Retail & Specialised Banks: High potential to influence companies towards more environmentally responsible behaviours, as financial intermediaries.
However, money laundering, Board’s composition and diversity remain among the banks' top sustainability risks.
New Vigeo Eiris report reveals an improvement on the sector’s approach to prevent discrimination and promote diversity. The Banks’ compliance with the law related to the reporting of companies’ gender pay gap in some European countries such as United Kingdom, Germany, and France contribute to this trend. In this regard, the banks in the UK report on the monitoring of salary disparities.
The report provides Vigeo Eiris’ exclusive opinion on 281 banks belonging to the Retail & Specialised Banks sector. Retail & Specialised Banks are banks with assets less than EUR 200 billion that deal directly with retail customers. Also known as consumer banking or personal banking, or retail banking. There is no explicit split of subsectors and a bank’ customisation might only differ if the bank is operating only in one segment of activities (Retail Banking / Corporate Banking / investment banking). Some special purposes banks might be operating in one or in few specialised activities such as mortgage services, saving services, SME’s finance, and/or Treasury Services & Markets; some regional banks are also part of the sector. The report includes the sector’s strengths, innovations and best practices as well as controversies, vulnerabilities and emerging challenges such as money laundering, the Board’s composition and functioning, sustainable investment, financial inclusion, and non-discrimination. It analyses performance scores and advanced indicators on critical issues such as energy transition, business ethics, human capital and human rights, governance, executive remuneration, transparency on taxes, integrity of lobbying practices, the level of sustainable products & services, and contribution to the UN Sustainable Development Goals.
• Vigeo Eiris awarded an average limited overall score of 32 to companies in the Retail & Specialised Banks sector, on a scale of 0 to 100. The sector’s performance has improved by 2 points since our previous analysis.
• The sector ranks 14th out of Vigeo Eiris’ 39 sectors, which cover a total research universe of 4,500 companies. Previously, the sector ranked 21st.
• An advanced performance is observed only in three banks from Europe (La Banque Postale, Yorkshire Building Society and Credit Mutuel Arkea). As to Emerging Markets, Piraeus Bank is the best performer in the sector. Overall, best performers are mostly concentrated in Europe, whilst laggards are in general listed in Asia Pacific and North America.
• The Retail and Specialised Banks sector’s reporting rate is 60%, slightly above the universe average (58%), with European companies communicating most comprehensively on their ESG policies, practices and performances.
• ESG risk mitigation scores are limited in relation to legal security (39/100), reputation (31/100) and operational efficiency (31/100), and weak in relation to human capital (29/100). The weak score in human capital is due to weak performances on fundamental labour rights (observed in 66% of the sector), on labour relations (observed in 58% of banks), on reorganisation (observed in 85% of the sector) and on health and safety (observed in 64% of the sector).
• The capacity of the sector to tackle climate change and support the transition to a low-carbon economy remains weak (22/100). European companies lead the sector in efforts to integrate climate risk management into their activities.
• The sector faces 253 controversies, affecting almost 42% of the companies: of which 2% are involved in critical cases, 27% in high severity cases, 13% in significant cases and 0% in minor cases. The most recurrent controversies concern corruption and money laundering, internal controls and risk management, information to customers, responsible customer relations and fundamental human rights.
• Money Laundering: As the recent scandals such as the Troika Laundromat and the U.S. sanctions programmes violation showed, the Retail & Specialised Banks are highly exposed to risk of money laundering in many countries. Vigeo Eiris’ findings reveal that only 16.7% of the Retail & Specialized Banks has taken concrete steps on this such as training on business ethics that go beyond legal requirements, proactively supporting a culture of responsible conduct. As a best practice, PNC Financial Services Group, and Regions Financial report on making managers personally responsible for preventing and managing business ethics risks, through financial incentive measures including business ethics metrics or through the evaluation system. Despite Banks’ efforts to comply with ever growing regulations, the sector remains heavily affected by controversies related to unethical behaviour (79 out of 253 controversies). Among the 48 banks that are involved in controversies related to business ethics, the majority (58%) does not report on these allegations, and only Fifth Third Bancorp is remediative, providing corrective measures.
• Board’s composition: A sound governance system can contribute to the long-term success of a company, with the board of directors playing a key role in setting the company’s strategy and in management oversight, providing the necessary checks and balances. As stated by European Central Bank, “independence is not enough in itself: all board members need to be independent thinkers too. In Board discussions, the view of each board member must count. This is a prerequisite not only for sound collective decision-making, but also for fostering critical thinking and diversity.” In Retail & Specialised Banks sector, about 30% of the companies has a board with a major part of independent directors; the roles of Chairman and CEO are separated in three fourths of the banks, but an independent Chairman is observed only in 20% of the companies. Only 15% of the banks analysed in the Retail & Specialised Banks Sector have a CSR committee in place at Board level, which remains an area for improvement.
• Non-discrimination and Diversity: In a sector where the percentage of women in the workforce is high (52% according to last data available), the low percentage (17%) of women at management level remains a cause of concern. Most companies have identified and addressed non-discrimination and diversity in their reporting but very few banks have set quantified targets in this regard. Likewise, gender pay disparity for the same positions remains an issue for the sector, with only 21.7% of the companies monitoring salary disparities. As a good practice, Raiffeisen Bank International has achieved 55% female representation in management and has also implemented an affirmative action where management positions are advertised and not filled until there is at least one qualified female candidate. In addition, as an effort to reduce the gender pay gap, La Banque Postale went beyond the monitoring of salary disparities and has allocated a budget dedicated to reducing wage inequalities between men and women. Finally, the representation of women on boards is increasing in Europe, due to governmentally imposed quota policies for boards of directors, whereas women remain less represented on the board in other zones.
• Financial inclusion: The World Bank Group’s Universal Financial Access 2020 initiative is aimed at enabling 1 billion people to have access to a transaction account, as it is estimated that 31% of adults worldwide do not have a basic transaction account. Financial inclusion is an enabler and featured as a target for eight development goals in the 2030 Sustainable Development Goals. indeed, Retail and Specialised Banks play a considerable role in promoting financial inclusion and expanding credit and financial services to a wider population, particularly to vulnerable and to financially excluded population. In September 2018, The International Monetary Fund (IMF) released its nine annual Financial Access survey, based on data collected by central banks from providers of financial services in 189 countries; the survey highlights an expansion in financial inclusion over the past decade and a significant progress by some countries towards greater financial inclusion of women. However, the sector’s performance on this material topic is weak (26/100), indicating that retail banks’ approach towards financial inclusion is still not fully developed as they do not appear adequately prepared to support vulnerable segments. La Banque Postale achieves the highest score in the sector (85/100): its CSR policy promotes access to both basic banking services and credit for weaker customers; and indicators related to financial inclusion have shown improvements over the past three years. YES BANK from India shows the second highest score in the sector thanks to its policy related to financial inclusion. YES BANK promotes access to credit for weaker customers through adopting the guiding principle of Frugal Innovations for Financial Inclusion (FI4FI). The objective is to systematically leverage Information and Communication Technologies (ICT) and frugal business models to offer focused financial solutions
• Sustainable investment: Sustainable investing strategy has become more widely deployed globally as it makes good business sense. The European Commission High-Level Expert Group (HLEG) on Sustainable Finance advised on developing a comprehensive EU strategy on sustainable finance with the aim of re-orienting capital flows towards sustainable investment. At global level, other actors such as the UN PRI pushes in same direction. In 2018, finance leaders and world leaders from government and health launched The Tobacco-Free Finance Pledge which has currently over 140 Signatories and Supporters. Additionally, the Responsible Investment Benchmark Report 2018 – Australia finds out that issues attracting negative screening include the ‘mature’ ESG and ethical issues such as tobacco, controversial weapons and gambling, highlighting increases in exclusions focused on climate and human rights in the year. Retail and Specialised Banks sector has slightly improved its performance on addressing this issue, but it remains limited (34/100). Only 20 banks have applied sustainable environmental strategy in a significant part of their investment portfolio. Among them, La Banque Postale Asset Management applies a wide range of SRI strategies and has developed a methodology to calculate the SRI ratings; the managed assets integrating ESG criteria represented 53% of all its AUM and the Bank measures the carbon emissions linked to corporate bond segments of company’s portfolios. Van Lanschot in Netherlands has allocated all the advocated sustainable investment products strategies, including shareholders activisms.
Best performing areas:
o Internal controls & risk management
o Non-discrimination and diversity
Worst performing areas:
o Business travel and commuting
o Responsible lobbying
Top Performing Companies:
o Europe: La Banque Postale (69/100)
o North America: PNC Financial Group (44/100)
o Asia Pacific: CYBG (44/100)
o Emerging Markets: BMCE Bank of Africa (61/100)
Companies making best progress since 2017:
o Europe: Yorkshire Building Society (+22)
o North America: Regions Financial (+10)
o Asia Pacific: CBYG (+15)
o Emerging Markets: BCP (+14)