responsible behaviour entails.”

Photo: Simon Rogers via Freeimages

Further reading:

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