You are here: Home The Ceres Roadmap for Sustainability Sector Performance Financial Services
Document Actions
  • Print this Print this
  • Email this page

Financial Services

Financial services sector analysis: Given the enormous influence of financial services companies on the economy, the global financial crisis has put pressure on this sector to improve its accountability and performance.

Financial Services

Companies

Affiliated Managers Group Inc.
American Express Company
Ameriprise Financial Inc.
Bank of America Corporation
BlackRock, Inc.
Capital One Financial Corp.
Citigroup, Inc.
CME Group Inc.
Discover Financial Services
E*TRADE Financial Corporation
Eaton Vance Corp.
Franklin Resources Inc.
IntercontinentalExchange, Inc.
Invesco Ltd.
JPMorgan Chase & Co.
Legg Mason Inc.
Leucadia National Corp.
Moody's Corp.
Morgan Stanley
Nasdaq OMX Group Inc.
Northern Trust Corporation
NYSE Euronext, Inc.
Raymond James Financial Inc.
Sallie Mae, Inc.
SEI Investments Co.
State Street Corp.
T. Rowe Price Group, Inc.
TD AMERITRADE Holding Corporation
The Bank of New York Mellon Corporation
The Charles Schwab Corporation
The Goldman Sachs Group, Inc.

Key Findings

  • Companies have started to make sustainability concerns a governance issue, but the pace of change remains slow.
  • The sector is beginning to recognize the value of engaging with stakeholders, particularly investors, on sustainability.
  • An increasing number of companies are disclosing their sustainability performance through a variety of channels; however material sustainability disclosure in financial filings remains low.
  • Financial Services companies have made progress in addressing operational environmental impacts, especially by “greening” their owned and leased buildings.
  • More Financial Services companies are starting to capitalize on sustainability as a business opportunity by expanding their lending and investments to projects and industries that offer sustainability solutions. However, the proportion of these offerings remains small compared to overall lending and investment portfolios.
  • Companies are proactively engaging employees on sustainability, particularly through training.


Introduction

The Financial Services sector has a powerful role to play in supporting the shift to a sustainable economy through its influence on capital across global markets. Companies in this sector have begun to demonstrate their commitment to sustainability by expanding investments in clean technology, adopting policies to address environmental and social risks, and engaging in more proactive and robust stakeholder engagement and disclosure.  Yet, much of the progress is happening within a small group of leading companies. Despite positive steps, the sector as a whole has a long way to go.

Risk management remains a top priority for stakeholders. The massive risk management failures that led to the economic collapse of 2008, and the continuing ethical and governance crises that hang over this sector, have attuned stakeholders to other potential risk management failures that could also have similarly dire economy-wide implications. In response, many large Financial Services companies are enhancing their enterprise risk management systems. There is a growing expectation that the large scale risks facing Financial Services companies include environmental and social (sustainability) risks that must be actively and wisely managed. Larger companies in this sector have taken note and revised their risk management frameworks to specifically address sustainability issues, such as climate change, human rights, and biodiversity.  Some companies have gone a step further and are proactively growing their lending and investments in sustainability solutions such as renewable energy, energy efficiency and clean technology. While these public commitments to sustainability are welcome, the scale of the commitments is still relatively small.

A noteworthy development has been a growing willingness by Financial Services companies to work together to develop standards intended to bolster the credibility of the sustainability products being launched. In January 2014, for example, thirteen companies worked together to launch the Green Bonds Principles, a set of voluntary guidelines intended to promote the integrity of the Green Bonds marketplace. The Principles now have 25 signatories. A number of companies from this sector are also working with the United Nations Environment Programme Finance Initiative (UNEP FI) and the World Resources Institute (WRI) to develop sector-specific guidance for measuring emissions from projects in their lending and investment portfolios.

While the Financial Services sector is an average performer across the Roadmap expectations as a whole, there has been substantial improvement on aspects of the Roadmap’s Stakeholder Engagement and Performance expectations since 2012. Continued scrutiny from investors, advocacy groups and the public has encouraged companies to engage in ongoing conversations with critical stakeholders on sustainability risks and opportunities for leadership. On the Performance front, the sector has focused on reducing operational impacts – including energy use and greenhouse gas emissions reductions.

For sustainability in the financial sector to reach scale, internal capacity building is essential. On their own, the four largest banks in the United States employ well over a million people. It is encouraging, therefore, that many companies in this sector have programs to engage employees on sustainability, including through employee surveys, town halls and training on environmental and social issues.

Governance Section Icon

 

GOVERNANCE FOR SUSTAINABILITY

 

  • Companies have started to make sustainability concerns a governance issue, but the pace of change remains slow.

 

A growing number of companies in this sector have begun to develop formal systems for integrating sustainability into their corporate structures and by adopting policies intended to impact decision-making related to sustainability issues. However, the pace of change remains slow, and the involvement of corporate executive leadership is unclear.

Formalized board oversight of sustainability has remained steady for this sector between 2012 and 2014 with twenty six percent (8 companies of 31 companies) falling in Tiers 1 and 2 in both years. These companies have institutionalized formal oversight over environmental and social issues.

Similarly, management accountability for sustainability has started to take hold among some companies, but sector performance on this Roadmap expectation remains fair at best. Thirty-two percent (ten companies) perform in Tier 2 and 13 percent (four companies) perform in Tier 3, indicating some established accountability mechanisms at the middle and senior management levels. However, no company performed in Tier 1 and more than half fell in Tier 4. In short, disclosure of C-Suite accountability for achieving sustainability goals is minimal across the sector.

State Street Corporation has strong systems to integrate sustainability across its management structure. The company’s Executive Corporate Responsibility Committee is charged with integrating sustainability into the company’s business strategy. The broader Corporate Responsibility Working Group, representing close to 50 business units, corporate functions and geographies coordinates the company’s enterprise-wide sustainability initiatives.

The Roadmap expectation on corporate policies and management systems measures the extent to which companies embed sustainability into decision-making. Performance on this expectation was poor. Forty-two percent (13 companies) fell in Tier 3 and another forty two percent (13 companies) fell in Tier 4 for this expectation. To the extent companies in this sector are integrating sustainability concerns into corporate policy and day-to-day decision making, it tends to be meeting regulatory requirements, such as policies on bribery and corruption and whistleblower programs.

Additionally, the Financial Services sector has been slow to integrate sustainability criteria into lending and investment related decision making, though there has been modest improvement over the past two years. Only twenty three percent (seven companies) have formal policies on responsible investment, and only twenty three percent (seven companies) have formal human rights policies that apply to their lending practices. A relatively small proportion of this sector has signed on to initiatives that explicitly address environmental and social risks, such as the Equator Principles (three companies) and the U.N. Principles for Responsible Investment (PRI) (seven companies). Most of the companies that have signed on to the PRI have done so over the past two years.

In April 2014, JPMorgan Chase released an Environmental and Human Rights Policy Framework. While outside the scope of this analysis’s timeframe, the Framework is noteworthy for the details provided on the company’s environmental and social risk review process, including the application of enhanced reviews for sensitive sectors. Additionally JP Morgan launched a “portfolio review approach” to proactively assess sustainability risks in critical sectors outside the timeline associated with a transaction review. Portfolio reviews were conducted for clients engaged in hydraulic fracturing, and are being planned for global oil and gas companies in 2014.

Although some Financial Services companies are beginning to adopt formal systems for sustainability oversight, when it comes to the Roadmap expectation that companies will link executive compensation to sustainability performance, eighty percent (25 companies) fall in Tier 4.

Stakeholder Engagement Section Icon

 

Stakeholder Engagement

 

  • The sector is beginning to recognize the value of engaging with stakeholders, particularly investors, on sustainability.

 

Investors, advocacy groups and other stakeholders have increased the pressure on Financial Services companies to address a range of environmental and social issues in recent years, and many have responded. Not only are they engaging stakeholders on sustainability issues with more consistency, they are disclosing the results of these engagements. Twenty-nine percent of the companies in this sector (nine companies) now perform in Tiers 1 and 2 across the Roadmap’s stakeholder engagement expectation, up from just from 7 percent (two companies) in 2012. However, fifty eight percent (18 companies) remain in Tier 4.

Financial Services companies are showing particular improvement in investor engagement. Twenty-nine percent (nine companies) ranked in Tiers 1 and 2 for investor engagement on sustainability; no company performed in Tiers 1 or 2 in 2012. Growing investor interest in sustainability issues, and corporate efforts to demonstrate that they are capitalizing on business opportunities associated with sustainability solutions, are driving this improvement.

Citigroup holds annual events for investors to discuss equity research and financing challenges related to climate change and water. JPMorgan Chase and BNY Mellon each hold meetings with investors on relevant sustainability issues including climate change, consumer lending and business ethics.

Disclosure Section Icon

 

Disclosure

 

  • An increasing number of companies are disclosing their sustainability performance through a variety of channels; however material sustainability disclosure in financial filings remains low.

 

There has been general improvement by this sector on the Roadmap’s disclosure expectations. Twenty-three percent (seven companies) ranked in Tiers 1 and 2, up from three percent (one company) in 2012.

And a growing number of companies are using the Global Reporting Initiative (GRI) guidelines. Fifty-five percent (16 companies) did so in 2014, up from forty two percent (13 companies) in 2012.  There has also been a significant jump in the number of Tier 1 companies using a range of vehicles to disclose their sustainability performance, including the Carbon Disclosure Project’s annual survey and annual sustainability reports. Twenty-three percent (seven companies) performed in Tier 1 on the Roadmap’s standards for disclosure expectation in 2014; none did so in 2012.

Goldman Sachs’ annual report identifies a number of sustainability risks, including catastrophic environmental events, reputational and other risks related to its commodities activities. The report explicitly notes that “the need to pursue sustainability and manage environmental risks is a growing imperative both for our clients and Goldman Sachs” and details how the company’s Environmental Markets Group works to identify and mitigate those risks for clients.

However, with regard to the Roadmap expectations that sustainability risks be disclosed in financial filings, and that sustainability disclosure be externally verified, Financial Services companies, as in 2012, do not perform well. Only thirteen percent (four companies) have strong disclosure of material sustainability issues in their financial filings and perform in Tiers 1 and 2 on that expectation, up from three percent (one company) in 2012).  Eighty-four percent (26 companies) do not externally verify their sustainability disclosure and fall in Tier 4 on the Roadmap’s verification and assurance expectation, down slightly from ninety percent (28 companies) in 2012.

Northern Trust leads in the expectation for external assurance for having the entirety of its 2012 Corporate Social Responsibility Report reviewed by Deloitte. A letter noting the scope and standards associated with this assurance is included in the report.

An important emerging trend is the growing number of sector-wide efforts to develop sustainability disclosure standards. For example, influential companies including NYSE Euronext, NASDAQ and Blackrock are involved in the United Nation’s Sustainable Stock Exchange Initiative. This initiative explores how stock exchanges, in collaboration with investors, regulators and companies, can improve corporate transparency – and ultimately performance – on sustainability issues and encourage sustainable investment. Bank of America, State Street and Citi are working with UNEP FI and WRI’s Greenhouse Gas Protocol to develop financial sector guidance for greenhouse gas accounting and greenhouse gas risk management. The guidance is intended to provide a framework for reporting value chain emissions, including emissions associated with financial products and services.

Performance Section Icon

 

Performance: Operations

 

  • Financial Services companies have made progress in addressing operational environmental impacts, especially by “greening” their owned and leased buildings.

 

Fifty-two percent of companies in this sector (16 companies) have goals or programs to reduce their carbon footprint through energy efficiency and use of renewable power. Thirty two percent (ten companies) rank in Tiers 1 and 2 for adopting sustainable building practices, a significant jump from ten percent (three companies) in 2012.  The sector has made significant progress in promoting sustainable building management practices and Leadership in Energy and Environmental Design (LEED) certification.

NYSE Euronext has reported that it has achieved carbon neutrality for the third consecutive year using a combination of energy efficiency programs, Renewable Energy Credits and carbon offsets. Citi became the first bank in the world with 200 projects receiving LEED certification. The company has also set a goal to LEED certify 15 percent of its real estate portfolio by 2015.

Most large Financial Services companies occupy facilities (owned and leased) and also invest in real estate, which enhances opportunities for positive impact in sustainable building management. Going forward, the sector should disclose how the results from the operational efficiency efforts are influencing product developments and offerings.

Performance Section Icon

Performance: Products & Services

 

  • More Financial Services companies are starting to capitalize on sustainability as a business opportunity by expanding their lending and investments to projects and industries that offer sustainability solutions. However, the proportion of these offerings remains small compared to overall lending and investment portfolios.

 

Financial institutions have a critical role to play in supporting the shift to a sustainable economy through their products and services offerings. The majority of the companies assessed in this sector have started to capitalize on sustainability as a business opportunity; fifty five percent (17 companies) have some form of environmental or socially focused product or service offering. The companies that perform in Tier 1 have set specific goals to grow their lending and investments to projects and industries that offer sustainability solutions, such as clean technology, renewable energy and energy efficiency. While there has been an uptick in the supply and demand for sustainability-related financial products and services since 2012, the scale of the commitments remains small within the companies’ overall portfolios.

Citigroup, Bank of America, Morgan Stanley and Goldman Sachs fall in the top tiers for setting goals to grow their investments in environmental finance, and adopting systems to facilitate this growth, such as teams that work on sustainability-related services, management oversight, and risk management procedures that address environmental and social issues.

A key challenge for the sector is ensuring the credibility of financial products that are intended to advance sustainability. There is a rapidly growing market for sustainable investments, evidenced by the popularity with investors of Green Bonds – debt financing for projects with environmental benefits. The Green Bonds Principles, described above, is one such effort to assure investors.

Performance Section Icon

 

Performance: Employees

 

  • Companies are proactively engaging employees on sustainability, particularly through training.

 

The Financial Services industry is powered by human intellectual capital. Creating a workforce fluent in sustainability issues is crucial for financial companies to develop and meet the demand for sustainability-related products and services.

Forty-two percent of the Financial Services companies (13 companies) rank in the top two tiers for engaging employees on sustainability. Leading companies systematically embed sustainability into training and employee engagement, and demonstrate the importance of sustainability to business by involving executives in employee-focused sustainability programs. There has been progress in this area across the board, with the number of companies in Tier 4 dropping to forty five percent (14 companies) in 2014 from seventy four percent (23 companies) in 2012.

Citi and JP Morgan have formal processes to train financial professionals on their Environmental and Social Risk Management Policies. Northern Trust’s senior management regularly participates in panel discussions and town halls aimed at engaging the company’s workforce on sustainability. One of the primary’ goals of the company’s CSR Task Group is to increase employee engagement in sustainable environmental practices, stakeholder engagement and business growth.

 

Explore the interactive data to see how the Financial Services sector performed across all Ceres Roadmap expectations in the Gaining Ground report.