Two Tomorrows consultant Samantha Parsons draws lessons for the global financial sector from the Tomorrow’s Value Rating of leading global companies and the Tomorrow’s Value Rating Korea
Talk of the financial and economic crisis is everywhere. Distrust remains sky-high, as is demonstrated by the global anti-capitalist protesters and major financial sector lay-offs. So what are the leaders of our financial institutions doing to regain our trust? To fully understand what sustainability leadership means in this high-profile sector, and what companies are doing to regain the confidence of their stakeholders, we have compared the top five most sustainable financial institutions from the global Tomorrow’s Value Rating 2011 and this year's Tomorrow’s Value Rating Korea.
We are asking if there are lessons to be learned from these sustainability leaders for other financial institutions currently struggling to retain customers and stakeholder trust. Are they able to repair their reputation as a trusted partner in society by aligning these new strategies as demonstrated by the TVR leaders – ING, HSBC, Daegu Bank, Westpac Banking Corporation and Allianz – into their management practices? Put simply, an institution should be able to reassure its stakeholders that it is honest, accountable, and investing funds responsibly, through three key areas: engagement, balanced reporting and incorporating non-financial risks into key risk frameworks.
With that in mind, what does sustainability leadership currently look like in the financial sector? What are the comparisons between Korea, and the global institutions who have already demonstrated their ability to integrate these core processes into management practice?
Firstly, engagement. Financial sustainability leaders are actively seeking to rebuild stakeholder trust by expanding their materiality process to incorporate direct stakeholder engagement. This not only enables sustainability leaders to write sustainability reports that more accurately reflect the concerns of their stakeholders, but it also ensures that their sustainability strategies are in line with their stakeholder expectations.
Korean Daegu Bank and global Westpac Banking Corporation lead the pack in this area; however, the majority of the financial institutions we studied use stakeholder engagement to either help them develop their strategy or guide their reporting, but not both.
Daegu Bank is the only Korean financial institution which has expanded its materiality process by directly integrating stakeholder engagement. This involves first defining its 40 material issues using a materiality matrix. Then, it reviews the key issues again through a stakeholder survey to define its 24 core material issues. Daegu has a three-level system to define and prioritise stakeholder groups into core, strategic and environmental levels utilising ISO 26000 guidelines. This differs from other financial institutions whose materiality processes usually only involve a materiality matrix test.
In contrast, Westpac Banking Corporation has established a Community Consultative Council to guide its materiality process. This has not only helped Westpac to determine what sustainability priorities to report on, but has also led Westpac to revise its sustainability strategy and governance structure in order to be more responsive to stakeholder feedback.
Likewise Allianz – the highest scoring financial institution in the Global TVR - has conducted a materiality survey with stakeholders, which shaped the five chapters of its sustainability report. These covered the key questions of access to finance, climate change, demographic change, digitisation and financial markets stability.
Secondly, balanced and transparent reporting is the key to building trust with stakeholders and ensuring accountability. Yet even amongst the financial sustainability leaders balanced reporting is hard to find. Only three financial institutions - Dongbu Insurance, Westpac Banking Corporation, and HSBC - received a maximum score in the Tomorrow’s Value Rating for this criterion. No wonder there is a lack of trust in the world’s financial institutions, when the majority are not communicating how their core business decisions impact the environment and society in a balanced way.
One of these, Korean Dongbu Insurance ensures balance by incorporating excerpts from in-depth interviews conducted with each stakeholder group, covering both positive and negative opinion in its sustainability report. In addition to this balanced reporting, Dongbu also scores highly in regards to responsiveness through their inclusion of 'Your Say / Our Say", which describes how they will respond to or improve on the issues raised by stakeholders' feedback.
Although global Aa-rated HSBC’s sustainability report could be improved by obtaining assurance against the GRI principle of balance, and through the inclusion of more opposing views, compared to its peers HSBC does not shy away from an honest discussion of where their commitments and targets are not meeting the mark.
Lastly, we found only a small number of financial institutions globally – the most sustainable – are integrating non-financial risks into their core business decision-making, understanding that strong sustainability practices will lead to better long-term financial performance. Although this is a key aspect of sustainability leadership in the financial sector, only two institutions out of the five studied, ING and HSBC, are actively taking this on board. In this regard, Korean financial institutions are falling behind their global counterparts and this remains an opportunity for them.
ING demonstrates some valuable processes that it has implemented in this area. Its Environmental and Social Risk Framework applies the Equator Principles and sector specific policies to ensure that new investments respect human rights, labour, and the environment to create shared value. Having a sustainability risk framework in place is crucial for minimising reputational risks, which can bubble to the surface and amplify distrust.
Given that best practice is mixed even amongst the five most sustainable global and Korean financial institutions, where does this leave the sector as a whole? To start, not a single financial institution received a rating of Aaa in either the global or Korean TVR, demonstrating that the sector is still behind others – such as food and beverages, diversified industrials and ICT - with regard to sustainability management. Rebuilding trust in the sector is not a quick fix. Engaging with stakeholders does not just involve listening, but rather incorporating feedback and changing the fundamental way that the finance sector does business. Although there are some examples of leading practice in the sector, financial institutions rebuilding trust in all three ways is few and far between. The majority of such organisations, especially in developing countries, are still far behind in implementing the sustainability practices that could rebuild trust in the sector. A few leaders will not save the reputation of the whole sector alone; all financial institutions will have to do their part.