Major-bank sustainability focus: ANZ

ANZ is on a journey toward integrated reporting among a raft of initiatives in the sustainability space. Anna Stewart, head of corporate sustainability in Melbourne, and Katharine Tapley, Sydney-based head of sustainable finance, share views on the bank’s approach.

PURPOSE: To shape a world where people and communities thrive.

There is a global shift toward integrated reporting taking place in the banking sector, and among companies more generally. What is ANZ’s position in this regard?

STEWART We signalled our move toward integrated reporting with the release of our annual review in 2017. This combines the key elements from our financial and sustainability performance to produce a compelling and concise document that tells a more holistic story about the bank.

You can’t just suddenly start doing integrated reporting – it’s actually quite a difficult thing to do, involving many parts of the business. Integrated reporting is an output of integrated thinking, and getting the integrated thinking piece right takes time. The work we’ve been doing over the past couple of years on defining our organisational purpose has helped with this. We know what our purpose is and we have clear strategic priorities, so it makes sense for us to move toward integrated reporting now.

A particular value of integrated reporting is that it brings together different areas of the bank and helps break down silos. A number of teams need to be involved, including strategy, investor relations, finance, sustainability and risk. It really does involve a whole-of-organisation approach, which I think is why it is quite difficult and why we haven’t yet seen large numbers of companies in Australia doing it. But the momentum is definitely growing.

Integrated reporting came into being for investors. But the audience is broader than this. We would like all our stakeholders to pick up the annual review and get a feel for ‘who’ ANZ is – how we are creating value, the challenges and opportunities in our operating environment and how we are managing them, our governance, our key strategic priorities, and how we have performed.

I think integrated reporting represents the next wave of best practice in reporting. We are increasingly seeing the environmental, social and governance (ESG) world intersecting with the financial world. You just can’t talk about them separately now.

TAPLEY Our chief executive talks about our social ambition marrying our strategic ambition. Financial wellbeing, environmental sustainability and housing have been drivers for our purpose and also form the key strategic priorities of our sustainability framework. The purpose informs who we bank and how we bank, so it makes perfect sense that we would be taking steps towards integrated reporting.

“Investors are asking for visibility and disclosure, and it has been well documented that debt investors see the emergence of the ESG bond market as a way to engage and steward in a way equity investors have been doing for quite a while now.”

Are fixed-income investors asking for integrated reporting?

TAPLEY Yes. Investors are asking for visibility and disclosure, and it has been well documented that debt investors see the emergence of the ESG bond market as a way to engage and steward in a way equity investors have been doing for quite a while now.

Through socially responsible investing (SRI), investors are able to get their hands on information that tells the story. They haven’t previously had this level of information available to them. Nor have they asked – until recently. It’s working both ways: debt investors are finding their voice and they are also getting better disclosure through instruments like green bonds.

Impact reporting is also gaining traction. When we roadshow bonds, the more sophisticated investors are asking about issuers’ intentions around impact reporting, the metrics that will be reported on and whether the investor can have any input. This is becoming more prevalent across the debt investor community, particularly in Europe.

All the major Australian banks have signed up to support the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Why is this important and what is ANZ doing in this regard?

STEWART When we published the 2017 annual review we used the TCFD recommendations. In fact we were the first bank to report using these recommendations. We have continued to progress our TCFD reporting this year.

The TCFD is focused on financial risks and opportunities associated with climate change. Having a reporting framework like the TCFD is helpful as it enables more consistent and comparable reporting. This is particularly beneficial for stakeholders who are interested in how we are supporting the transition to a low-carbon economy and managing the physical and transition risks associated with climate change.

Will ANZ continue publishing a separate sustainability report as it progresses more on the integrated annual review?

STEWART We will keep producing a sustainability report as it provides a deep dive into particular ESG issues. It contains a lot of data and many stakeholders are looking for this deeper level of ESG disclosure.

I think what we may start seeing is climate disclosures being published separately, as they already are in some European countries. Some companies have released a separate TCFD or climate-risk report in addition to their financial and sustainability reports. I think there’s a specialised audience for certain types of disclosures.

Companies can report under a dizzying array of frameworks. Would investors or other stakeholders get better outcomes from the commoditisation of some of these reporting standards?

STEWART There is a plethora of reporting frameworks and this can make it confusing for preparers and consumers of reports. Ultimately, I think it comes down to materiality. As long as you’re reporting against your most material issues you’re less likely to be either under- or over-reporting. You need to be reporting on the issues that really matter to your business and stakeholders.

We do a materiality assessment every year, for which we consult internal and external stakeholders. It’s a good check for us to make sure that what we think are the most important issues is in line with what our stakeholders believe.

ANZ and ESG collaboration

A strong environmental, social and governance (ESG) agenda is not just about a bank’s independent actions. ANZ is actively involved in collaboration with third parties to improve social and environmental outcomes.

What collaboration projects is ANZ involved with in the ESG space?

STEWART I would highlight our financial-wellbeing work. We have some very strong partnerships in this space working together with a number of fantastic community partners, including The Smith Family and the Brotherhood of St Laurence.

In 2018, we undertook a substantial piece of work surveying the financial wellbeing of Australian and New Zealand adults. It was really informative in highlighting that financial wellbeing is not so much about what you earn but rather your savings habits and not using credit for everyday expenses. The survey results are helping inform our product development and the types of conversations we have with customers.

TAPLEY Another one I’d mention is our membership of the Qantas Future Planet Partnership. This partnership was established by Qantas alongside various corporate members.

We have a number of initiatives under the partnership. We’re doing carbon offsetting for our environmental footprint. We’re working out ways to engage our employee base around issues associated with environmental degradation.

There are also some initiatives in the pipeline on the corporate side with the partnership – for example, we’re part of a group talking about developing “blue carbon” markets.

Some market users believe taxonomy is crucial to support the transparency and comparability needed for the sustainable-finance sector to grow. What are your views on some of the moves to develop standardised taxonomy?

TAPLEY We didn’t use a taxonomy to create our green-bond impact report, but we did engage with investors and we also spent quite a lot of time researching and working out which metrics make the most sense.

Personally, I’m somewhat on the fence about taxonomies because I think defining what is green, ESG or SRI is quite jurisdiction-dependent. What’s green in Australia may be very different from what’s green in Vietnam.

This informed our thinking when we started looking at how to produce an impact report showing the benefit from the use of proceeds of our green bond. This was nearly 18 months ago, when there wasn’t any formally developed taxonomy. We went to a few key investors in Australia and Europe and asked them what they wanted to know.

Do you think ANZ will continue with this investor consultation process even as the EU and ASEAN nations move closer to developing their own taxonomies?

TAPLEY The question is quite timely because we are due to report on the impacts of our UN Sustainable Development Goal (SDG) bond. An SDG bond is quite different from green, social or sustainability bonds – for which it is easier to impact report as there is more real data for these types of bonds. For SDG bonds, the obvious place to go back to is the SDGs themselves, and their targets and indicators.

Data is another issue for banks in particular, because we don’t own the assets. We’re reliant on our clients to provide data and information, and we have to manage this within the expected degree of confidentiality that should flow between a banker and its clients.

Do you plan to report annually on SRI bond impacts?

TAPLEY We have put into our framework that we will do these annually. But investor needs on frequency and content are still emerging, realising that impacts themselves don’t actually change a lot in a year but may change in a 2-5 year time frame. I think investors really want to see willingness to engage and think about impact. Pragmatically speaking, I can envisage that producing two impact reports over – for example – a five-year bond tenor will be sufficient.

Source: ANZ Sustainability Review 2018

Should reporting have a view on downline impact? For example, investors might question the funding of a light-rail project because the electricity that powers the trains is not renewable.

TAPLEY We have to start somewhere. Creating light rail is better than not creating light rail, particularly in Australia. We are in transition and it’s important that we start with the things we can control and change in the short-to-medium term. This is versus sitting back and saying it’s all too hard, we’re a coal-power-generated country anyway so there’s no point in us doing anything.

STEWART I agree. We have to start somewhere and the reality is Australia’s electricity generation is largely coal-fired at the moment. But a transition is under way.

Let’s talk about ANZ itself. What commitments has the bank made on climate change?

TAPLEY We have had a target in place since 2015, which was to finance A$10 billion (US$7.2 billion) of low-carbon transition projects to 2020. A year ago, we increased this to A$15 billion. In our 2018 results, we reported that we have financed A$11.5 billion – so we are well on track.

STEWART We have also broadened this commitment. It predominantly covers low carbon but we have also specifically called out waste and water. Energy, waste and water are the key focus areas sitting beneath our commitment to environmental sustainability.

“I don’t think we can underestimate the impact the royal commission has had on our sector. Our key priorities must be improving customer outcomes and ensuring the failures of the past are not repeated.”

In 2018, Australia’s Royal Commission in the Banking, Superannuation and Financial Services Industry has caused the banks to focus on social and governance issues. How has ANZ responded?

STEWART Over the last three years, in our materiality review our stakeholders have been telling us that the most important issue for the bank is fair and ethical conduct. Fair and responsible banking is core to our sustainability framework.

I don’t think we can underestimate the impact the royal commission has had on our sector. Our key priorities must be improving customer outcomes and ensuring the failures of the past are not repeated. Governance is incredibly important and the royal commission highlighted some governance failures across the sector. There’s quite a bit of material on governance in our annual review because, understandably, stakeholders are interested to know what boards are focused on.

We have endeavoured to improve transparency in our reporting, including disclosing information on the board’s focus areas. In 2018, these included strategy, improving customer outcomes, the bank’s purpose and values-led transformation, and financial and regulatory issues.

At board level we have an ethics, environment, social and governance (EESG) committee, led by our chairman. The committee has a specific focus on sustainability, approving the bank’s sustainability targets and reviewing progress in achieving them.

At executive level, we have the ethics and responsible-business committee chaired by the CEO with senior executive representation from across the business. It is a leadership and decision-making body that exists to advance ANZ’s purpose.

In 2018, this committee informed the development of an ethical decision-making framework to help guide who we bank and the activities we undertake. During 2018, Dr Simon Longstaff from the Ethics Centre joined this committee as an observer, providing an independent voice on the committee.

TAPLEY The fact that the board-level EESG committee is chaired by our chairman shows that these committees are at the centre of the governance story for ANZ and that they are chaired by the people who are the most responsible for issues.

Which external rankings does ANZ focus on?

STEWART The one we put a lot of effort into is the Dow Jones Sustainability Index (DJSI). ANZ’s executive scorecard has an element related to the bank’s performance on the DJSI. While not a perfect measure of sustainability, it is well-established and has global recognition.

All the Australian banks decreased their ranking on the DJSI in 2018. Australian banks have traditionally led the rankings, but we all saw our scores go down this year as a result of governance failures highlighted by the royal commission.