Signatories of the UN Principles for Responsible Banking (PRB) are not doing enough to link remuneration policies to sustainability outcomes, according to a progress report published today.
PRB members commit to boosting their positive impacts and remediating negative impacts on the societies and environment where they operate, in addition to implementing effective governance processes.
However, the PRB reported that only 38 percent of its 325 member banks have made remuneration subject to sustainability-related metrics in the four years since the initiative was launched.
Gaps on remuneration were highlighted by both the PRB’s 12-member civil society advisory board and its governing body, which noted “the need for future emphasis in this area”.
They added that “as the initial four-year implementation period ends, the focus will shift towards actions and what is necessary to achieve targets, with increased attention on remuneration”.
The progress report, which is published every two years, comes at a critical juncture for the initiative and its affiliated banks. (Read Responsible Investor’s recent interview with PRB head Simone Dettling here)
Signatories have four years to start identifying impact areas and adopt targets, after which they risk being delisted from the group if a “sustained and unexplained failure to address shortcomings” is found.
This means that the 100 or so banks which initially joined the PRB in 2019 will now be assessed on the pace of their progress towards achieving impact targets from the next reporting cycle. All signatories are required to submit annual reports to the PRB, with feedback sent direct to their CEOs.
PRB banks performed better on governance metrics other than remuneration, with 98 percent of signatories found to have established governance structures which incorporated oversight of sustainability topics, massively exceeding a 22 percent banking sector average cited by the PRB.
Board-level governance was less common among smaller banks, in favour of executive-level governance. According to the PRB, 95 percent of signatories with assets between $100 billion and $1 trillion had board-level governance in place for sustainability policies – this dropped to 47 percent for banks with less than $1 billion in assets.
The majority of member banks, some 87 percent of signatories or 200 institutions, identified climate change mitigation as an impact area, followed by financial health and inclusion which was selected by around 80 banks.
Climate change adaptation had the least support from signatories, with under five banks reporting it as a priority.
Regionally, social topics were more popular among banks from Latin America, Africa and the Middle East, compared with North American, European and Asia-Pacific institutions.
However, the majority of PRB signatories are yet to comply with the initiative’s flagship requirement to adopt two targets based on their chosen impact areas, with only 38 percent having done so.
Around 38 percent of signatories have adopted one target, while 23 percent were still in the process of formulating theirs.
The PRB is set to begin collecting data on whether member banks have policies and engagement processes to encourage sustainable practices among clients, along with sector-specific policies for high impact industries. The information is to be included in future progress reports.
Members of the PRB represent around half of global banking assets, according to its calculations, but the initiative continues to have very limited support among major US banks. In contrast, nearly all of the Chinese, Japanese and European banks listed among the largest 20 banks globally are members.
The PRB is on track to release the banking sector’s first target setting guidance for nature in November, alongside climate adaptation.