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Sector Reports - 21/11/2019

The Specific Purpose Banks and Agencies: a crucial role to play for sustainability but high material risks remain to mitigate

New Vigeo Eiris report analysing 24 institutions finds that, despite high ESG scores, the sector faces controversies over financing projects with environmental and social liabilities

The sector can be classified according to three main groups with specific mandates: National or State Development Banks, Public groups serving the public interest and Export Credit Agencies. The nature of these Financial Institutions would accentuate their vocation to invest in a long term and positive impact projects.

The report provides Vigeo Eiris’ exclusive opinion on sector vulnerabilities, controversies and emerging risks, as well as strengths, innovations and best practice in terms of CSR. The review also highlights sector ESG challenges and emerging issues, as well as performance scores and advanced indicators on critical issues such as climate change and energy transition, human rights protection, business ethics, human capital and contribution to the UN Sustainable Development Goals.

 

Key findings:

  • Vigeo Eiris awarded an average overall score of 46.8 to institutions in the Specific Purpose Banks & Agencies sector, on a scale of 0 to 100. The sector’s performance is stable compared to our previous analysis.
  • The sector ranks 2nd out of Vigeo Eiris’ total research universe of 4,838 companies.
  • Largest Specific Purpose Banks & Agencies display homogeneous performance from robust to advanced due to a high level of cooperation to implement common ESG standards in their operations.
  • The Specific Purpose Banks & Agencies sector disclosure rate is 80%, significantly above Vigeo Eiris’ universe average (60%).
  • ESG risk mitigation scores are homogeneous: they are limited in relation to reputation, operational efficiency and human.
  • The sector faces 18 controversies, none of which is critical. The most recurrent controversies relate to fundamental human rights, environmentally responsible financing and climate change.

Key Takeaways:

  • Specific Purpose Banks and Agencies have a strong vocation to generate climate and sustainable finance on a large scale. Some of the institutions in this sector have taken relevant steps to enhance their efforts to tackle climate change, such as developing specific risk assessments to support a low carbon economy. In addition, some of the banks are participating in industry networks to enhance climate finance globally. Five of the institutions (Kreditanstalt Fur Wiederaufbau, Agence Francaise de Developpement, FMO, Caisse de Dépôts, Caisse de depot et placement du Quebec) disclose information on the CO2 emission linked to their loan portfolio and the reports that emissions have decreased. Further three institutions (Rentenbank, BPIFrance Financement and NRW.Bank) report on the share of share of climate finance of the total financing and it shows stable or improving trends.
  • The exposure of the Specific Purpose Banks and Agencies to business ethics risks both for their staff and in the scope of the projects they finance, in their investments and the guarantees they issue is a material issue. However, only the Agençe Française de Développement, FMO, Nederlandse Waterschapsbank and Kreditanstalt Für Wiederaufbau have established a formalised commitment to preventing corruption and money laundering for their internal operations and investee projects. Additionally, the same Institutions, Caisse des Dépôts and Cassa Depositi e Prestiti have taken concrete steps on this regard such as training on business ethics that go beyond legal requirements, proactively supporting a culture of responsible conduct. The sector displays an average score of 48.7/100 on the Institutions’ efforts to prevent corruption and money-laundering. Two Organisations are facing allegations related to fraud, conflict of interest and misuse of public funds.
  • On April 7th, 2016, the OECD has revised its Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence to establish a frame to identify, consider and address the potential environmental and social impacts and risks relating to applications for officially supported export credits as an integral part of Members’ decision-making and risk management systems. Members are expected to benchmark projects against international standards as part of their environmental and social due diligence, they are also required to provide information on projects for which official support has been provided that have a potentially high or medium negative social or environmental impact. As regards to human rights risks related to credit operations, even though most of the Export Credit Agencies have implemented social due diligence, it appears that only OeKB and Finnvera have committed and have integrated relevant measures to implement grievance mechanism and remediation processes for impacted stakeholders. As regards to environmental standards in the Institution’s financing process, even though all the Institutions appear to have a relevant environmental framework for their operations, according to the American research organisation Oil Change International, Export Credit Agencies are supporting climate disaster while providing little help to clean energy. In 2017, 88 percent of the export credit agencies energy financing went toward fossil fuels.
  • Financial institutions can play a crucial role in contributing to the UN Sustainable Development Goals (SDGs). Seven institutions have made commitments to integrate the SDGs in their strategy by pursuing investments and developing business plans in line with the UN 2030 Agenda. Agence Française de Developpement, FMO, Cassa Depositi e Prestiti and Caisse des Dépôts has set quantified targets related to issues such as job creation, social housing, infrastructure projects and access to basic goods and services. Further, seven of the top performers in the sector report on measures such as systems to measure the effectiveness of its projects in terms of sustainable development and contribution to the SDGs. Overall, the sector displays a robust reporting about its contribution to social and economic development (60.6/100).
  • Sustainability is becoming the most material challenge for the Specific Purpose Banks & Agencies. Indeed, Promotional Banks’ consideration of environmental impacts in their financing and investment decisions appear as a common practice among these Institutions: the average score regarding environmental products is robust (50.5/100 in 2019), increasing by 2.6 points compared to the previous review. Among others, it is worth mentioning Agence Françoise de Developpement, FMO and BPIFrance Financement which systematically considers ESG impacts of their operations and develop financial products with an environmental upgrade. Nevertheless, despite this performance, this ESG area is one of the most affected by controversies in the sector: the 77% of controversies faced in the sector are associated to stakeholders’ concerns over financing of projects with high exposure to environmental deterioration and human rights violations, such as dams and pipelines.

Best performing areas:
o Social and economic development
o Non-discrimination and diversity
o Social dialog

Worst performing areas:
o Executive remuneration
o Management of environmental impact from transportation
o Societal impact of the company’s products and services

Top Performing Institutions:
o Europe : Agence Francaise de Developpement (74/100)
o North America : Caisse de depot et placement du Quebec (48/100)
o Asia Pacific: Development Bank of Japan (30/100)
o Emerging Markets: Banco Nacional de Desenvolvimento Econômico e Soc. (27/100)

Institutions making best progress since 2017:
o Europe: Cassa Depositi e Prestiti (+15)

To view an excerpt of our 2019 Specific Purpose Banks and Agencies sector report, download the document below

To enquire about accessing our sector reports, please contact the relevant team below:
If you are an investor: investorcustomer.service@vigeo-eiris.com
If you are a corporate entity: corporatecustomer.service@vigeo-eiris.com
If you are an NGO or a university: contact.academique@vigeo-eiris.com
If you are a journalist: news@vigeo-eiris.com

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Keywords : ESG