Banks play a crucial role in the transition to a sustainable economy. As providers of financial capital, they can encourage companies to pursue more sustainable business models and direct funds towards investments that generate a positive impact on society. Recognising banks’ role, policymakers and regulators are integrating ESG considerations in the banking sector.
The CIMA-funded research project, ESG Reporting As a Driver of Value Creation: A Case Study of ABN AMRO, uses document analysis and interviews to explore the channels through which ESG reporting represents a driver of value creation in the banking industry, through the experience of ABN AMRO.
ABN AMRO is a Dutch bank with an international presence that employs more than 20,000 people. It’s a frontrunner in the sustainability space, which is why it was chosen for the case study described in this FM article.
In 2018 the bank redeveloped its purpose and strategic objectives, making sustainability part of its three strategic pillars: The bank aims to establish trusted relationships with customers and support them in important financial moments; has a strategic focus on sustainability; and future-proofs the business by simplifying and centralising its operating model, delivering a better customer experience while delivering cost savings.
Through its reporting tools, including integrated annual report, impact report, Pillar 3 report, and human rights report, among others, ABN AMRO explains how it creates value for its stakeholders, not only as a provider of banking and other financial services but also as a responsible employer and an active contributor to society as a whole.
4 best practices for finance to support the ESG journey
The ABN AMRO case study provides the accounting and finance function with four areas of best practice in the field of ESG reporting and impact reporting:
Integrate sustainability into strategy
ABN AMRO published its first integrated report in 2015 and reworked its purpose and strategic objectives in 2018.
The corporate strategy is supported by comprehensive ESG reporting, including an annual impact assessment, increasing attention to sustainability goals, and involvement of stakeholders.
Reporting can be a very valuable tool to accelerate integrated thinking and therefore create value. It gets everyone onboard and creates awareness of the impacts and the value created through different capitals, such as financial, human, or social. The process of ESG reporting enhances transparency, fosters companies’ reputation and value creation, and ultimately enables companies to identify ESG-related risks and opportunities. (See the sidebar, “Integrated Reporting and Sustainable Businesses,” at the end of this article.)
The bank’s ESG journey is the result of both internal and external drivers. Besides the increasing attention of regulation towards sustainability, ABN AMRO has an intrinsic motivation to provide comprehensive ESG reporting, driven internally by new leadership and employees, and externally by clients, nongovernmental organisations, and investors, among others.
Engage stakeholders
ABN AMRO carries out a rigorous materiality assessment process that allows the identification of the key drivers of long-term value that are aligned with its purpose. The bank employs a materiality assessment process based on a stakeholders’ survey to determine the value-creating topics for the bank. This involves the board and regular dialogue with stakeholders and management.
This process has led to the current identification of nine strategic differentiators, each linked to a strategic pillar.
To strengthen and accelerate the absorption of the value-creating topics into the organisation, ABN AMRO has established an integrated thinking community whose members discuss challenges and how to overcome them.
Assess positive and negative impact
ABN AMRO conducts an annual integrated review and publishes an annual impact report that includes an integrated profit-and-loss statement. The report examines how the bank’s activities affect its four main stakeholder groups: clients, employees, investors, and society. This includes assessment of the 17 Sustainable Development Goals (SDGs) the UN adopted in 2015, particularly SDG 8, Decent Work and Economic Growth; SDG 12, Responsible Consumption and Production; and SDG 13, Climate Action.
The impact can be positive or negative and can create or deplete value for stakeholders. For example, mortgages allow borrowers to become homeowners and build wealth, but new house construction increases consumption of natural resources. Similarly, lending to companies promotes economic growth and employment, but this can also contribute to climate change and biodiversity loss.
An important goal of an organisation’s strategy is to maximise positive impacts and minimise negative impacts. This requires managers to have insight into and to understand the various impacts.
Provide authentic reporting
False or misleading statements about the environmental commitment not only mislead customers, investors, and the public, but they also compromise efforts towards addressing climate change.
Greenwashing can be prevented through setting up effective internal controls, implementing appropriate regulations, and getting external assurance. ABN AMRO is noted for having its financial auditors provide external limited assurance of its integrated report and for being the first financial institution to use the reporting framework of the UN Guiding Principles on Business and Human Rights for its human rights report. Further, reporting in a transparent way, on both positives and negatives, and having a disclosure focused on authenticity, accuracy, completeness, and relevance are key to ensure reporting reflects an authentic effort.
Integrated reporting and sustainable businesses
An integrated report tells a more complete story of how an enterprise creates value over the short, medium, and long term. It creates a holistic narrative of an enterprise beyond the financials and helps the organisation connect the dots across silos, driving integrated thinking, planning, and performance.
Integrated reporting incorporates material sustainability-related information and provides meaningful insights into an organisation’s use of and effects on tangible capital, such as financial and manufactured, as well as the intangible elements of an enterprise, such as its human, intellectual, social and relationship, and natural capital.
Global standards for sustainability reporting IFRS S1 and S2, issued by the International Sustainability Standards Board, build on the concepts of the Integrated Reporting Framework. When used with these standards, integrated reports provide decision-useful information to providers of capital and help improve the efficiency of capital markets through higher-quality information relating to the business model, risks and opportunities, strategy and resource allocation, and performance and prospects of an enterprise.
Irma Malafronte, CA (Italy), Ph.D., is a reader (associate professor) in accounting and finance at Roehampton Business School in London. John Pereira, ACMA, CGMA, Ph.D., is associate professor in finance at Kingston Business School in London. Cristiano Busco, Ph.D., is professor of accounting, reporting, and sustainability at UCL School of Management in London, professor of accounting at LUISS Guido Carli University in Rome, and co-chair of the IFRS Foundation’s strategy and integrated thinking group. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
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AICPA & CIMA RESOURCES
Article
“How a Conglomerate Streamlined Its ESG Reporting”, FM magazine, 15 July 2024
Website
Sustainability-Related Assurance, AICPA & CIMA website