Major-bank sustainability focus: Commonwealth Bank of Australia

Kylie Macfarlane, general manager, corporate responsibility, and Mohamed Khalil, general manager, digital guidance, at Commonwealth Bank of Australia (CommBank) in Sydney, share insights into the bank’s sustainability strategy and how it measures and discloses performance.

PURPOSE: Do good as good business practice.

There is a global shift towards integrated reporting. What is CommBank’s position?

MACFARLANE We are seeing a shift to integrated reporting domestically and globally, and this is something our business is starting to do. In 2018, for the first time, we combined our annual report with our sustainability report, only publishing one document. This included 13 pages dedicated to reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as well as broader information on environmental, social and governance (ESG) issues.

The move to a single report with more integrated content ensures we’re providing the transparency and reporting our stakeholders require. This is not just institutional investors – we have more than 800,000 retail shareholders.

It is important they have a document which is easy to understand, includes context and clarity across our breadth of operations and also provides the regulatory information we’re required to report on an annual basis, all in one place.

We started this move in 2017 and for our 2018 financial year we simplified it further by having just one document. In 2018 we also realised we needed to support this single document with a range of what we call “spotlight articles”. These are small booklets of 4-5 pages each on particular topics.

For example, we produced one on financial wellbeing, another on diversity inclusion, one on education and climate, and so on. This has given us the ability to provide additional information on areas of interest to a broader range of stakeholders without needing to include all the content in our annual report.

It will be interesting, moving into 2019 and continuing to iterate this approach, to ensure we are merging financial and nonfinancial information in a way that makes sense to the internal organisation and stakeholders as well.

Does this mean CommBank will no longer be producing a separate sustainability report?

MACFARLANE The data sheets within our annual report are very comprehensive. We have included more than 80 lines of nonfinancial data. From a more qualitative reporting sense, we did not compile a standalone sustainability report in 2018. We focused on the six spotlight articles instead.

We continue to assess whether this approach is effective, what best-in-class looks like domestically and globally, and how we continue to iterate our reporting to ensure we’re meeting the requirements of a range of stakeholders.

For example, we need the annual report to speak to institutional and retail investors because they both need a central document to go to. But our community stakeholders may have a requirement to hear more about our nonfinancial areas of interest and therefore having a standalone, or a series of standalone, reports may work better for them. We will continue to evolve and improve the reporting process over time.

Will integrated reporting become compulsory in Australia?

MACFARLANE At the moment the banks are moving on this voluntarily. I certainly haven’t had it put to me that there may be a regulatory environment that will enforce it, although countries such as Japan and South Africa have moved in this direction.

The more interesting thing may be that as the new Australian Securities Exchange listing rules proceed through the drafting process – there is a draft out for public consideration at the moment – there might be consequent growth in propensity toward integrated reporting. This is particularly so as the concept of social licence has been drafted into these rules.

I personally view mandatory integrated-reporting developments in Japan, South Africa and Brazil as interesting. But one needs to ensure organisations are given a period to adapt, to enable them to shift naturally, for this to be done successfully. This is not a change that can be implemented overnight – it’s a big piece of change management for an organisation and its shareholders.

“The myth we need to break down is that running a sustainable business is just about the end game – profit. Running a sustainable business brings with it a need to look at what the drivers of sustainable profit are.”

Would you say a consciousness of impact is embedded in CommBank’s DNA? How does this manifest itself in the business?

MACFARLANE The most important aspect of embedding impact in a financial-services organisation is ensuring everything you do is aligned with your purpose. For us, that purpose is focused on improving the financial wellbeing of our customers and communities. If we can align our activities to this, the impact can be better determined, measured and reported on over time – because it aligns with a goal.

KHALIL This is a journey that we will be on for quite some time. A critical step for us has been to spend time reflecting on and better defining our purpose, which as Kylie says is to improve financial wellbeing for customers and communities. But what is financial wellbeing? How does one define, influence and change it?

To this end we have collaborated with experts at the Melbourne Institute for Social and Economic Policy rigorously to define and develop new tools with which we can consistently evaluate our impact on customer and community wellbeing. These tools not only allow us to measure progress but have also helped us understand the determinants and drivers of financial wellbeing and how we can make a difference.

This research and these tools are publicly available to anyone who wishes better to understand this space. For CommBank, the immediate implication is that we now have greater clarity on our purpose and the specific things we can do to drive meaningful, sustainable impact.

For example, we have deployed several experiences that help customers better manage their everyday wellbeing. This includes real-time notifications with spending insights better to inform subsequent purchase decisions, bill reminders to ensure households meet critical obligations and alerts notifying customers so they are able to avoid a fee or charge.

Simply put, by helping customers be better we are building better customers. While it would be too presumptuous to say it is fully embedded we are certainly making significant headway. We are seeing more of our teams come to the realisation that driving toward evidence-based impact is not just the right thing to do but the smart thing to do if we want to secure our long-term commercial success.

Fully signed up

There is no shortage of options for companies to sign up to as a means of demonstrating their sustainability credentials. Choosing the most relevant ones is important – and the Task Force on Climate-Related Financial Disclosures (TCFD) is front and centre for Commonwealth Bank of Australia (CommBank).

All the biggest Australian banks have signed up to support the TCFD recommendations. Why is this important and how is CommBank approaching climate-related financial disclosure?

MACFARLANE Like the other major banks in Australia, we have aligned with the TCFD recommendations. In fact, 2018 was the first year we reported against this framework. We devoted 13 pages in our annual report to our TCFD reporting and have received a fantastic response on our transparency from external stakeholders at the institutional-investor and nongovernmental organisational levels.

Per the recommendations of the TCFD, we have undertaken scenario analysis on transition and physical risk. Our physical analysis was on our homebuying and insurance book and the transition-risk analysis was across part of the wealth business as well as our business-lending portfolio.

How does the role of general manager of digital guidance fit into the corporate-responsibility group?

KHALIL The role of digital guidance is to create commercially sustainable shared-success models for customers, communities and corporations based on an evidence-based, multidisciplinary approach to solution design. We support the objectives of corporate responsibility but from within the profit-generating, commercial functions of the group.

To do this effectively, we first had to develop our ‘how’: methodologies, capabilities, tools and partnerships that are critical to generating innovative, effective solutions to complex customer and community challenges.

Some of the key ingredients include setting up strategic partnerships with leading experts, such as the Melbourne Institute and the Harvard Sustainability, Transparency, Accountability and Research Lab, building a sizeable behavioural-economics capability better to understand human financial decision making and creating rigorous, scientific instruments such as our financial-wellbeing measurement tools.

Of course, this ‘how’ must be rigorously enforced to ensure consistency of approach and evidence of impact. For example, Harvard Business School recently completed a case study on one rigorous trial where we improved trust and transparency in credit-card selection while driving better commercial outcomes.

In collaboration with these key partners, we are now producing defensible evidence of what works and by how much. We will be sharing our findings in this area with the global community in the coming months and years.

MACFARLANE This is nirvana from a corporate-responsibility perspective. To embed impact and social return in a commercial organisation you need products and services that manage to this outcome explicitly.

KHALIL As another example, if you tell most banks today you want to save they will provide you with a savings account. Our focus, however, has been on ensuring we deliver the outcome the customer is seeking by spending more than a year testing and iterating a behaviourally informed savings experience addressing the hidden complexities of articulating, adapting, progressing and fulfilling savings goals over the months or years it takes to complete them.

This consistent focus on outcome, the discipline of evidence-based design and the understanding of customer and commercial needs has resulted in an experience that is far more effective in helping customers save. This improves their engagement, satisfaction and resilience – which has clear implications for our customer loyalty, retention and even creditworthiness.

MACFARLANE The myth we need to break down is that running a sustainable business is just about the end game – profit. Running a sustainable business brings with it a need to look at what the drivers of sustainable profit are.

Having healthy customers and an organisation that understands its risks around climate change and making sure we comply with human-rights and modern-slavery agreements are drivers which will ensure we have a healthier business. Profit is driven by having a sustainable organisation, and this means understanding nonfinancial and financial drivers.

The great thing about the partnership between the digital-guidance and corporate-responsibility teams that we have been able to build internally is being able to provide a mechanism to amplify the importance of sustainable growth within the organisation while also ensuring we take the greenwash out of what running a sustainable business is about. It is about doing the fundamentals well.

KHALIL When we’re interacting with parts of the group that haven’t previously engaged with us, the primary measure I use is how quickly I see a team move from saying they are doing something because it’s the right thing to do to recognising they are doing it because it’s the smart thing to do.

We have started to see this shift because our people are beginning to understand that protecting our customers is also protecting our business.

Could you give an update on the public targets CommBank has committed to around low-carbon transition on its own account, and how these are evolving?

MACFARLANE We have a number of public targets which are outlined in our annual report. The existing public targets were determined prior to us completing our scenario analysis. Now this is complete we can re-examine these targets to ensure they are still appropriate and amend where required.

For example, one target set around 12 months ago was to align with the TCFDs and undertake scenario analysis. Having completed this we now need to consider what the next iteration of targets will be.

Some will remain the same. For example, we have a target to reduce our emissions output per individual staff member to two tonnes of carbon dioxide by 2020. We have a target to provide A$15 billion (US$10.8 billion) of finance for low-carbon projects by 2025. As things stand both these targets remain in place.

We are progressing the targets we have put in our public statements but we have also taken other actions. For example, we have just become the first Australian company, and the first Australian signatory, to join the RE100. RE100 is a global initiative which asks corporates to set a public goal to achieve 100 per cent renewable energy by 2030. We hope that other organisations, within the banking industry and across the wider economy, will follow suit.

“When we’re interacting with parts of the group that haven’t previously engaged with us, the primary measure I use is how quickly I see a team move from saying they are doing something because it’s the right thing to do to recognising they are doing it because it’s the smart thing to do.”

What is your view on global moves to create standardised taxonomies in the sustainability space?

MACFARLANE Having a uniform set of reporting principles and guidelines is important. But ensuring the taxonomy is appropriate for the country or region within which you operate is crucially important as well. A standardised taxonomy will help the communication of issues and reporting against them over the long term, where we can get clarity and agreement across the sector.

As an example, the TCFD is great at setting an overarching framework. But I think an interesting area to explore, in Australia and globally, is how to set national protocols as opposed to going through the thought process individually and setting individual definitions. Some subsectors have the need and opportunity to develop a more uniform approach which would create better economic outcomes.

There comes a point where policy certainty underwrites the ability to invest. However, the economics, particularly in the renewable-energy space, are starting to drive investment without the need for overriding regulation.

Bank governance has come under the microscope of late in Australia for well publicised reasons. What can you tell us about CommBank’s approach on governance and the role it will play in future?

MACFARLANE As an organisation, our board has fully acknowledged the Australian Prudential Regulation Authority (APRA) prudential enquiry into CommBank in early 2018. We understand the importance of the role of governance and we are committed to making changes for a more accountable and customer-focused culture and ensuring we have the right risk-management frameworks in place for this across our financial and nonfinancial risk categories.

Good governance supports all the environmental and social efforts the organisation undertakes. It is ultimately the underpinning that allows us to manage, monitor and govern the work we do comprehensively, but also allows us to be transparent in our disclosures publicly as a proof point of deploying that governance.

The APRA review has been a fundamental piece of work for the bank, and many other organisations around Australia have used this report as a mechanism to review their own governance structures to ensure we all have the correct frameworks in place going forward.