ITFA’s ESG Committee releases new research: Towards a Common Audit Standard for Sustainability reporting

Further to yesterday’s announcement, the research conducted by Dr. Rebecca Harding and published by ITFA is now available here. By way of reminder the report, “Towards a Common Audit Standard for Sustainability reporting” uncovers that:

1. The regulatory reports mention a total of 23 reporting standards around the world that frame the 15 regulatory reports covered by the research.
2. There are no common compliance methodologies that all banks use.
3. 13 of the 15 banks explicitly use their own approach to regulatory reporting rather than focus simply on a specific regulatory framework.
4. None of the banks covered in this report comply fully with the regulatory frameworks laid out by the Sustainability Accounting Standards Board (SASB).
5. 10 of the banks report explicitly against either the GRI, the SASB or the TCFD standards but do not state how.
6. The reports use words heavily focused on regulation, compliance, risk and finance; they do not use as many words that suggest a focus on sustainability itself, such as “climate change”, “human rights” or “environment” as much.

The report is a development of earlier research that identified a “Regulatory Paradox” in sustainability reporting requirements. This paradox can be defined as follows: regulations are solving for past financial risk that can be associated with climate; as such they directly militate against any long-term transition to more sustainable business models, for example through differential capital treatment, because they are designed to solve for systemic financial risk and not existential climate risk.

The findings suggest that the lack of clarity on reporting requirements from regulators is exacerbating the regulatory paradox. While financial organisations take different approaches, the regulators will not be able to provide preferential capital treatment and this itself will damage attempts to manage supply chains for sustainability and move towards net zero targets.

The research for this report was part of an ITFA-supported long-term action-research programme looking at sustainability reporting.
ITFA’s first report on sustainability reporting was published in May 2023 and identified the need to establish a separate and independent entity that focused on creating common, consistent and comparable audit standards for sustainability reporting. Such an organisation would have a remit to create those standards on the basis of:

1. A qualitative iterative process that looked at common practice amongst ITFA banks and matched this to regulatory structures amongst a small number of leading corporate transactions and trade and supply chain finance banks, and
2. A quantitative process of data collaboration at a transactions level to create a data repository that allows sustainability-related financial risks to be modelled.

This new research update is a first step towards understanding that common practice and as such provides a potential framework for this new entity. The ESG strategies of 15 of the largest global banks operating in international banking and trade finance at present were matched using AI techniques to the emerging benchmark framework standard set out by the Sustainability Accounting Standards Board (SASB) in June 2023.

This suggests that the standards themselves are insufficiently prescriptive on the “How” and the “What” in terms of data collection and analysis. This is not a viable position as the regulators increasingly become more stringent in their expectations of reporting.

None of these banks state clearly that they report across all of these standards. While this position may correct itself as these standards become streamlined and inter-operable, at present this represents a substantial divergence in standards, not least because each has a different methodological framework.

Dr. Rebecca Harding, report author said, “This report is a wake-up call to the trade finance industry. It is divergent in its reporting standards and while this continues, it will not be anywhere near the desire expressed by survey respondents in the first report to use trade and supply chain finance as a means of enabling transition. As a planet we are seeing record-breaking climate change, increases in global migration as a result (especially in Africa) and the social and political challenges that are the inevitable consequence of climate-induced instability. The banking sector has the tools at its disposal to do something meaningful but the approach at the moment is duplicative and expensive; however, this is a problem that is too big for us to fail and we need to use this research as a catalyst to action.”