Israel aligns with the world: Banks will be required to present to the public the environmental, social and corporate aspects of corporate governance in their activities (ESG), As part of measures taken by the Supervisor of Banks to strengthen the contribution of the banking system to the environment and society. In a circular published this morning (Sunday) by the Supervisor of Banks, Yair Avidan, It requires banking corporations to expand public disclosure on exposure to environmental risks, including climate risks, and banks will need to detail how these aspects fit into their business objectives and strategy.
In light of guidelines on risk disclosure arising from recent climate change, the Supervisor of Banks instructs corporations to examine the need to expand disclosure on the issue, to reflect material changes in the specific environmental risks to which the Bank is exposed, including due to climate change and transition risks. In the manner of managing these risks.
Under the new provisions, banks’ risk management bodies will be required to take into account the impact of international agreements related to environmental and climate risks (such as the Paris Agreement) on their activities, legal, technological, political and other specific developments regarding environmental risks, including climate change developments. New to the banking corporation. In the report of the Board of Directors, the banks will describe the climate risks, using quantitative indices for exposure to risks and an overview of how they are managed.
The Supervisor of Banks, Yair Avidan, says that “the amendments to the directives we published today improve the public’s disclosure by the banking system on aspects of the environment, society and government, in accordance with the best standards implemented by leading banks in the world.” “And for the company, and for improving the sustainability of the banking system and the economy in the long term. In light of the great importance we attach to the issue, and in light of the significant developments in the world in recent years, we intend to continue to improve management of the environment and society.”
Corporate responsibility reports will also change
In recent years, regulators around the world have expanded the requirements for supervised bodies to be transparent on these issues, but the current approach to the issue is very broad, so that bodies have great flexibility in measuring their impact and presenting it to the public. The reference to the ESG arena will appear in the banks’ reports due to the decision of the Supervisor of Banks now, already in 2021.
The Board of Directors’ reports not only cover aspects of profit and loss, but also reference to the arena in which the Bank operates, and the impact of its conduct on climatic and environmental aspects, as well as company and corporate governance issues. Along with a review of the risks and an explanation and analysis of their significance for the results and the business situation, there will be accounting policies and estimates related to the issue. In the absence of uniform rules for the implementation of the guidelines, the banks will be required to explain in the reports each estimate, including the manner in which it was determined, the assumptions and data that served as a basis for selecting it.
Apart from details in the report of the board of directors and the management, the corporate responsibility reports will also change to some extent. According to current procedures, banking entities publish a corporate responsibility report to the public once every two years, in which they specify their activities according to flexible rules – from donations to non-profit organizations to investments in environmental aspects. Now, the name of the report will be changed to the Environment, Society and Government (ESG) report, and will be published once a year. In the report, banks will be asked to detail how material aspects of the environment, society and government fit into their objectives, and to indicate a summary of key indicators set by the banking corporation to promote these issues.
The report, which will be published to the public, will include significant developments during the year, including commitment to the environment, environmental risk mitigation and integration of environmental considerations in credit risk analysis, along with risk management and reducing the economy’s exposure to systemic risks. Of customers and stakeholders, a commitment to community involvement, a commitment to anti-money laundering and terrorist financing, a commitment to a code of ethics and strong corporate governance, responsible contact with suppliers, employee care and work environment and more.
Adv. Orly Aharoni, Climate Policy and Regulatory Adviser, Chairman of the Committee for Climate Indices for Investments in the “Life and Environment” organization, believes that this is a significant step forward, which will affect the banks’ attitude to the field. In the world. “This is a welcome step in the right direction. In the reality we live in, even changes and clarifications that seem technical like an annual report instead of a biennial, the obligation to sign the report by the CEO and chairman of the board, and the obligation to publish the report to the public, have significant significance. Reference is made to international disclosure methodologies in relation to climate risks, the obligation to disclose in accordance with which disclosure practice the reporting is carried out, and the instruction to bring climate risks among the considerations in credit risk analysis.
According to Aharoni, “These measures are part of the adjustments that financial regulation is committed to today, for a moderate and stable transition to a carbon-neutral economy. It is important to note that such a regulation leaves flexibility for supervisors, so “There is also an importance to uniform requirements between the financial regulators. In the ‘Money Money’ forum, we work in favor of taking these steps and implementing them horizontally also by the Capital Market Authority and the Securities Authority.”
There are no binding standards or measurement practices
In light of the rapid development in disclosure on these issues, the provisions relating to the report on the environment, society and government stated that a banking corporation should consider updating the disclosure in this area in accordance with the world’s leading disclosure standards and practices. That is, the Supervisor of Banks does not currently require supervised entities to adhere to binding standards or practices that will allow the public to compare entities, and the field remains with maximum flexibility for banks.
For example, in the reports of banks in Israel, it is not uncommon to find investments in gas infrastructure under the environmental chapter – even though it is a fossil fuel, which contributes to the climate crisis. Even now, banks will be required to address a defined list of issues quantitatively, but will not be required to examine them under an accepted and uniform method, while alongside presenting the issues in the way the bank chooses, it will also have the flexibility to decide not to present specific issues.
In the absence of binding measurement practices and without a binding standard, even now, banks have great flexibility, and the public will have difficulty comparing the various reports presented by the banks, and fully formulate a picture regarding the banks’ impact on the issues in question. Globally, an approach is emerging that aims to reduce banks’ discretion in reporting. In the United States and Europe, the possibility of publishing binding provisions on the subject is being examined, and it is estimated that the purpose of the Bank of Israel is to align with this trend as it progresses around the world.
Although the circular published by the Bank of Israel constitutes progress, similar to parallel entities around the world, the Bank of Israel states that a banking corporation may not include reference to these matters if it “may prevent the completion of an activity or activity of the banking corporation or a party to or interested in, or “Significantly worsen its terms or the condition of the banking corporation, provided that information regarding these matters is not made public by the banking corporation.”
“The prompt is missing the required detail”
Will the new guidelines change the quality of information that banks publish to the public? Not sure. According to Dr. Or Karsin, an Open University environmental policy and regulation expert, “Increasing the quality of environmental, social and government reporting is a welcome step but the new guidelines in the published format are not expected to lead to better reporting of the Bank’s credit and investment exposure to environmental risks and their contribution to gas emissions. . The directive lacks the required details and does not oblige the banks to quantify the risks and greenhouse gas emissions as a result of their investment and credit policies. “
According to Krasin, “Banks’ reporting so far in this area has been poor, giving the public a very shallow and partial picture of the risks. Polluting vehicle fleets in leasing, and the new guidelines do not seem to change this situation. “Expressing the main impact on the environment, a substantive examination requires reporting on the environmental risks arising from this activity in much more detail, while accompanying the reporting of targets for reducing banks’ investments in carbon-rich energy sources and polluting factories.”