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. Public trust in the financial services sector remains low, given continued controversies relating to mortgage financing and banking fees. This lack of public trust and increased regulatory scrutiny have pushed financial companies to rethink their risk management frameworks. Many of the larger banks have started to improve their accountability systems, implement more robust stakeholder engagement processes and enhance transparency.
Financial services companies are particularly exposed to environmental and social risks as part of their lending and investment practices. Companies in the sector have started to address this by integrating sustainability criteria into their policies and systems. However, concerns remain about the translation of such policies and risk management systems to performance changes.
The financial services industry includes a range of market segments, including commercial and retail banking, capital markets and trading, investment banking, asset management, specialized products and services, and stock exchanges. This assessment includes an evaluation of 31 highly diversified companies whose activities reflect the complex and global nature of today’s financial markets.
The analysis that follows includes a summary of the sector’s progress within each of the four chapters of The Ceres Roadmap for Sustainability: Governance, Stakeholder Engagement, Disclosure and Performance. Within the Performance section—which covers operations, supply chain, transportation and logistics, products and services and employees—those issues that are of greatest relevance to the sector have been highlighted.
GOVERNANCE FOR SUSTAINABILITY
The last few years have seen an increase in the number of large financial companies integrating ESG criteria into board responsibilities. Of the 31 companies assessed, eight have explicitly outlined board oversight over ESG issues in relevant board committee charters. Internationally-headquartered financial firms are sustainability leaders in the sector, although large U.S. banks are catching up. For example, Bank of New York Mellon’s board-level Corporate Social Responsibility Committee comprises four independent directors tasked to review the company’s CSR performance against its commitments.
Ten of the financial services companies evaluated have implemented an executive management structure for ESG issues, typically led by an executive level officer, reporting to the CEO and the board. For example, State Street’s Executive Corporate Responsibility Committee is composed of senior managers and led by the Executive Vice President of the company’s Global Product Management Division, who provides updates to the board on a regular basis.
Executive compensation remains a point of contention as U.S. financial services companies continue to face intense public and investor scrutiny over excessive executive pay. Global leading practice for executive compensation includes the integration of sustainability metrics within executive remuneration packages, which provides incentive to top executives to meet sustainability goals. While many U.S. companies have yet to meet this leading practice, five of the financial companies evaluated have begun incorporating non-financial performance criteria into executive compensation policies, including workforce diversity, customer service and employee relations. For example, Northern Trust considers criteria such as leadership, compliance and risk management, employee relations, client service, ethics and diversity in its remuneration policy.
CORPORATE POLICIES AND MANAGEMENT
Lending and investment practices represent the most significant sustainability risks and opportunities for financial services companies. Stakeholder expectations are rapidly evolving in this regard, and the sector is increasingly being held accountable for the environmental and social footprint of their lending and investment activities. Increased stakeholder scrutiny has prompted the industry to push the boundaries of traditional credit risk assessments towards more stringent environmental and social due diligence procedures. Sector-specific policies that impose additional due diligence on high-risk activities such as coal mining, are also becoming common.
Advocacy groups are increasingly tracking whether polices and systems put in place by financial services companies are leading to changes in lending and investment patterns. Regarding financing of coal companies, specific concerns have been raised that many of these policies are not as effective as anticipated.
The assessment found a number of financial sector companies disclosing how they include ESG in their financial processes. Bank of America has publicly disclosed its lending standards addressing risks associated with operations in emerging markets. As the first major U.S. financial company that signed on to the U.N. Global Compact, Citigroup complements its internationally-aligned environmental risk assessment procedures with a human rights risk assessment process. Goldman Sachs, one of the world’s largest commodity traders, has established a Physical Commodity Review Committee to ensure consistency in the evaluation and management of environmental, health and safety risks in the trade of physical commodities.
Financial services companies are increasingly engaging with stakeholders, although the level of engagement varies depending on the size of the company and the nature of its business. Brand name companies with global, retail or customer-facing operations disclose more on their stakeholder engagement processes than the smaller companies assessed.
State Street takes the lead in expectations addressing the focus and quality of stakeholder engagement. Its materiality matrix maps out the company’s different ESG issues as a basis for its engagement efforts. Citigroup regularly engages with investors, advocacy groups, customers and other impacted constituencies in identifying emerging risks, and developing policies and systems that are linked to the company’s Environmental and Social Risk Management system. Both companies convene a formal stakeholder engagement process annually and publicly disclose stakeholder feedback as well as the company’s response in their Sustainability Reports. However, neither company has disclosed a formal process for engaging with their investors on sustainability issues.
The fallout of the financial crisis is likely to be a key driver for ongoing improvements in stakeholder engagement by the sector. Following a series of significant legal, ethical and reputational issues that confronted the company, Goldman Sachs formed its Business Standards Committee in May 2010 and launched a firm-wide investor and client engagement process. The consultations informed the committee’s final recommendations, which included new guidance on conflict of interest, suitability of products to clients, and improvements in transparency. However, the company does have in place a formal process for engaging stakeholders on environmental and social risks and impacts of their business.
C-suite involvement in stakeholder engagement sends a strong signal about the level of importance assigned to a company's stakeholder process. This is included in The Ceres Roadmap but not formally measured in this assessment. Within the Financial Services sector, a small number of companies are engaging their top leadership in stakeholder discussions on environmental and social priorities. At their first formal stakeholder meeting in November 2011, Legg Mason’s CEO discussed the company’s sustainability performance and plans with a group of investors, advocacy and community groups.
In general, the financial sector is split between strong and weak sustainability reporters, with large, brand name companies taking the lead on disclosure. Of the 31 companies assessed, 13 use the Global Reporting Initiative’s G3 guidelines as a basis for their reporting, although only three externally verify their disclosure. State Street stands out for having its CSR reports externally verified under the AA1000 Assurance Standard.
Some large financial companies have started to integrate ESG issues in their annual financial reporting. For example, Citigroup’s FY2011 annual report includes a discussion on microfinance and environmental commitments, while JPMorgan Chase discusses its position on Dodd-Frank in detail. Citigroup and Morgan Stanley also discuss climate change in their annual 10-K, following the Securities and Exchange Commission (SEC) guidance on how companies should disclose material climate risks in SEC filings.
Though not an area of major exposure for financial services companies, 58 percent (18 companies) are reducing their operational environmental footprint by setting aggressive greenhouse gas (GHG) emissions reduction targets and investing in energy efficient buildings. Goldman Sachs aims to be carbon neutral by 2020 through a combination of carbon reduction technologies, renewable energy use, as well as the purchase of carbon offsets. Many large brand name banks have set GHG reduction targets, including Citigroup (25 percent by 2015 from a 2005 baseline) and Bank of America (15 percent by 2015 from a 2010 baseline).
Financial companies have also been investing heavily in energy efficiency measures at their headquarters and branches, with a number of companies obtaining LEED certifications for their new or renovated properties. JP Morgan Chase’s renovated 1.5 million square foot global headquarters in Manhattan obtained LEED Platinum certification in January 2012. While achieving LEED certification at company headquarters signals a noteworthy commitment to sustainability, expanding such initiatives to the branch level allows for a much more far-reaching impact. Companies with LEED certified branches, such as Citigroup, with more 100 LEED certified retail locations, are able to significantly reduce energy and water usage across the company.
PRODUCTS AND SERVICES
Innovation of sustainability-related financial products and services poses significant opportunities for financial services companies. Eighteen of the 31 companies evaluated offer sustainability-related financial services, ranging from sustainability indices and carbon trading platforms organized by NYSE Euronext and NASDAQ OMX, to socially responsible investment funds and financing of climate change mitigation activities and projects. Citigroup’s 10-year $50 billion climate financing commitment sets an industry standard. However, these products and commitments are still a small part of the sector’s overall lending, investment and finance, and many U.S. banks continue to finance environmentally and socially sensitive activities, such as coal mining and oil sands.
Moving forward, companies can scale their commitment to sustainability by linking their ESG efforts to the core business. Northern Trust reported that in FY2010, approximately 2.8 percent of its total assets under management were screened based on environmental and social factors. This represents a small portion of their total assets under management but it is a starting point. Companies financing renewable and alternative energy transactions can further industry standards by reporting sustainability-related financing relative to total energy portfolios or total lending portfolios.
Many financial service companies consider employees to be one of their most important stakeholders, although of the 31 companies covered, only eight have implemented employee engagement strategies on sustainability issues. Typical employee engagement strategies among financial companies range from information sharing, volunteerism and employee-led initiatives, to formal sustainability training sessions. The next step after building awareness is to integrate sustainability metrics into the performance goals of individual employees. This will encourage employees to seek opportunities to reduce operational footprint, and incentivize ownership and innovation around the sustainability-focused products and services suite.
The majority of financial service companies assessed have yet to disclose their efforts in educating and promoting sustainability issues among employees, much less integrate sustainability-related elements into their performance goals. Companies without such initiatives miss an opportunity to enhance employee involvement in achieving sustainability goals and objectives.
American Express’ Environmental Champions Network is composed of employee representatives from different business units and staff groups, and meets monthly to share and disseminate information and best practices across the company. Morgan Stanley’s employee-led Environmental and Social Finance Forum organizes global forums and discussions on key sustainability issues as well as volunteering opportunities for employees. Meanwhile, Northern Trust’s Partners Think Green Champions promote sustainable habits in the workplace and identify issues that need management attention through an Intranet site.