We will implement our commitment to these Principles through effective governance and a culture of responsible banking, demonstrating ambition and accountability by setting public targets relating to our most significant impacts.
PLEASE NOTE: The Implementation Guidance is being updated following the completion of the Consultative Process, the below is the original draft version.
Implementation guidance for Principle 5: Governance and Target Setting
Key words and intent: target setting; most significant impacts; leadership; daily business culture and practice; roles and responsibilities; resource allocation
Fulfilling commitments to these Principles will allow your bank to credibly position itself as aligned with the needs of society and in so doing to building trust and credibility for its actions. In order to claim that credibility and an industry leadership role, to focus and drive efforts within the bank and to scale up your bank’s contribution to society, it will be essential to set targets and KPIs. These need to be in the areas of your bank’s most significant impacts and in terms of scale and ambition, in line with the objectives and targets expressed in the SDGs, and the Paris Climate Agreement and other relevant national, regional or international frameworks.
To be able to respond with the speed and scale necessary to address global challenges requires leadership, buy-in and active support of the CEO, senior and middle management. It requires establishing a daily business culture and practice in which all employees understand their role in delivering the bank’s purpose, and integrate sustainability in their work and their decision making. To deliver on its commitments under these Principles, a bank needs to put in place effective governance procedures pertaining to sustainability, including assigning clear roles and responsibilities, setting up effective management systems and allocating adequate resources.
+ Governance and culture
How your bank can achieve this
- Integrate sustainability into a clearly communicated purpose and/or vision and mission for the bank.
- Actively communicate top-level buy-in from directors, CEOs and C-suite executives.
- Ensure that dedicated resources with sufficient status and influence to effectively lead and coordinate the implementation of sustainable practices throughout the bank are put in place. This could take the form of a sustainability team, environmental and social risk management unit, or positive impact capability.
- Engage all functional areas in the bank by assigning roles and responsibilities across your bank regarding its sustainability agenda and ensure adequate resource allocation.
- Establish appropriate policies, systems and procedures with effective management systems and controls, including risk, compliance and third-party assurance procedures.
- Educate and train employees to develop appropriate awareness and expertise at all levels.
- Integrate the bank’s sustainability targets in the bank’s incentive systems. Reward strong sustainability performance and leadership, for example through remuneration and by integration in performance assessments and promotion decisions.
- Communicate internally and externally (see Principle 6) on the bank’s sustainability approach and performance, in particular on its targets and progress in meeting them.
- Integrate sustainability into a clearly communicated statement linking environmental and social issues to the vision and mission of the bank, with clear C-suite endorsement.
- Actively communicate top-level buy-in from CEOs and the C-suite with statements, quotes and interviews in internal and external media and build awareness and knowledge among the bank’s employees.
- When not already in place, set up a corporate sustainability department with strong leadership and clear roles and responsibilities, acknowledging that these Principles can only be fully implemented if all functions within the bank play a role.
- Assign clear roles and responsibilities at board level and across functional areas.
- Educate and train employees on your bank’s sustainability strategy and targets in general, and in particular on sustainability issues pertaining to their respective area of work.
- Practice what you preach: For the bank’s efforts on SDGs and climate to be credible to staff and to translate into culture and everyday practices, day-to-day realities in the bank need to reflect the ethos and values underpinning the SDGs and the Paris Climate Agreement. This includes issues such as gender equality, climate-friendly transport options, etc.
Ensuring continuous improvement…
- Establish your internal sustainability community of champions including all the employees who have a clear contribution and responsibility towards the achievement of the targets. Manage and strengthen this community with frequent engagements, such as webinars, meetings and seminars, newsletters. Honor sustainability leaders.
- Integrate performance with regards to the bank’s sustainability targets and responsible banking leadership into performance assessments, remuneration schemes and promotion decisions. Formally include sustainability criteria in the Terms of Reference of nomination, remuneration and audit committees.
- Align lending policies with scientific and robust approaches developed via a multi-stakeholder process. Where available, use sustainability standards and certification systems developed via multi-stakeholder processes such as the ISO and ISEAL standards.
- Communication is repetition: regularly address sustainability-related topics in internal communications to raise awareness, understanding and interest among staff.
- Ensure sustainability objectives and targets are integrated into all decision making processes across the bank. Regularly review existing management systems and processes to assess whether these need to be modified or strengthened to enable your bank to deliver on its sustainability-related goals. Set key performance indicators that enable progress against the objectives and targets to be assessed.
Some key resources and examples
Some key resources
- Integrated Governance by UNEP FI – 2014: this report sets out a new model of governance that puts sustainability at the heart of governance and corporate boards’ strategic agendas. The report makes a compelling case for the development and execution of sustainable strategies in corporations and illustrates why the current state of governance is not well suited to advancing sustainability effectively.
- Sustainability and the board: What do directors need to know in 2018? This report gives an updated and concise view on the issues, questions and references that directors should have in mind or address when discussing sustainability at board level.
- Basel Committee on Banking Supervision (BCBS) issued in 2010 a set of principles for enhancing sound corporate governance practices at banking organizations. Drawing on the lessons learned during the crisis, the principles set out best practices for banks. Key areas of particular focus include: (1) the role of the board; (2) the qualifications and composition of the board; (3) the importance of an independent risk management function, including a chief risk officer or equivalent; (4) the importance of monitoring risks on an ongoing firm-wide and individual entity basis, (5) the board’s oversight of the compensation systems; and (6) the board and senior management’s understanding of the bank’s operational structure and risks.
- The OECD Corporate Governance Principles aim at helping policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance. They also provide guidance for stock exchanges, investors, corporations, and others that have a role in the process of developing good corporate governance. First issued in 1999, the Principles have been adopted as one of the Financial Stability Board’s Key Standards for Sound Financial Systems and endorsed by the G20.
- G30 – Banking Conduct and Culture – A Call for Sustained and Comprehensive Reform: this report addresses the governance challenges facing the world’s largest banks, their boards, their management, and the supervisors who oversee the health of the financial system as a whole, and the economic sustainability and strength of the individual firms.
- Financial Conduct Authority: Transforming culture in financial services: the British Financial Conduct Authority (FCA) has published this discussion paper on transforming culture in financial services which presents views from academics and industry thought leaders. The paper is intended to provide a basis for stimulating further debate on transforming culture in the sector.
- Earth On Board: an ecosystem of sustainability actors dedicated to helping organizations achieve an Earth Competent Board, where board members are proficient in sustainability, with the right governance, asking management the right questions, recognizing that peer exchange is key to driving transformation.
- WWF Sustainable Banking Assessment (SUSBA) tool: an interactive tool for banks to assess and benchmark their Corporate Governance (CG) and Environmental, Social, Governance (ESG) integration performance to accelerate their efforts to stay competitive, resilient and relevant in a resource constrained, low carbon future.
- The International Social and Environmental Accreditation and Labeling Alliance (ISEAL) provides a database of sustainability certification standards which can be incorporated into banks’ polices and client assessment criteria.
a. Linking sustainability objectives to remuneration
More and more banks are incorporating sustainability-related considerations into the performance assessment and remuneration of staff throughout the organization, including for their executive committees and board members. Aligning remuneration programmes with the sustainability agenda of the bank creates awareness, delivers action, and demonstrates credibility.
For example, a major European bank measures the share of its lending portfolio that strictly contributes to at least one of the 17 SDGs. This indicator is embedded in a set of sustainability-linked KPIs (e.g. exposure to renewable power sector, operational carbon footprint, number of individuals that have benefited from a financial education session provided by the group). Part of the long-term compensation for the bank’s 5000 top managers across the group is linked to these criteria.
b. Dedicated Board Committee on sustainability
A major European bank has set up a “responsible banking, sustainability and culture committee” to assist the board of directors in fulfilling its oversight responsibilities with respect to the responsible business strategy and sustainability issues of the company. This committee:
- Advises the board of directors on issues such as the strategy on responsible business practices and sustainability, and on potential changes to the organization’s approach on these issues.
- Reports periodically to the board of directors on the group’s sustainability performance and the progress made.
- Liaises with the remuneration committee on the alignment of remuneration with the organization’s culture and values.
- Liaises with the risk supervision, regulation and compliance committee in its review of the alignment of the risk appetite and its assessment and evaluation of the company’s non-financial risks.
- Advises the board of directors on the Group’s strategy on relations with stakeholders, including, employees, customers and local communities and on the quality of its engagement with these stakeholders.
+ Target Setting
What is required from your bank
- Set SMART targets (see below) that address the most significant negative impacts resulting from your bank’s products, services and activities and that scale up your bank’s most significant (potential) positive impacts and contribution to society’s goals. The ambition level of these targets needs to be in line with (i.e. align the bank’s portfolio with) the international and national targets of the Paris Climate Agreement and the SDGs.
- Signatory banks are generally expected to set and publish their targets within 12 months of becoming a signatory to the Principles for Responsible Banking. The exception are those banks who self-assess as being in the early stages of integrating sustainability, i.e. “starter banks”. These banks as a result may take up to 24 months to set and publish their targets.
“Starter banks” could:
- Conduct a gap analysis regarding the expected actions under all six Principles and then set targets to close these gaps on policy, strategy, assessment capability, leadership, management systems and procedures. These targets should be clear and specific and supported by plans defining the actions that will be taken and the intended completion dates. Progress should be regularly reported internally to maintain awareness, and periodically in public reports.
- Conduct a qualitative materiality assessment (see Principle 1: Alignment, and Principle 2: Impact), e.g. by mapping impacts on a sector-by-sector basis to identify where your bank’s most significant positive and negative impacts with regards to society’s goals are. Engaging key stakeholders, e.g. from civil society or government, can help to bring together the necessary expertise and knowledge. Based on this assessment, identify one to three focus areas for setting targets.
- Set targets linked to relevant national/regional/international frameworks (link can be qualitative for starter banks) and KPIs that enable progress against them. For a “starter bank” that might lack process, methodologies, and relevant data to set targets directly linked to the metrics of national/regional/international targets, KPI’s could be established in a simple way. As an example, regarding the contribution to the Paris Climate Agreement, a starter bank can decide that it wants to act on reducing greenhouse-gas emissions. From that point, they might realize they do not have client data related to carbon emissions yet nor the tools to obtain it. However, they could still have a target of, for instance, allocating more relationship managers to renewable energy companies, or having them spend at least 20% of their time or have 20% of their clients in that sector. This would be a possible qualitative target for “starter banks” while they work on developing systems and obtaining data and hence move forward to more intermediary/advanced practices regarding target setting (see below).
- Define measures to achieve these targets, such as working with clients and customers (see Principle 3: Clients and Customers) or proactively working to expand/reduce your exposure to certain sectors (see Principle 2: Impact), etc. Allocate resources and responsibilities to ensure that the objectives and targets can be met.
- Ensure frequent reporting on progress to the Board of Directors and executive team to ensure its buy-in.
Ensuring continuous improvement…
- Base your target setting on a thorough materiality assessment (see Principle 1: Alignment) and consult relevant stakeholders to identify focus areas, i.e. the areas where your bank has the most significant positive and negative impact (Principle 4: Stakeholders).
- Clearly link your targets to the relevant national/regional/international targets to ensure that your targets are at least in line with or more ambitious than the targets expressed in the SDG, the Paris Climate Agreement and other relevant national, regional or international frameworks, and be transparent on the scale of your contribution to these targets.
- Ensure that your objectives and targets drive continuous improvement in practice and performance regarding your contribution to society’s goals. Establish mechanisms to continuously review your targets with the objective of ratcheting them up over time.
- Your objectives and targets should be SMART; that is, they should be:
- Specific: It should be clear what activity is the subject of the objectives and targets, how the objectives and targets relate to individuals’ needs and society’s goals, what improvements in performance and in impact are being sought.
- Measurable: It should be clear how performance and impact are being measured or assessed.
- Achievable: The objectives and targets should be attainable. There is limited value in setting targets that cannot or will not be delivered.
- Relevant: The objectives and targets should focus on areas where the bank has the greatest impact. They should clearly link to one or more of the Sustainable Development Goals, the Paris Climate Agreement and other relevant national, regional or international frameworks.
- Time-bound: It should be clear when the objectives and targets are to be met, and the timeframes should be at least as ambitious as those expressed in the Sustainable Development Goals, the Paris Climate Agreement and other relevant national, regional or international frameworks.
- Set processes to monitor and review progress against the objectives and targets, including any negative impacts and take corrective action in the event that negative impacts are identified.
- Link internal functions, such as marketing and communication, training, human resources, innovation and compliance to the targets to ensure internal coherence.
- Link the achievement of targets and progress relating to the bank’s sustainability objectives to remuneration and incentive systems throughout the organization.
Setting targets consistent with science expectation regarding climate goals
The Science Based Targets Initiative helps companies to set greenhouse gas emission reduction targets that are in line with the reductions needed to keep global temperature rise 2°C above pre-industrial levels. Companies can submit their targets for validation and verification against established criteria.