Ernst & Young: UK banking market leads on governance structures, but lags on environmental and social factors

December 14, 2020

According to the first ever EY Sustainable Finance Index, which ranks financial services firms across the globe on key sustainability and disclosure metrics, UK banks have world-leading governance systems in place, but have work to do to compete on environmental and social factors.

The EY Sustainable Finance Index is a global benchmark comparing over 1,100 financial services firms worldwide on ESG metrics and disclosure rates, which act as a key indicator of activity and commitment to improve. The Index collates reported data from financial services firms across a wide range of topics that make up a firm’s sustainability metrics. This data is compiled into a scoring system which ranks countries as they progress on their sustainability journey, creating a score out of ten, as well as measuring the extent of disclosure on activity, expressed as a percentage.

In 2020, the UK banking market scored 5.6 out of a possible ten for the ESG activity it is currently carrying out and reporting on. This compares to the global average of 4.2, and while it is comparatively progressive, at little over the 50% mark, it demonstrates the extent of work still to be done across the world on sustainability. UK banks’ rate of disclosing ESG data against over 200 parameters tracked by the Index is 62%, which is higher than the global benchmark of 48%.

Gill Lofts, UK Sustainable Finance Leader at EY, comments: “The UK has long been recognised as one of the best places in the world to do business, which is partly due to its heritage of strong corporate governance, reinforced by industry codes and regulation. While the banking industry – particularly the largest institutions - should be commended on its exemplary governance structures, this Index demonstrates that there is a long way to go to fulfil any ambitions to lead on environmental and social practices, especially for smaller players. The Bank of England’s emphasis on supporting the transition to a carbon neutral economy and the recent Government announcements calling for the City to become a leader in green finance highlight that the motivation is there. In addition, the UK’s ongoing strong supervisory framework should accelerate banks’ focus on environmental factors, but firms need to go beyond regulation if they are to break into the ranks of the top global performers on social and environmental measures.”

Karl Meekings, Lead Global Banking Analyst at EY, adds: “Disclosure is a strong indicator of progress on sustainable finance as it suggests that firms are acting to meet ESG goals, are willing for their efforts to be scrutinised and are committed to making further improvements – this is a good sign for the future. However, what is clear from the Index is that ‘good’ is still a low benchmark, and there is an enormous amount of progress to be made for any banking market to truly claim triumph.”

Large UK banks lead the pack on ESG disclosure
The Index reveals that large UK banks (with over £375bn in assets) are significantly more transparent in ESG reporting than their smaller peers, scoring highly across all categories and disclosing at a rate of 25% more than the smaller banks. This is driven by multiple factors, including the sophistication of regulatory oversight that large banks operate under and the relative effectiveness of their highly scrutinised boards. The larger institutions are also more able to focus resource on good governance, transparent processes and robust controls, and have more robust policies and measures in place on key ESG-related areas like data and privacy.

Karl Meekings, Lead Global Banking Analyst at EY, comments: “Sustainability is an increasingly important theme for banks of all sizes, not least because investors and customers are demanding action. The UK’s largest banks particularly recognise the key role they must play in improving sustainability by engaging with the agenda, setting ambitious targets to make progress, and reporting on activity. If smaller players are to properly compete on ESG activity and disclosure, the industry as a whole needs to agree common reporting standards, which will improve consistency and comparability, and ultimately will reduce the associated costs of the exercise for those with fewer financial resources to draw on. This is no small feat and will require collaboration across the industry, Government and regulators.”

UK banks are global leaders on governance
The Index finds that the UK banking market is unparalleled in the rigour it places on good governance, with strong disclosure rates across the majority of British banks. The sector scored 7.2 out of a possible ten for the level and strength of governance in place. Where the sector does particularly well is on board effectiveness, scoring highly due to the focus placed on board members having deep industry knowledge and ensuring appropriate independence, as well as maintaining high standards of conduct. Board meeting attendance rates are a key indicator of good conduct, which for UK banks is 98%, compared to the global average of 85%.

UK banks also lead by example on transparency and receive high scores for having robust checks and controls in place which lead to strong shareholder protection. Specifically related to sustainability, UK banks score higher than the global average on ESG-specific governance, scoring 6.6 out of ten compared to the global average of 3.7.

UK banks have more work to do on environmental policies
Multiple challenges remain to be addressed on the environmental front for UK banks. Just two of the 19 banks included in the Index report having environmentally friendly or green sites. To achieve higher scores on the green agenda, banks need to incorporate environmental processes into their branch optimisation and restructuring strategies and should also consider developing more green-focused policies and products. Just eight of the 19 UK banks report to having green or environmentally friendly products and claim to evaluate projects on the basis of environmental or biodiversity risks. However, on a relative scale, the UK is performing in line or better than many of its peers. Within the French banking market – which scores highly on environmental policies - just the three largest institutions report to have environmentally friendly products and evaluating projects on the basis of environmental factors.

Another key indicator of strong environmental credentials is banking partnership with NGOs or government organizations that are focused on environmental issues. Only five of the UK banks in the Index can claim this, however, again when comparing to France, the UK comes out top, as only the three largest French banks report such partnerships. Banks in all markets need to collaborate further with key external organisations to leverage their expertise if they are to improve their environmental impact.

The overall environmental score UK banks achieved by the Index was aided by an impressive 90% of firms reporting their CO 2 equivalents emissions.

UK ranks 12th in Europe on diversity and inclusion in the workplace
Progressive policies to encourage a more diverse and inclusive (D&I) banking sector are paying off, and the UK ranks as the 12 th best market in Europe for diverse and inclusive hiring and progression. However, even the leaders on this agenda sit at a relatively low level, and there remains significant work to be done. When looking at the largest European banks, France was the highest scorer, achieving 6.3 out of a possible 10 for its D&I activity, which compares to the UK’s 3.3 score.

In particular, UK banks need to act on enhancing board diversity; while many firms have strong policies on board gender diversity, women currently make up just 29% of board members.

Dan Cooper, UK Banking and Capital Markets Leader at EY, comments: “D&I within the workplace is something that all UK firms are working to move the dial on, and the banks are no exception. It is well acknowledged that diverse teams drive stronger performance, and that it is not only the right thing to do, but it makes commercial sense. The prominence of the Black Lives Matters campaign this year has acted an important catalyst for change on the race agenda, but the speed of change remains slow. It is not new news to say that more needs to be done in this space, and while it is positive that UK banks are outperforming most other markets across the world, this is not an area where anyone can claim ‘victory’.”

UK boasts one of the most transparent compensation systems in Europe
Remuneration in the UK banking sector has been a key area of regulatory scrutiny over the last decade. Action in this space has paid off, and the UK scored 9.4 out of a possible 10 for operating compensation systems which remunerate competitively and are transparent, outstripping US peers and ranking 2 nd highest among the European banks in this area. UK banks are focused on rewarding performance and linking CEO compensation to total shareholder return, and also have a comparatively low gap between highest and lowest earners. The Index reveals that UK banks are committed to disclosing how they pay
employees, with many regularly releasing ‘Fair Pay’ reports.

Gill Lofts, UK Sustainable Finance Leader at EY, concludes: “Although UK banks have work to do to compete on environmental activity and reporting at a global level, there is a lot of positive work being done across the industry. The UK Government has made it clear that the future of UK financial services is green, which is an exciting ambition and one which many firms are already committed to. At an national level, the UK is gearing up for the launch of the UK’s first ever green sovereign bond and a green gilts programme, but we shouldn’t forget the change that can be made a firm level, where the sum of many small changes for the good can result in large scale positive progress.

“Innovation will be key as we transition to a lower carbon future, and banks will play a crucial role by creating more sustainable financial products and services that underpin the businesses that drive the economy. Developing green strategies is not only be the right thing to do for the environment and for society but will also increase and diversify revenue streams and reduce risks. The overarching message is clear, while the UK banking market is making strides in the right direction and demonstrating the power of strong governance, there remains a chasm to be crossed before it can claim a perfect ten on ESG.”