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5 sustainability questions Australian financial institution board members should be asking

Photographic portrait of Lara Gaede
Lara Gaede

EY Oceania Financial Services Climate Change and Sustainability Services Leader

Contributors

7 minute read 12 Sep 2024
Related topics
Sustainability
Banking and capital markets
Financial services
Insurance
Wealth and asset management
Climate-related reporting

The forthcoming Australian Sustainability Reporting Standards push directors to focus on overseeing sustainability-related risks and opportunities.

  • Boards are still grappling with the uplift needed to meet the new requirements of the forthcoming Australian Sustainability Reporting Standards (ASRS).
  • Challenges include skills gaps, poor-quality data, immature sustainability processes, resource constraints and the evolving regulatory landscape.
  • By asking the right questions of themselves and management, boards can help financial institutions navigate the step change in expectations. 

How EY can help

Sustainability is an emerging battleground for growth and competitive advantage. The 13th annual EY/IIF Global Bank Risk Management Survey found climate and nature-related risks were the top emerging risk for boards. In Australia, mandatory climate-related financial disclosure rules mean the clock is ticking for directors to ensure they are comfortable with their organisations’ approach to climate change. With the ASRS coming into play for financial years beginning on or after 1 January 2025 for the largest financial institutions, boards have a short amount of time to do a significant amount of work.

 

Despite the raft of policy and regulatory activity on sustainability matters, maturity in the understanding and oversight of these topics has been slow to develop. An Australian Institute of Company Directors study found that 80% of directors are concerned about climate change as a material risk and 60% believe it warrants greater board attention – yet only 45% are confident in their board’s competence on the matter.1

Climate change is a material risk
Australian directors confident in their board’s competence to oversee climate change risk

Given the ASRS will require financial institutions to disclose their governance, strategy and risk management processes in relation to climate-related risk and opportunities, directors should consider whether their organisations have:

  • Integrated sustainability strategies into broader business strategies
  • Allocated capital to deliver on net-zero commitments and targets
  • Identified and addressed sustainability risks as part of their broader risk management framework
  • Published accurate and credible sustainability reports and commitments
  • Aligned sustainability and financial reporting

Meeting these responsibilities is more complicated than many anticipate. As a starting point, board committee charters should indicate where responsibility for oversight of sustainability reporting, strategy and risks will reside. EY’s Sustainability Disclosure Hub’s guidance recommends that governance arrangements are implemented across areas reported on under ASRS as well as the reporting processes over these disclosures.

As directors start to fulfil their new sustainability-related responsibilities, key questions include:

1. What will our sustainability disclosures say about our organisation?

Annual reports will soon disclose an auditable trail of how directors have overseen and made decisions around sustainability-related risks and opportunities. Reporting will also reveal how well sustainability is integrated into business strategy. Directors need to consider what light these and other new disclosures will cast on their organisation.

2. Does our board have adequate environmental, social and governance (ESG) accountability, knowledge and expertise?

Given the increasing importance of sustainability risks and opportunities, sustainability should be part of every board competency matrix. EY research indicates a greater willingness to engage in investor activism and vote against directors when investors are concerned about the board’s oversight of risks and opportunities. Where board sustainability experience is limited, external consultants or education may be needed to address the skills gap in the short term. Over time, sustainability skills can be brought on as the board is refreshed.

For details on incorporating sustainability into remuneration, please see our Sustainable Remuneration Guidelines (SRGs).

3. Are ESG metrics included in executive KPIs? 

Mandatory climate-related reporting will disclose whether and how climate-related performance metrics are included in executive remuneration policies. While the option to disclose the lack of a link between climate commitments and executive compensation is available, organisations may face pressure from stakeholders to demonstrate commitment to their climate goals through the incorporation of climate-related executive compensation targets. In 2022, the EY Sustainable Finance Index found that 40% of global wealth and asset managers and 30% of global banks and insurers were already connecting remuneration to sustainability outcomes. As more financial institutions follow suit, this issue is likely to become a topic of increasing interest for ESG-interested shareholders.

4. Do capital allocation decisions align with net-zero targets?

The board should understand how capital allocation decisions impact sustainability outcomes and have a mechanism for monitoring whether those decisions are consistent with the company meeting its net-zero goals. The Australian Competition and Consumer Commission has warned that claims not supported by scientific or independent evidence may be considered to lack a ‘credible basis’.2 This mirrors guidance from the Australian Securities & Investments Commission (ASIC) that companies should disclose their strategy and progress towards net-zero claims.3 Directors must ensure their organisations’ sustainability ambitions are credible and supported with disclosures to this effect.

5. Is management up to speed and on the case?

Boards need to set up strong lines of communication and clear articulation of delegation between board and management around managing sustainability-related risks and opportunities. As a starting point, boards will need to ask the following questions of management:


Summary

The Australian Sustainability Reporting Standards introduce a significant step up in disclosure requirements for which financial institution directors are ultimately responsible. Board oversight must expand to cover sustainability-related risks and opportunities. Controls, data and capability gaps are commonplace. Directors must start asking the right questions to ensure their institutions are ready for mandatory climate-related financial disclosures.

How EY can help

About this article

Photographic portrait of Lara Gaede
Lara Gaede

EY Oceania Financial Services Climate Change and Sustainability Services Leader

Passionate about helping clients tell their ESG story. Committed to mentorship and developing community. Animal lover.

Contributors

Related topics
Sustainability
Banking and capital markets
Financial services
Insurance
Wealth and asset management
Climate-related reporting

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.