Despite these challenges, some institutions are trying to be more transparent. Wealth and asset managers significantly improved disclosure rates on environmental parameters, rising from 59% in 2018 to 69% in 2021. Disclosure rates for both banks and insurers were 66% in 2018, which increased to 68% and 70%, respectively, in 2021.
European institutions have the highest ESG scores and highest environmental disclosure rates. The average disclosure rate for European institutions on environmental parameters was 84% compared to just 58% for their North American peers. This is largely attributable to the focus of European regulators who have introduced more regulations to promote transparency (e.g., Corporate Sustainability Reporting Directive or CSRD) than their counterparts in other regions.
Slow progress on emissions
Financial institutions have struggled to progress on emissions. In disclosing the data on financed emissions (i.e., emissions attributable to companies that are financed by financial services firms), of the 226 banks that have signed up for the Partnership for Carbon Accounting Financials (PCAF), only one-third report their numbers on the PCAF site.
More broadly, only one-third of firms disclose their scope 1-3 emissions data. Approximately 40% of those that consistently report emission data failed to reduce emissions from 2018 to 2021. Consider how firms are performing on emissions intensity (the average emission per US$1m in assets, assets under management (AUM) or gross written premiums):
- The banks in the index reported an average emission of 1.18 tonnes per US$1m assets in 2021, up from 0.85 tonnes in 2018.
- Insurers reported an average emission of 6.49 tonnes per US$1m gross written premiums in 2021, nearly doubling the 3.32 tonnes reported in 2018.
- Wealth and asset managers' emissions were stable at 0.09 tonnes per US$1m AUM throughout 2018 to 2021.
Reduced emissions can only be achieved by increasing climate-aligned investments and financial inflows, with a simultaneous shift away from investing in emissions-intensive projects over the next few years. As more financial services institutions disclose the greenhouse gas (GHG) emissions associated with their loans and investments, financed emissions intensity is likely to increase. This position may worsen in the short-term — as the current energy crisis may require greater investment in high-emitting energy producers, such as coal as well as over the medium-term — as greater financing is required by brown sectors to transition. This points to a particular challenge: it will be difficult to understand how emissions are really evolving until a baseline, anchored by a consistent understanding and methodologies for calculations, is established. However, greater transparency will help financial institutions undertake informed actions as they decarbonize their portfolios.
Top priorities in the sustainability agenda
Another area of opportunity highlighted by the SFI is the alignment of product offerings to green strategies. Currently, fewer than half of all financial institutions report offering green products or solutions. Banks are the laggards here, while insurers and wealth and asset managers have made significant progress.