Report: Finance sector failing to measure or report impacts on society and the environment

Published today (8 November) by the World Benchmarking Alliance (WBA), the Financial System Benchmark looks at the social and environmental sustainability actions which banks, insurers, asset owners and managers are and are not taking.

The headline finding is that disclosures of impacts in these areas is disjointed and, broadly, extremely weak.

Less than 10% of the organisations included in the benchmark disclose any process to identify and address human rights risks and impacts within their own operations beyond the disclosures they are legally mandated to complete. Disclosure is, as would be expected, even weaker regarding potential human rights abuses in the businesses and projects the financiers support.

Previous work from the WBA has revealed that half of the world’s biggest companies are unable to prove they are aligning with UN requirements on human rights. The organisation has also tracked broadly poor action to safeguard workers against specific risks raised during the Covid-19 pandemic in 2020.

Moreover, most of the organisations covered in this latest benchmark are not reporting on the financing provided to areas of the economy which are associated with sustainable development. Around one-quarter (23%) disclose their financing to SMEs, falling to 14% disclosing their financing to marginalized groups and areas. Only eight of the organisations included disclose financing to low-income nations.

On the environmental sustainability side of things, the benchmark reflects the growing net-zero movement in the finance sector but illustrates how top-level commitments are not necessarily filtering down into meaningful action. A significant minority – 37% – of the organisations included have a top-level net-zero targets with long-term deadlines. However, just 2% have interim goals on cutting financed emissions.

Nature-related target-setting and disclosure was found to be even weaker than on climate. Only 5% of the organisations included acknowledge that they have a process to identify the impact of their financing activities on nature.

Overall, just one in five of the financial institutions included in the WBA’s benchmark publicly address their negative impact on people and the environment. This, the WBA states, makes it challenging for stakeholders to consider their true impact when making decisions, and means that it is hard to set or report against meaningful targets.

The WBA is warning that it is nearly “impossible” to properly assess whether the finance sector is fulfilling its role in managing and incentivizing businesses in their portfolio to act ethically and play their role in creating a sustainable future.

“While we recognise that great efforts are being made by many, frustration is high and trust in the sector is low,” the WBA’s financial systems lead Andrea Webster said. “This Benchmark provides a basis for hard but meaningful conversations.”

Webster added: “We have developed this Benchmark as a tool for change. Yes it shows a dismal picture overall of where we are now, but the intention is for it to provide a roadmap for companies themselves.”

Tomorrow (9 November) is finance day at COP27, so we can expect the publication of several other major reports scrutinizing the finance sector’s progress on climate-related issues including fossil fuel support and deforestation.

Click here to read all of edie’s COP27-related content.