Collaborating with governments and how to advance responsible banking practices

What are the various aspects of responsible banking and what are the challenges faced by banks? In this interview, Aude Payan and Elena Fuzzi, respectively Director and Senior Manager in Risk Consulting and in charge of ESG services for credit institutions at KPMG provide detailed insight and examples for innovative strategies for financial institutions to advance ethical banking standards.

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1. How can financial institutions effectively collaborate with governments to promote responsible banking practices?

As “responsible banking practices” is a broad term, we’ve selected three examples where financial institutions and governments can partner up successfully.

First, by helping countries transition to a more sustainable economy through green bonds and loans that finance governmental initiatives, such as investment projects in renewable energy, clean public transportation and sustainable agriculture.

Second, by centralising the databases used by both parties. This would allow banks to leverage government data to assess and stress their ESG risk exposure and plan mitigations, as well as propose solutions for the country’s long-term sustainable economic growth. Examples include data points on weather and temperature forecasts, natural disaster risks by location, population statistics, water supply forecasts, agriculture risks, critical infrastructure vulnerabilities, greenhouse gas emissions and buildings’ energy performance.

Third, by developing expert and technical profiles through upskilling to help banks assess green financing criteria, among other tasks. They can also help boost the population’s financial literacy by promoting banking products that support responsible practices and the financial independence of disadvantaged people.

2. What are the key challenges faced by banks when engaging with regulatory bodies to advance responsible banking?

While banks are well used to complying with different regulations, the fast-paced regulatory landscape of responsible banking sometimes lacks clear and concrete guidelines and requires multiple reporting disclosures.

To address this, banks are encouraged to engage with regulatory bodies either directly or through an intermediary that represents banks’ interests, such as the Luxembourg Bankers’ Association (ABBL).

Another challenge is the sheer number of internal stakeholders that are impacted by responsible banking regulations. This includes the front-office teams in charge of client relationships and the products offered; the second and third lines of defence; top management; and departments like facilities, data office and human resources. Therefore, banks must coordinate all these pain points and potential solutions in one central message when dealing with regulatory bodies.

3. On a worldwide level, can you provide examples of successful partnerships between banks and governments in promoting socially responsible banking initiatives?

We’ve gathered three examples across three continents.

Since 2019, the UK’s Climate Financial Risk Forum, a joint initiative between the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), has provided practical guidelines to banks on measuring and monitoring climate-related financial risks. These guidelines have also helped European actors address the ECB’s climate-related and environmental risk expectations.

The Australian government regularly collaborates with banks to enhance the public’s financial literacy. Programs like "MoneySmart" are run jointly by the Australian Securities and Investments Commission (ASIC) and financial institutions to educate consumers on responsible financial behaviour, ethical banking practices and responsible banking.

In Brazil in 2017, the Financial Innovation LAB, a multistakeholder organisation, was launched to discuss and pilot sustainable finance initiatives. Since then, they have conducted thematic research on ESG reporting practices among Brazilian companies, trained financial actors to identify and mitigate financial risks, and supported ESG risk regulation development.

4. How do changes in regulatory policies impact the way banks approach responsible banking practices?

Banks first viewed ESG regulations as an additional compliance exercise rather than an opportunity to adapt their market vision and overall strategy to the new and evolving reality.

However, we’ve recently seen large banking groups updating their strategy and service offering to remain financially stable and attractive while enhancing their responsible banking practices. This includes launching new products like green vehicle loans, energy performance improvement loans at favourable rates, and investments in ESG-focused projects.

Responsible banking also requires institutions to apply good governance standards. For example, having a strong control framework and dedicated risk indicators is essential to mitigate and monitor unintentional greenwashing when implementing new regulatory policies and disclosure requirements. This should include (i) controls that evaluate the client’s or product’s greenwashing risk, such as comparing the product’s ESG disclosures with its original purpose, (ii) limits to greenwashing risk indicators and (iii) an independent review that involves the three lines of defence of the banks.

The public reporting requirements of the Corporate Sustainable Reporting Directive and Pillar 3 also have an impact on banks' activities and decisions. Even if a bank does not take strategic action in response to regulatory changes, it must still disclose its strategy or lack thereof. This transparency will compel banks to adopt more responsible banking practices.

5. What are your five tips for innovative strategies that financial institutions can implement to advance ethical banking standards?

Innovate with impact through your products: offer “classic” financial products where a part of a client’s profit is donated to an ESG project, which the bank tops up at the same amount.
Innovate your tools: use technology to enhance internal and external transparency and reduce fraud, leverage AI to detect and prevent unethical practices, and adapt your risk monitoring and stress testing tools to incorporate your counterparties’ ESG risks.
Innovate through employee power: encourage your employees to join ESG project committees and perform community service through volunteering days and programmes or train them on sustainable practices they can apply in their daily lives.
Innovate your current business practices and client acceptance processes: limit client liabilities (i.e. client deposits) if the source of funds is from industries with negative ESG impact.
Innovate for your future client base: redesign your strategy, communication and digital offering, educate clients on financial independence and responsible investment, and foster entrepreneurial ESG projects.

About the blog:

There is an urgent need for rapid transition to global sustainability. Business and industry have enormous social and environmental impacts. "Why does it matter?" is a bi-monthly blog that aims to elucidate this important topic through the eyes of our experts.

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Collaborating with governments and how to advance responsible banking practices

1. How can financial institutions effectively collaborate with governments to promote responsible banking practices?

2. What are the key challenges faced by banks when engaging with regulatory bodies to advance responsible banking?

3. On a worldwide level, can you provide examples of successful partnerships between banks and governments in promoting socially responsible banking initiatives?

4. How do changes in regulatory policies impact the way banks approach responsible banking practices?

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