More Stringent Guidelines Force ESG Transparency

The Big Idea

In the absence of universal ESG standards, regulators are scrutinizing institutional practices. The European Banking Authority (EBA) published more stringent ESG guidelines to create precise language on climate risk accountability for banks in their disclosures. In the United States, firms leaning into green finance face pressure to establish barriers between their advisory and evaluation functions. As eager investors drive demand for ESG – portfolios managers and financial firms must curb their conflicts of interest and provide additional transparency.

RepTrak Perspective

Companies must adjust their ESG reporting to contend with regulators' oversight. Strong ESG Scores show a positive correlation with stakeholder intent, including "Benefit of the doubt" and "Trust it to do the right thing." A lack of clarity on sustainably driven earnings from financial services firms may decrease ESG credibility and quickly tarnish stakeholder advocacy.

Reputation Context

Where do global Banks' ESG Scores stand today?

Perceptions of ESG strengths vary regionally, with different routes for growth:

• APAC has a strong ESG performance where the majority (five out of the nine) ESG Factors held scores 70+ in Q4 2021.

• Comparatively, Americas only had one ESG Factor, "Offers equal opportunities," with a strong score of 70.3

• Banks in EMEA struggles to move the needle positively, where every ESG Factor held average scores (<70).

• In the Americas and APAC, "Operations & supply chain transparency" and "Reduces environmental footprint" are the lowest-performing Factors for Banks in Q4 2021.

• EMEA struggles with perceptions across the Social Performance Factor "Improves people's lives" (63.6) and "Operations & supply chain transparency" (63.5).

What is the reputation risk?

Over the past two years, companies addressed corporate inequalities.

• In 2020, the Commonwealth Bank of Australia aimed to appoint women in at least 45% of its manager roles or above. The EBA demanded improved diversity policies among European credit institutions and investment firms to increase gender representation. 

• In 2021, the US Banks' most reputational damaging events reflected the public's attention to firms' social advocacy, including "Unequal pay for employees due to race/gender" and "Unequal opportunities for employees due to race/gender."

Now, banks are dedicating their resources to reach net-zero emissions and increase environmental management. At November's COP26, 450 financial institutions pledged $130 trillion towards fighting climate change; comparatively, commitments in 2019's COP25 totaled $4 trillion. Financial institutions' leaders must stay wary of their stakeholder's attention to environmental impact, as it may lead to future reputation risk factors. 

Convo Starters

1. What steps is your company taking to expand its ESG agenda and global landscape?

2. Do your current ESG metrics satisfy its growing global importance? If not, how can your company re-evaluate ESG performance?

3. How is your company dividing ESG principles internally?