the path forward

The financial sector from a non-financial perspective

The Path forward

3The financial sector from a non-financial perspective - The Path forward

Table of Content

1 Introduction 5

2 Sustainability reporting for financial institutions 7 2.1 Evolution of sustainability reporting 7 2.2 Sustainability reporting for financial institutions 7

3 Benchmark 9 3.1 Approach 9 3.2 Results 9

4 Reporting quality 11 4.1 Reporting framework 11 4.2 Report verification 12 4.3 Levels of assurance 12 4.4 Scope of assurance 13

5 Focus in the sustainability reports 15 5.1 Reporting materiality 15 5.2 Reporting materiality disclosure in the sustainability reports 15 5.3 Size of the reports 16 5.4 Size of the reporting chapters 17 5.5 Integrated reporting 18

6 Significant KPI’s and disclosures 19 6.1 Facts about the Key performance indicators 19 6.2 Financial key performance indicators 21 6.3 Social key performance indicators 22 6.4 Environmental key performance indicators 24 6.5 Other types of key performance indicators 25

7 Socially Responsible Investments and Equator Principles 26

8 Disclosure on management approach 29 8.1 Governance structure 29 8.2 Person bearing ultimate responsibility for sustainability and executive compensation 30

9 Concluding comments 31 9.1 Increased importance of Sustainability reporting and assurance in the financial industry sector 31 9.2 The sustainability reports of the Financial Institutions are not dealing with the most material topics relevant for their sector 31 9.3 Stakeholder dialogue is missing 31 9.4 Little disclosure on SRI funds or Equator Principles 31 9.5 Unnecessary repetition of financial KPIs and subdividing of KPIs 32 9.6 Little disclosure on CSR governance and executive remuneration 32

Appendices: list of reports of organizations used in the benchmark 33 Appendices: Glossary 34 Who to contact 35

4 The financial sector from a non-financial perspective - The Path forward

Organizations are facing growing pressure to explain and improve their sustainability performance. Investors and equity analysts are building sustainability factors into their analysis and investment decisions. Consumers and non-governmental organizations (NGOs) are demanding more data regarding organizations’ environmental and social performance. Regulators and standard-setters are piling on this pressure too.

A recent Ernst & Young survey “The top ten risks for businesses” confirmed that ‘radical greening’ and ‘social acceptance risk and corporate social responsibility’ were now in the top 10 risks affecting businesses globally and ranked 8th and 9th respectively. Corporate social responsibility is a new entry in the top 10 risks and it indicates that businesses are more conscious than ever about managing reputation and building public trust.

Further, another recent Ernst & Young Survey, “Competing for growth- winning in the new economy” revealed that 64% of 1,400 surveyed executives indicated that they are seeking to improve the transparency and frequency of corporate communication on their performance with stakeholders. They indicate that the major difference in performance arises in the non-financial area – identifying risk and risk management, increasing non-financial performance measures and significantly increasing coverage of environmental and corporate social reporting issues.1

For anyone working in the reporting arena, the last decade could easily be referred to as the “decade in which sustainability was born”. Indeed for the last couple of years we

have been witnessing an increase in the number of sustainability reports published by major international organizations. According to the corporate register report: Global winners and reporting trend from April 2010, more than 3,500 organizations issued a sustainability report for 20092.This shows the importance that sustainability has taken in society and more particularly in our minds when we are in our role of consumers or stakeholders.

Sustainability reporting can happen either through a separate sustainability report or as an elaborate integrated disclosure on this topic in the annual report. The sustainability reporting informs stakeholders about the manner in which sustainability is embedded within the organization. The transparency of an entity’s economic, social and environmental performance can enhance the organization’s reputation.

This report focuses on the current status of sustainability reporting of Top 20 European financial services organizations based on a review of their sustainability reports issued in 2010 (see also section 3). These organizations are experiencing pressure from stakeholders and society to be transparent on their business activities and decisions in order to regain trust. They face the challenges of sustainability reporting with the objective of building trust, but without wanting to be in the spotlights for ‘green washing’. Despite the fact that sustainability is tailor-made for each organization, comparison within the sector shows the current practice and trends. The objective of this report is to provide insight in the common content and issues for sustainability reporting by financial institutions and where possible provide best-practice examples.

1 Ernst & Young, Competing for growth – Winning in the new economy, page 242 Corporate Register, CR Reporting award ’10 - Global winners and reporting trend from April 2010


1 Introduction

The financial crisis has altered the

basis of trust between stakeholders

and organizations and as a

consequence the financial markets

focus on immediate returns is

challenged by the need for a longer-

term perspective. Now more than

ever, organizations need to address

current and future risks and pay

greater attention to their medium

and long-term business strategy.

This significant growth in sustainability reporting is remarkable considering that reporting is only voluntary in most jurisdictions and hardly any regulation currently exists for it.

Pressure from external stakeholdersAlthough most reporting is voluntary, organizations face growing pressure to release information. Community associations, government regulators, customers, suppliers and employees want more information about entities’ long-term impact on society. In particular, powerful customers can force organizations to become more transparent, the classic example being Walmart, which launched a supplier sustainability initiative in July 2009.

Reputation managementDone properly, reporting on sustainability helps organizations establish a reputation for transparency and helps builds stakeholder trust. Research conducted by the Global Reporting Initiative shows that 82% of US organizations and 66% of those in Europe cite transparency as the main factor influencing their corporate reputations.

But, there are other drivers for sustainability reporting. As mentioned before, pressure of stakeholders and society are drivers for sustainability reporting. The pressure comes from the stakeholders, i.e shareholders, customers, governments, consumers and NGO’s are requesting more and more transparency (in particular since the financial crisis) from the institutions as to their investments portfolio and lending policies. Consumers, customers, employees, and many others want to know what the strategy and position of the financial institution is regarding sustainability. This includes sustainable investments and lending policies. Stakeholders want to know the position of their financial institutions compared to their competitors. They also want to know if they are really doing what they are claiming: practice what they report.

The motivations of organizations for reporting are also driven by their own will to improve their sustainable strategy and targets. They are aware that this can help put pressure on the business to implement the targets and transparency regarding sustainability.

2.2 Sustainability reporting for financial institutions

The content of the sustainability reports have evolved over time. It has taken several years for the financial institutions to develop their sustainability reports and improve the level of transparency. Indeed, the first sustainability reports, published by the financial institutions in the late nineties, were mainly focusing on environmental data (the planet: P), ie. their electricity consumption and paper use. After a couple of years, the perception of significant themes for sustainability reporting

2.1 Evolution of sustainability reporting

In order to benchmark the quality of sustainability reporting of financial

institutions, it is important to have some insight in how sustainability

reporting has been evolving recently, in particular for financial institutions.

Sustainability reporting in the financial sector has significantly increased,

with only a few of the financial institutions reporting on sustainability in

the late nineties, to the majority of financial institutions now reporting on

sustainability. Of the Top 20 European financial institutions included in this

benchmark, 100% reported on sustainability issues whether it was on their

website, in the annual report or in a separate sustainability report.


2 Sustainability reporting for financial institutions


within the financial sector was extended to the other P’s: People and Profit. The organizations started to report also on their community engagement and towards other stakeholders next to their shareholders (mostly towards their customers and employees).

Nowadays financial institutions report on their governance, targets and risk management, with some comments linked to their sustainability policy. Also, as part of this development, organizations mention their memberships with international principles or guidelines such as the UN global compact, UNPRI and Equator principles.

Nevertheless, even if sustainability is becoming a major topic in reporting, several questions can still be asked such as what the major issues are in the sector regarding sustainability that financial institutions report on? What are the trends regarding sustainability reporting? In the case of financial institutions, the question is where they have the biggest impact? Where can they act in order to really be sustainable? Based on the benchmark performed, we have tried to provide some clarity and suggest areas for improvement and future action.

The financial institutions included in the benchmark were 13 banks, 1 insurance company and 6 banking and insurance organizations.

All the surveyed financial institutions are reporting on their sustainability performance:

16 organizations report through separate sustainability reports, 1 financial institution publishes an integrated report including annual accounts and sustainability information, and 3 institutions are reporting via their website with a short chapter in their annual report.

3.2 Results

These reports are the basis on which we have performed our review. The objective of the review was to assess the sustainability information with respect to the following five themes:

1. Reporting quality2. Focus of the sustainability reports3. Significant KPI’s and disclosures4. Socially responsible investments and

equator principles5. CSR Governance

3.1 Approach

In our survey we selected the top 20 European financial institutions based

on total assets as per 31 December 2009 according to the OneSource

Global Business Browser3. For each of the selected institutions, we performed

a review on whether the organization reported on their sustainability

performance and strategy via the publication of a separate sustainability

report, reporting on their corporate website, or have the sustainability

report integrated in their annual financial report. The scope of the benchmark

is only limited to the sustainability reports (including specific references

made on the website) and interactive webbased reports for the reporting

year 2009. No interviews were performed.

3 See appendix 1 for the list of Financial institutions included in the benchmark

What is the format of reporting?

a) Separate sustainability report 80% 16b) Integrated report 5% 1c) web-based 15% 3Total 100% 20


3 Benchmark

4.1 Reporting framework

Organizations face pressure to adopt evolving voluntary reporting standards to help stakeholders compare organizations’ sustainability performance. Currently, no universally accepted set of reporting standards exist in this area, but there are some widely used voluntary guidelines that prescribe the kind of non-financial information organizations should disclose, such as the AA1000 AccountAbility Principles Standard and the GRI Reporting Framework.

The GRI guidelines have been updated twice since their inception, making the current version the “third generation” or G3. Developed in consultation with private industry, it is currently used in 65 countries and comprises a set of core guidelines that apply to all organizations, plus supplementary guidance applicable to particular industries. For the financial sector the supplementary guidance is the financial sector supplement.

Of all surveyed reports, 16 reports are prepared using reporting guidelines.

The guidelines that are used for the most part are the GRI G3, which were supplemented by the financial sector-specific guidelines in 11 reports we reviewed.

Currently, the GRI is the most commonly used reporting framework for non-financial reporting. In the reporting year 2009, over 38% of financial organizations produced a GRI compliant report.4 Our benchmark revealed that this percentage is significantly higher for the leading European financial institutions.

The GRI uses a system of Application Levels. The Application Level system provides organizations with a pathway towards continuous and gradual improvement of their sustainability reporting. The Levels are intended to motivate reporters to enhance the quality of their reporting over time. Application Levels also meet the needs of reporting organizations in terms of objectively displaying their use of the GRI Guidelines. The Application Levels indicate the extent to which the G3 guidelines have been applied in sustainability reporting. They communicate which part of the Reporting Framework has been addressed - which set of disclosures, varying with the different Levels. The Levels do not give an opinion on the sustainability performance of the reporting organization or the quality of the report. GRI requires that organizations using its guidelines, declare a reporting level

The quality of the sustainability reports is enhanced by comparability and

credibility. When entities use guidelines like those of the Global Reporting

Initiative (GRI), this increases comparability. Credibility can be enhanced

by verification by an independent party. We will elaborate further on both

aspects in this section.

4 Corporate Register, Reporting State of Play, http://www.corporateregister.com/pdf/CRRA10.pdf

What guidelines were used in preparing the sustainability report?

a) GRI 3, including sector-specific guidelines 55% 11b) The general GRI guidelines only 20% 4c) Other guidelines (AA 1000) 5% 1d) No guidelines 20% 4Total 100% 20


4 Reporting quality

5 The text of France’s law is available at http://www.assemblee-nationale.fr/13/ta/ta0458.asp and the guidelines issued by Sweden’s Ministry of Enterprise, Energy and Communications are availabe at http://regeringen.se./sb/d/574/a/94125.6 Weathering Change: A newsletter from the Climate Change and Sustainability Services of Ernst & Young (Ernst & Young Global Limited, 2010), page 11, 5 june 2010. Available at http://www.ey.com/Publication/vwLUAssets/Weathering_Change_June_2010/$FILE/Weathering%20change_june%202010.pdf.


A, B, or C, depending on how the GRI indicators are applied. It also allows organizations to apply a “plus” (+) at each level if they have secured third-party verification.

For the financial institutions in our survey, reporting in compliance with the GRI, we investigated as to the Application Level of their reports. The outcome of this investigation is shown below:

We found that most organizations in our benchmark had their report externally verified.

4.2 Report verification

As sustainability reporting matures, stakeholder expectations are likely to increase, making external assurance virtually a requirement. Organizations now obtaining a lower level of assurance, typically described as “limited” or “negative” assurance, will come under pressure to move more towards a “reasonable” or “positive” assurance level comparable to what is applied to financial statements.

Sustainability reports are being more closely monitored than ever before. NGOs and the news media read them to assess the sustainability performance of the reporting

entities, while investment firms use them to decide whether to include the organization in a sustainable investment fund. As this trend continues, users of sustainability information will come to expect that the information has been validated by a reliable third party. Assurance sends a message that the report is relevant, reliable and free from bias. And third-party providers can often recommend ideas for improving business processes, leading to more efficient

management of the organization overall. In addition, some executives who sign the reports may desire third-party assurance to protect their personal reputations.

Some countries have already implemented rules requiring some level of verification. In May 2010, the French Parliament adopted rules strengthening the verification requirements for major organizations. Sweden requires state-owned organizations to present an independently assured sustainability report in accordance with the G3 GRI guidelines since 20095. Over time, other countries will follow this trend.

Leading organizations are already ahead: according to an Ernst & Young report, “the majority of the Fortune Global 500 most recent sustainability reports were assured by accountancy organizations. Two-thirds of the latest reports were assured by financial auditors.”6

Of the surveyed sustainability reports reviewed, 15 were verified by an external assurance provider.

Thirteen of the reports were verified by a big 4 audit company, while one report consisted of a review by a big 4 company to assess the plausibility combined with an assurance report of an environmental consultant and for one report, the environmental data was verified by an environmental agency.

4.3 Levels of assurance

If organizations consider having their report verified, they can opt for an assurance engagement that leads to an assurance conclusion providing limited assurance (review engagement) or an assurance conclusion providing reasonable assurance (audit engagement) or a combination of the two. A review engagement tests whether the information provided is plausible, whereas an audit focuses on the accuracy and adequacy of the information.

What are the level of application used for the GRI?

a) A (+) 47% 7b) B (+) 20% 3c) C (+) 6% 1d) undeclared 27% 4Total 100% 15

Has external assurance been provided on the report?

a) Yes 75% 15b) No 25% 5Total 100% 20


Out of the 20 reviewed reports, 15 had an assurance (limited and/or reasonable) report provided by an external body: independent auditors for (part) of the report and or other stakeholders.

The category “other” includes other types of reviews such as stakeholder panels, review of third parties not being auditors and also reports having a mixed assurance report, i.e. some information audited with reasonable assurance, and other information with limited assurance.

4.4 Scope of assurance

The scope of an assurance engagement can take different formats. Assurance can be provided on the complete sustainability report, meaning that all information included in the report (both quantitative as qualitative information) is externally verified. Another option is that only parts of the sustainability report are verified. This means that only specific chapters are verified (eg the environmental chapter). Assurance on only KPI’s is another common assurance practice.

What is the scope of the assurance provided?

a) Complete report 47% 7b) Only parts of the report 13% 2c) KPIs 13% 2d) Other 27% 4Total 100% 15

What level of assurance is provided?

a) Reasonable assurance 6% 1b) Limited assurance 67% 10c) Other 27% 4Total 100% 15

Assurance standards. There are two primary global assurance standards. The International Standard on Assurance Engagements 3000(ISAE 3000) is the benchmark that accountants most often use as a basis for assurance of sustainability reports. It was developed by the International Auditing and Assurance Standards Board (IAASB) of the International federation of Accountants (IFAC), whose standards exist primarily for assurance engagements. The other global standard, AA1000AS (2008), was designed for use beyond the accounting profession. It was created by Accountability, a global nonprofit organization. AA1000 is a principles-based standard that, in addition to reported information, also addresses management and reporting systems and processes.

5.1 Reporting materiality

Materiality is a key aspect in sustainability reporting. It helps organizations to select what they need to disclose to stakeholders. However, the perception of what is important can differ between users, preparers and auditors due to their varying objectives. This makes it important to define materiality.There are various definitions and guidelines proposed by bodies such as the GRI, the International Accounting Standards Board (IASB) & AccountAbility. The common thread in the definitions is that materiality is the threshold or selection criteria of sustainability that would significantly influence stakeholders’ (including but not limited to shareholders) actions, decisions, or judgements on the organization such as

investment rationale and comparison of business performance.

As a benchmark, financial reporting frameworks generally explain that mis-statements, including omissions, are considered to be material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Judgments about matters that are material to users of the financial statements are based on a consideration of the common needs of users as a group.

5.2 Reporting materiality disclosure in the sustainability reports

In order to answer to the request of the readers, organizations can disclose their materiality approach, wherein they specify what they see as the most material topics for the organisation and their stakeholders. Reporting based on materiality often leads to more concise reports focusing on the strategic issues of the organization. We surveyed how the leading financial institutions are approaching materiality.

Our survey revealed that only 2 institutions have a materiality matrix in their report, and only 2 organizations are disclosing on a narrative basis analysis of what are the most material topics.

In their ambition to gain legitimacy, a substantial number of organizations

devote much of their sustainability report to a qualitative explanation of

their sustainability performance (soft disclosures). However, this often

leads to long reports which are difficult to compare. Choosing the issues

and indicators to focus on, and determining the reporting boundaries, are

fundamental to the preparation and quality of any report. To make those

choices, an organization must first establish a methodology for identifying

issues that are material to stakeholders, and therefore to an organization.

We reviewed whether the surveyed organizations have disclosed their

materiality approach. We also looked at the size of their reports and the

amount of pages per chapter.

4 Corporate Register, Reporting State of Play, http://www.corporateregister.com/pdf/CRRA10.pdf

Does the report contain a materiality analysis?

a) Materiality matrix in the report 10% 2b) Narrative disclosure on materiality approach 10% 2c) No disclosure on materiality approach 80% 16Total 100% 20


5 Focus in the sustainability reports


Many organizations follow the GRI framework when deciding what to include in their sustainability reports. The framework starts with a series of principles that organizations can use to judge whether a particular piece of information merits inclusion in their sustainability reports. The framework consists of principles for defining quality, content and the boundary of the sustainability report. The content principles are materiality, stakeholder inclusiveness, sustainability context, and completeness.

Materiality — Information in the report should reflect the company’s most significant impacts to society and the environment. Material issues can be those that affect the organization’s financial position in the short term, but can also extend to factors with longer-term implications. Determining what is material

requires that the organization assess its “overall mission and competitive strategy, concerns expressed by stakeholders, broader social expectations, and the organization’s influence on upstream (e.g. supply chain) and downstream (e.g. customers) entities. “

Stakeholder inclusiveness — Reports should respond to stakeholders’ “reasonable expectations and interests.” In this context, stakeholders are any individuals or communities likely to be significantly affected by what the organization does, or whose actions are likely to affect the organization’s ability to carry out its business strategy and achieve its goals.

Sustainability context — The purpose of a sustainability report is to show how an organization is helping to improve (or at

least halt the deterioration of) environmental, social and other conditions over the long term. Reporting on isolated or narrowly local instances of improvement fails to meet this objective. For example, an organization reporting on the benefits it provides to employees could put those benefits in context by presenting them “in relation to nationwide minimum and medium income levels and the capacity of social safety nets to absorb those in poverty or those living close to the poverty line.”

Completeness — Reports should reflect significant impacts of its business and enable stakeholders to assess its performance in the reporting period.Source: GRI Sustainability Reporting Guidelines, Version 3.0, http://www.globalreporting.org/ReportingFramework/G3Guidelines/

Deciding what to disclose: guidelines from GRI

5.3 Size of the reports

Another indicator of the application of materiality is the size of the reports. There is no concrete standard for the number of pages of a sustainability report. An organization is free to choose the level of detail of reporting. It is advisable, however, to keep attention firmly focused in the actual sustainability report on truly relevant topics

and to use the website for providing further breakdowns or more detailed information for specific groups of stakeholders. This is also important to remember for the future when organizations will increasingly start to use their website as an alternative to publishing a hardcopy sustainability report.

The outcome of our survey on the size of the reports is showed in the table below:

Our survey shows that 35% of the surveyed reports contain more than 100 pages, with one report even counting as many as 205 pages. On average, in the reports reviewed, the number of pages was 89.

Number of pages in the report (including appendices)

1-25 25-50 50-75 75-100 > 100 WebbasedNumber of reports (Benchmark organizations) 5% 15% 25% 5% 35% 15%

7 South Africa Chapter of the Institute of Directors, IoDSA King III Report, September 2009. Available at http://african.ipapercms.dk/IOD/KINGIII/kingiiireport/.8 The Prince’s Accounting for Sustainability Project, “Press Release: Formation of the International Integrated Reporting Committee (IIRC), 2 August 2010. Available at http://i.globalreportingnews.org/

CmpDoc/2009/5873/0_press-release.pdf?dm_i=4J5,7KIL,J4006,J29X,1.9 GRI 2010 Conference, Amsterdam, interview with Ernst & Young


5.4 Size of the reporting chapters

We have made an analysis of the number of pages per chapter. Below, an overview is provided about the average number of pages per topic, however, there are significant differences between the surveyed institutions. Remarkable is that that a substantial amount of pages is on risk management and strategy which are often repetition from the annual report. Also, remarkable is that the amount of pages on environment and corporate citizenship is substantially higher than the amount of pages spent on areas which are seen as key for financial institutions as SRI/investment policy and stakeholder dialogue.

5.5 Integrated reporting

Our survey revealed that a lot of information in the sustainability report is taken over from the annual report. This results in extensive reports which are difficult to read and that lack focus. Not all intended readers of the sustainability report are interested in this type of information, just as not all intended readers of the annual report are interested in all the information in the sustainability report. This further stimulates a drive toward

integrating the sustainability report with the annual report. There is a global trend toward integrating the sustainability report with the annual report. For example, as of June 2010, organizations listed on the Johannesburg Stock Exchange in South Africa must integrate their sustainability reports in their annual reports.7 Broader initiatives are also pushing financial standards in this area, such as the recently formed International Integrated Reporting Committee (IIRC). This group aims to create a globally accepted framework for accounting for sustainability that brings financial, environmental, social and governance information together. IIRC includes representatives from civil society

and the corporate, accounting, securities, regulatory, NGO, Inter-Governmental Organization (IGO) and standard-setting sectors. Jim Turley, Chairman and Chief Executive Officer of Ernst & Young, is on the steering group of this committee. Sir David Tweedie, IASB Chairman and IIRC Steering Committee member, calls the group’s formation an “important step on that journey.”8 However, there are significant practical challenges in synchronizing timelines for

developing integrated reports. It may also mean that sustainability reports will need to include more quantification of traditionally qualitative measures, such as human rights and labor performance. Here, too, there are reasons for bringing in more sophisticated external advice: “As the reports become more integrated, they outgrow internal validation and boutique assurance firms.” Integrated reporting reflects how organizations are embedding sustainability into their company’s decision-making, governance, objectives and value chain, and how transparent they do this.

“The momentum is moving towards the integrated reporting model, which is music to my ears. What we are doing over the next year is trying to create the overall message to the G20. The overall message will be to ask the G20 to lend authority to a standard setter to start developing standards for integrated reporting. At the moment, we are starting to form the IIRC Establishing Steering Group – of which Ernst & Young’s Chairman and CEO, Jim Turley, is a member – and trying to make it easy for the G20 to say ‘yes, get on with it’. The overall concept is about integrated reporting.”Paul Druckman, Chairman of the Sustainability Policy Group of Fédération des Experts Comptables Européens (FEE), Chair of the Executive Board of The Prince of Wales’ Accounting for Sustainability Project.9

What is the average amount of pages per topic

SRI/Investment policy 3,59Customers 4,88Suppliers 1,24Stakeholders/Dialogue 3,88Environment 8,00Corporate citizenship/donation/Society 8,94Employees 7,24Risk Management 15,88Strategy 8,94Others 15,76

In order to ensure sufficient transparency, concrete objectives need to be formulated that are then translated into measurable key performance indicators (KPIs). This would seem a more challenging exercise for sustainability than for the more traditional types of reporting, such as financial reporting. For instance, how can an organization measure its progress in relation to health and safety? There tend to be no consistent definitions in this respect. That is why it is important that an organization should clearly indicate in its report what the scores (numbers and ratios) of the KPIs are based on.

All of the studied reports are reporting on several performance indicators regarding their economic, social, environmental and sometimes even their governance indicators. Most of the organizations report their indicators for 2009 and also list the results of the last one or two years, permitting the stakeholders that will read the report to analyze and compare the performances of the entity. This possibility of comparability is very important.

Next important step for the financial organizations will be to classify these indicators whether they are Key performance indicators (KPI’s) or only Performance indicators (PI’s). The difference between KPI’s and PI’s comes out of the fact that the KPI’s are the indicators where the organizations will be basing their decisions on.

6.1 Facts about the key performance indicators

The benchmark of the top 20 financial organizations shows how the organizations report on their performance indicators and their key performance indicators:

• Naming key performance Indicators and performance indicators with a clear distinction.

• Naming all the performance indicators without indicating if there is a difference between the performance indicators and the key performance indicators.

• Naming some indicators throughout the report on several topics but with no indications if these are (key) indicators or just figures that might be interesting for the reader.

An organization’s sustainability report should at least contain a clear

definition, vision and strategy relating to sustainability; this is necessary

to be able to analyze whether the organization has achieved its targets

over time and has made progress in its sustainability efforts.


6 Significant KPI’s and disclosures

Facts and figures

YES NOIs the financial institution reporting on performance indicators? 20 0Is the Financial institution reporting on its KPI’s? 12 8

Is the financial institution reporting on it targets / ambitions/ challenges for the coming years? 17 3

Is the financial institution reporting on specific targets regarding its KPI’s or PI’s? 1 19


As shown in the table on page 19, all of the 20 financial institutions are reporting on performance indicators throughout the report. These indicators are mostly about the financial, social and environmental performances of the organizations:

• Financial: key financial data for the organizations

• Social: data concerning the employees of the organizations

• Environmental: data concerning the environmental impact of the organizations

• Some organizations also report on the indicators linked to their governance (indicators related to the internal audits, board members…).

However, even if 100% of the studied organizations reported performance indicators, 8 did not publish information about their key performance indicators or stating which of these indicators where key for them.12 organizations reported on their key performance indicators. Some of them named these KPI’s but organizations can also choose to name them in a slightly different way such as “main indicators”, “key facts, ‘key figures”. A breakdown can also be made between the types of KPI’s that organizations are reporting on, see table I.

By looking at table I, it can be concluded that the most important KPIs for financial institutions are linked to financial, social and environmental aspects suggesting that the most important stakeholders for the entities are shareholders, employees and NGO’s with a focus on the environment.These statements are also emphasized by the amount of KPIs published by the financial organizations per topic. As seen in table II about 75% of the KPIs

are related to the financial situation of the company and social and environmental aspects.Key performance indicators linked to

Governance and communities/donations represent 15% of the total KPIs, letting 5% of the KPI linked to suppliers, customers and other types or KPIs.

I How many organizations did publish KPIs regarding the following topic:

KPI Financial 10KPI Social 10KPI Environmental 10KPI Communities and donations 6KPI Governance 2KPI Suppliers 3KPI Customers 6KPI Other 3Amount of institutions publishing KPI’s 12

II Within the 12 reports that published KPIs, how many KPI’s were related to

Nbr. of KPIsKPI’s Financial 76 25%KPI Social 66 21%KPI Environmental 87 28%KPI Communities and donations 29 9%KPI Governance 19 6%KPI Customers 17 5%KPI Suppliers 7 2%KPI Other 9 3%total 310 100%

III What is the average number of KPI’s institutions do have per topic (if they report about them)?

Nbr. of KPIsKPI Financial 8KPI Social 7KPI Environmental 9KPI Communities and donations 5KPI Governance 10KPI Suppliers 2KPI Customers 3KPI Other 3Average amount of KPIs reported by organizations 26


By analyzing the KPIs’s of the financial institutions, we also analyzed the amount of KPI’s per topic that organizations where defining as “Key”.

The average amount of key performance indicators organizations are reporting on is 26. (See table III on page 20) It can be noticed that some organizations define some “mandatory” performance indicators as key and also an organization sometimes breakdown the main item in several key performance indicators. One example is around diversity. Diversity could be only the percentage of women in the company but sometimes, an organization also reports also the net amount of men/women and then the percentage of men and of women as being key performance indicators which results in four key performance indicators. These conclusions can also be seen in the presentation of the indicators per theme in table I on this page.

6.2 Financial key performance indicators

Out of the 12 reviewed reports, 10 reports published key performance indicators linked to their financial results in the sustainability report. In total the 10 reports published 76 KPIs.These key performance indicators can be divided in four types of indicators (table I)

As shown in the table, most of the key performance indicators are directly linked to the financial results of the organizations and therefore often directly taken off the annual report. These KPIs represent 75% of the total population of the financial key performance indicators. The other type of key performance indicators of the organizations are mainly linked to the sustainable responsible investments (SRI)

and the equator principles projects. More information about these two aspects will be given in chapter 7 of this report. In order to have more insight in the type of key performance indicators directly linked to the financial results, we classified them in different categories. The five topics that were the most used are presented in table II.

The five categories presented in the above table represent almost 50% of the types of KPIs presented by the organizations and directly linked to their financial performances.However, some organizations have one or more KPIs related to one specific financial topic. For instance, in total there are 5 KPIs linked to the revenues or the sales for 3 of the organizations.These types of key performance indicators “directly linked to the financial results” are also the KPIs of the annual report and not

the KPIs set up for their sustainable performances or that will be showing the performances of the financial institutions regarding their sustainability policy or strategy.

I Within the 10 reports that published financial KPIs, how many financial KPI’s were related to:

Nbr.of KPIs

Overall financial results (usually also published in the annual report) 57 75%

Equator principles 5 7%SRI 7 9%

Other types of KPI (investments, Eco projects/credits…) 7 9%

76 100%

II Within the KPI’s linked to the overall financial results what were the 5 topics the most used:

Nbr. of KPIsAmount of organizations reporting about the kpi’s

KPI’s related to “Equity and or return on equity” 8 5KPI’s related to “Earnings per share and/or dividend” 5 5KPI’s related to “Revenues / sales” 5 3KPI’s related to the “balance sheet value” 4 1KPI’s related to the “capitalization value” 3 2

22


6.3 Social key performance indicators

The average number of social key performance indicators, for the 10 reports reporting on their social KPIs, is 7. This is an important amount for key indicators related to one item but as explained, organizations tend to sub-divide their KPI’s into “sub KPI’s”. In the table relating the amount of KPIs to the number of organizations, this conclusion will be shown more explicitely.

In table I, it can be seen that most of the social key performance indicators are linked to the total of employees, diversity and turnover ratios and amount of trainings.

Often financial organizations publish several social key performance indicators linked to the same topic such as one KPI representing the total amount FTE’s and then the total amount of FTE’s subdivided per contract and/or region. This is shown in table III.

Key performance indicators linked to diversity are mainly showing ratios or figures linked to male / female break-downs for the whole company and/ or top management or split down by region.

I Within the 10 reports that published social KPIs, how many social KPI’s were related to:

KPI’s related to “amounts of Headcounts / FTE” 21 32%KPI’s related to “diversity” 19 29%KPI’s related to “turnover” 7 11%KPI’s related to “trainings” 7 11%KPI’s related to “health and safety information” 5 8%KPI’s related to “satisfaction of employees” 2 3%KPI’s related to other aspect of social information 5 8%

66 100%

II What are the types of KPI’s used regarding the amounts of headcounts /FTE:

Nbr. of KPIs Nbr. of organizations

KPI’s indicating the overall amount of FTE’s/Headcounts 9 6

KPI’s indicating the amount of FTE’s / headcounts divided by types of contracts 7 3

KPI’s indicating the amount of FTE’s / Headcounts divided by region 5 1

21

III What are the types of KPI’s used regarding diversity:

Nbr. of KPIs Nbr. of organizations

KPI’s indicating the overall percentage and/or amount of male / female 6

KPI’s indicating the percentage and/or amount of male / female in management positions 7 5

KPI’s indicating the percentage and/or amount of male/female split up by region 5 1

KPI’s indicating the percentage and / or amount of disabled people within the company 1 1

19


6.4 Environmental key performance indicators

Out of the 12 sustainability reports reporting key performance indicators, 10 organizations reported key performance indicators related to their environmental performances. On average, the 10 organizations reported 9 KPIs on the topic.The review shows that most of the environmental KPIs were related to the amount of CO2 emissions, business travel (and their impact) and the water consumption of the entities (table I).

Because of the importance of the KPI’s used regarding the CO2emissions (almost 30%), the review of the reports also included an analysis of the KPI’s specificly linked to the CO2 emissions of the financial institutions.

This analysis is a good example of the fact that organizations often have several KPIs linked to the same subject.

II What are the types of KPI’s used regarding CO2 emissions:

Nbr. of KPIs Nbr of organizations

KPI’s indicating / linked the amount of CO2 emissions per employee 9 4

KPI’s indicating / linked the amount of CO2 emissions per greenhouse gas protocol scope 6 2

KPI’s indicating / linked the total CO2 emissions for the company 5 4

KPI’s indicating / linked the amount of CO2 emissions per type of activities 5 1

I Within the 10 reports that published environmental KPIs, how many KPI’s were related to:

Nbr. of KPIsKPI’s related to the amount of CO2 emissions 25 29%KPI’s related to business travels 15 17%KPI’s related to water consumption 9 10%KPI’s related to energy consumption 9 10%KPI’s related to waste produced by the organisation 8 9%KPI’s related to paper consumption 7 8%KPI’s related to recycling activities 6 7%KPI’s related to the use of renewable energies 3 3%KPI’s related to the consumption of electricity 3 3%KPI’s related to other environmental themes 2 2%

87 100%


6.5 Other types of key performance indicators

Nevertheless, financial institutions also report on other key performance indicators such as communities/donations, customers and supplier relationships and governance.Six organizations reported KPIs regarding their customers relationships and their donations to the community.

Communities and donations key performance indicators Most of the KPIs linked to the communities and donations are about amounts spend on donations and voluntaring time spent by employees. However, it can be said that most of the organizations reporting on these KPIs are reporting on several KPIs about this topic since the 6 organizations in total published 29 KPIs in their reports.

Key performance indicators in relation to customersCustomers are one of the most important stakeholder groups for financial institutions. Six of the twenty reports reviewed published KPIs about their customers. This represents in total 17 KPIs of which 24% are linked to the number of customers, 35% are linked to satisfaction rates and rankings in client satisfaction surveys and 12% are about complaints received.

Some KPIs are linked to other “customer topics” which shows that KPIs can varie a lot between organizations and that customer relationship aspects can be different for banks and insurance organizations.

Finally, 2 organizations reported on governance KPIs (mainly linked to information about CR Comittees, board of directors), 3 organizations on KPIs linked to

their supplier relationships (mostly supplier satisfactions and supplier sustainable code of conducts information) and 2 organizations reported their positions or ratings in several sustainability rankings (as Dow Jones Sustainability Index –DJSI or Sustainability Asset Management SAM).

Within the 6 reports that published KPIs linked to communities and donations, how many KPI’s were related to:

Nbr. Of KPIs

KPI’s related to the amount of donations / sponsorhips 19 66%

KPI’s related to the amount time spent by employees for volunteering work 7 24%

Other types of KPI’s linked to Communities and donations 3 10%

29

Within the 6 reports that published KPIs linked to customers, how many KPI’s were related to

Nbr. Of KPIsKPI’s related to the number of customers 4 24%KPI’s related to rankings and satisfactions rates 6 35%KPI’s related to complaints 2 12%Other types of KPI’s linked to customers 5 29%

17 100%


7 Socially responsible investments and equator principles

This attention for responsible investments, financing and lending by financial institutions is also shown in the number of financial institutions signing up for international guidelines such as the Equator principles, European SRI Transparency and United Nations Principles for Responsible investment (UNPRI). Signing up means at least the intention of applying the principles set by these international initiatives. Major steps have been taken by the financial institutions in the last few years to become more transparent about their investments and Project Finance. From the financial institutions in our benchmark, 13 report on their responsible investments and from the banks, 16 report on their responsible financing following the equator principles.

However, it is remarkable that only 4 financial institutions are only considering SRI funds as KPI. For the Equator principles, the number of KPIs is even lower with 3 institutions reporting.

The transparency of disclosure is also rather limited. Financial institutions often report on the fact that they are adopters of the Equator principles, European SRI Transparency guidelines and the UNPRI. However, cases are rare where organizations are reporting on the governance, strategy or dilemmas linked with these memberships. Financial institutions are often reporting only on a narrative basis on this, explaining what the concept of Socially Responsible Investments or the Equator Principles contains in general. However, there is very little disclosure in respect of the Equator principles, the amount of rejected projects, how the assessment is made on the classification of these projects or the stakeholder strategy. For SRI funds, it is generally not clear if institutions have a group strategy on SRI which is aligned and implemented within the whole group, which are the criteria for the set up of their SRI-funds and the scope of the Social Responsible Investments. Financial institutions are rarely disclosing the amount of their Sustainable Assets Under Management and almost no institution is reporting on targets on SRIs or Equator Principles.

Stakeholders often challenge financial institutions on their strategy in

respect of Socially Responsible Investments (SRI), and their Project

Finance projects. These topics can be linked with the core sustainability

strategy of financial institutions given the fact that these activities are

very sensitive and related to reputational risks. Financial institutions are

often in the headlines in respect of their investments in organizations who

have a controversial strategy relating to Economic Social and Governance

(ESG).

PI KPI

Is the financial institution reporting on the SRI funds (quantitative information)? 9 4

Is the financial institution reporting on its equator principles projects? 13 3


The Equator Principles (EPs) are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. The EPs are considered the financial industry ‘gold standard’ for sustainable project finance. The EPs, based on the International Finance Corporation (IFC) performance standards on social and environmental sustainability (http://www.ifc.org/ifcext/sustainability.nsf/Content/PerformanceStandards), and on the World Bank Group’s Environmental, Health and Safety general guidelines (http://www.ifc.org/ifcext/sustainability.nsf/Content/EnvironmentalGuidelines), are intended to serve as a common baseline and framework for the implementation by each adopting institution of its own internal social and environmental policies, procedures and standards related to its project financing activities.

Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures that implement the EPs.

The EPs apply to all new project financings globally with total project capital costs of US$ 10 million or more, and across all industry sectors. In addition, while the EPs are not intended to be applied retroactively, EPFIs will apply them to all project financings covering expansion or upgrade of an existing facility where changes in scale or scope may create significant environmental and/or social impacts, or significantly change the nature or degree of an existing impact. The EPs also extend to project finance advisory activities. In these cases, EPFIs commit to make the clients aware of the content, application and benefits of

applying the Principles to the anticipated project, and request that the client communicate to the EPFI its intention to adhere to the requirements of the EPs when subsequently seeking financing.

The adopting EPFIs view the EPs as a financial industry benchmark for developing individual, internal social and environmental policies, procedures and practices. As with all internal policies, these Principles do not create any rights in, or liability to, any person, public or private. Institutions are adopting and implementing the EPs voluntarily and independently, without reliance on or recourse to the International Finance Corporation or the World Bank.Currently, there are 69 official adopters of the Equator Principles. Source: www.equator-principles.com


An organization needs to embed sustainability in order to achieve a truly sustainable performance. The level to which sustainability has been embedded in the organization is reflected, for instance, in how stakeholder management has been rolled out and in the attention that is being paid to the sustainability report.

8.1 Governance structure

Disclosures on the governance structure of sustainability should address how the duties, responsibilities and powers relating to sustainability aspects have been assigned in the organization. This might involve persons, positions and ranks, committees and departments. It provides an understanding of how sustainability has been anchored in the organization.

Our survey shows that only 12 of the reviewed reports contain disclosures on the governance structure. In 9 of these, disclosures are limited. 8 reports do not include any disclosures on the governance structure.

The reported information on CSR governance of financial institutions is limited. Most commonly it is said that the CEO, CSR Committee and/or CSR departments are responsible for CSR but without more information on what their roles are. Some best practices illustrate this type of information about how the governance structure is set up (for instance by means of an organization chart) but only few of them are giving more information such as:

• The link between the CSR performance and remuneration;

• The roles and duties of each department involved in the CSR management;

• Responsibilities and targets of involved employees / departments.

8 Disclosure on management approach

The first order of business is governance. Far from something that can be

delegated to middle managers, sustainability reporting is a mandate that

needs senior management level support. A corporate governance

structure with clear reporting lines helps establish the requisite backing

from senior leadership and provides accountability at the operational level.

Some organizations link sustainability performance to executive

compensation, a step likely to sharpen organizational focus on the issue.

Is information provided on the governance structure regarding CSR?

a) Yes, detailed information is provided about the tasks and responsibilities regarding CSR (per country unit). The responsible in the Board is mentioned 15% 3

b) The information about the tasks and responsibilities is limited. 45% 9

c) No, no (or hardly any) information is provided on the tasks and responsibilities regarding CSR. Only the responsible board member is mentioned 40% 8

Total 100% 20

10 Royal Dutch Shell, “Royal Dutch Shell PLC Sustainability Review 2009,” page 1. Available at http://sustainabilityreport.shell.com/2009/servicepages/downloads/files/sd_review_shell_sr09.pdf.11 Azko Nobel, “Azko Nobel Remuneration Report 2009: Performance Share Plan,” Available at http://report.akzonobel.com/2009/governancecompliance/remunerationreport/performanceshareplan.html?cat=b.


8.2 Person bearing ultimate responsibility for sustainability and executive compensation

Articulating sustainability goals externally, and providing incentives to business units, helps embed the sustainability mission. There are different views on whether to link sustainability goals into an individual’s salary package. Some organizations embedded sustainability performance in top management’s compensation. For example, 20% of Royal Dutch Shell management remuneration is tied to sustainable development goals.10 AzkoNobel ties 50% of

management compensation to the Company’s ranking in the Dow Jones Sustainability Index11. An alternative approach is to change behaviors by celebrating the achievements of some managers or businesses, and holding poor performers to account.

Our benchmark revealed that only 3 financial institutions are indicating that the executive compensation is linked to the sustainability targets, with 1 institution revealing that they have plans for the future. 16 financial institutions are not disclosing any linkage between executive compensation and achievement of sustainability targets.

Does the report indicate whether executive compensation has been linked to (achievement of) sustainability targets?

a) Yes 15% 3b) No 80% 16c) Plans for the future are disclosed 5% 1

Total 100% 20


9.1 Increased importance of sustainability reporting and assurance in the financial industry sector

Sustainability reporting in the financial industry sector is becoming mainstream, given the fact that all financial institutions we reviewed are publishing a sustainability report, of which 75% of the reports are using the GRI guidelines and the same percentage includes external verification of their sustainability report. However, there is still room for improvement in the quality of the reports. The next step is that financial institutions truly integrate sustainability in their business strategy. This will further stimulate a drive towards integrating the sustainability report and the annual report.

9.2 The sustainability reports of the Financial Institutions are not dealing with the most material topics relevant for their sector

Only 10 % of the reviewed reports have a materiality matrix and only 10 % are describing on a narrative basis their materiality approach.

You would not expect financial institutions to focus so much on environmental KPIs, but rather on access to capital, equator principles and SRI funds. Probably, this is linked to the fact that sustainability is not yet fully embedded in the organizations.

It can be concluded from the benchmark that too much emphasis is still being placed on completeness in sustainability reports in the sense of including all topics, without any focus. The sustainability reports are not well-balanced. They tend to contain a plethora of positive messages whilst the true dilemmas facing the organisation are often left too vague or not explained at all.

Most of the time, financial institutions are reporting on key performance indicators linked to financial, environmental and social indicators. These KPIs are often not directly linked to the major sustainable performances of the institutions but on minor impacts as for instance waste or water consumption.

The core message of how sustainability is embedded in the organisation is difficult to extrapolate in a number of instances. Organisations are aware of the importance and scope of sustainability, but prove to struggle with truly owning it. More focus on the relevance of the different sustainability topics to the organisation could contribute to improving this situation.

9.3 Stakeholder dialogue is missing

As far as stakeholder management is concerned, the sustainability reports do not explicitly indicate what approach they have chosen and who exactly are considered the organisation’s stakeholders to be. The reports imply that organisations consider everyone a stakeholder, which is impossible from a practical perspective. Every organisation is forced to make choices between different – and often conflicting – interests.

9.4 Little disclosure on SRI funds or Equator Principles

As mentioned earlier, you would expect that sustainability reports of financial institutions would report extensively on their approach to Sustainable responsible investments or Equator Principles. This assumption is driven by the fact that more and more stakeholders are questioning institutions on these topics and a huge reputation risk is linked to it.

9 Concluding comments


9.5 Unnecessary repetition of financial KPIs and subdividing of KPIs

Our benchmark also revealed that 75% of the KPIs in the sustainability reports are related to the financial situation of the company and social and environmental aspects. Also, a lot of KPIs in the sustainability report are copied from the annual report. This results in extensive reports which are difficult to read and that lack focus.

Out of the review, it can also be concluded that most of the time financial institutions have several KPIs for the same topic and sub-topics which can be confusing for the reader and could be improved by selecting only one KPI. For instance for diversity, the KPI could be the percentage of women in the senior management positions and the information about the headcounts of male / female within the different positions could be named as being performance indicators used to calculate the key performance indicators.

9.6 Little disclosure on CSR governance and executive remuneration

The success of any enterprise wide strategy usually depends on a clearly defined governance structure and effective leadership. A strong governance framework with senior executive support from central and functional areas through a steering committee will be important in finding the appropriate balance between central controls and timely local responsiveness. Strong governance can also

help balance effective risk management and the enduring need for innovation, as well as the cost of sustainability responses (eg reputational risk) versus the potential value that can be unlocked by identifying and investing in opportunities.

Key elements for effective governance include:• A board-level sustainability strategy

committee operating effectively with clear responsibility

• External stakeholder engagement to respond to increasing demands for transparency in reporting

• Robust processes to identify risks to business objectives and a timely and appropriate risk management response

• Focused policies and procedures that respond to these risks

• Clear communication from the CEO to all employees regarding the risks, opportunities, strategies and goals

• An appropriate system of delegated authorities at each level of the organization

• A proven system of internal control reporting through to the CEO/CFO, linking non-financial data to the financial systems

• KPIs to benchmark performance and accountability against goals; programs to recognize achievement and to reward through performance-based compensation

• An effective process for reporting and disclosure, and broader stakeholder communications


Appendices: list of reports of organizations used in the benchmark

TOP 20 European Financial Institutions

1) BNP Parisbas SA 2) Royal Bank of Scotland Group plc 3) HSBC Holdings plc 4) Credit Agricole SA 5) Barclays plc 6) Deutsche Bank AG 7) ING Groep N.V. 8) Lloyds banking Group plc 9) Banco Santander SA 10) Société Generale SA 11) UniCredit spA 12) UBS AG 13) Commerzbank AG 14) AXA 15) Credit Suisse Group AG 16) Intesa Sanpaolo SpA 17) Allianz SA 18) Confederation nationale du Credit Mutuel 19) Dexia SA 20) Banco Bilbao Vizcaya Argentaria SA


Appendices: Glossary

European SRI – European Sustainable Responsible investments – www.eurosif.orgGRI: Global reporting initiative - http://www.globalreporting.orgIFAC – International Federation of Accountant – www.ifac.orgIIASB – International Accounting Standard Board – www.ifrs.org UNCTAD – United Nations Conference on Trade and Development - www.unctad.org

AA1000 Standard: The AA1000 Assurance Standard is a generally applicable standard for assessing, attesting to, and strengthening the credibility and quality of organizations’ sustainability Reporting, and their underlying processes, systems and competencies. It provides guidance on key elements of the Assurance process

SRI (Social responsible investment): Socially Responsible Investment (SRI) combines investors’ financial objectives with their concerns about social, environmental, ethical (SEE) and corporate governance issues. SRI is an evolving movement and even the terminology is still very much in

the evolving phase. Some SRI investors refer only to the SEE risks while others refer to ESG issues (Environmental, Social, Governance). SRI is based on a growing awareness among investors, organizations and governments about the impact that these risks may have on long-term issues ranging from sustainable development to long-term corporate performance.

Project finance Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors

Who to contact


The Netherlands Dick de Waard RA MA Partner / Leader Climate Change and Sustainability Services Belgium and the Netherlands [email protected] • + 31 (0)88-407 27 33

The Netherlands Rob Steensels Manager Financial Accounting and Advisory Services / Financial Services Organization [email protected] • +31 (0)88-407 18 75

Belgium Harry Everaerts Partner [email protected] • + 32 (0)2 774 9434

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