EMEIA Financial Services Sustainability Report 2016

Our year

In EMEIA Financial Services, we believe that profitability and inclusive growth aren't mutually exclusive. This report for financial year 2016 shows how we are bringing that to life with our clients, our people and our communities, and how we will continue to come together to meet the challenges ahead. For an overview of our year, watch our executive summary and join the conversation. #sustainableFS

See our year's data in our performance snapshot.

For an overview of our content, click here to download a short summary report.

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Materiality in
financial services

Our materiality assessment is a fundamental component of our sustainability journey — it identifies the most important issues for our stakeholders and industry, and informs what we report on. In financial year 2015, our desktop research identified 21 material topics rated by our internal and external stakeholders. Of those, six were rated as priority issues.

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Our materiality assessment

In financial year 2016, we validated the material issues through an interview on market trends with our Regional Managing Partner Marcel van Loo. The interview suggested that the six priority issues — regulatory compliance; environmental, social and governance (ESG), and climate change risk; culture, ethics and integrity; trust and transparency; governance and risk; and digital innovation and disruptive technology — remain the same. What did change, however, was the order of importance. Our stakeholders now identify digital innovation and disruptive technology as the top priority issue within financial services.

UN Sustainable Development Goals

The importance of the UN Sustainable Development Goals (SDGs) as a framework for addressing global challenges has grown, and this momentum is expected to continue as the terminology becomes more familiar, and organizations continue to assess and report on their alignment with the targets. We have evolved our thinking on the SDGs, undertaking an exercise to review which SDGs are most important to our business and the industry we work in.

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The importance of the UN
Sustainable Development Goals

We have a direct impact on these key SDGs through our people and the communities we work and live in. In addition, the extent of our influence on addressing the issues covered by the SDGs is much wider because of the nature of our business. We support clients across the whole range of issues included in the SDGs through the diversity of our service offerings — this will be our key strength in supporting the achievement of the SDGs.

Landmark
events in FY16

In 2016, a number of landmark events transcended sustainability and the financial services industry.

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Brexit

London is currently the center of financial services in Europe and we expect that to continue in the foreseeable future. The fundamentals that underpin the attractiveness of the UK remain unchanged. Financial institutions within the UK are well capitalized, its systems are resilient and the regulatory structure is well tested and well regarded around the world. We expect that the UK's financial infrastructure, connectivity to international markets, skilled workforce, optimal time zone, trusted legal system and regulatory environment will all continue to attract business to operate within the UK. However, many firms may need a physical EU27 nexus for some of their activities if they are to retain EU clients after a Brexit. Obtaining regulatory authorizations can be a slow process and firms are working now to create options for their businesses to deal with all possible outcomes from the negotiations.

Omar Ali, Managing Partner, UK Financial Services states: "Where there is change, there is risk, but there is also opportunity. By being prepared, we can embrace those opportunities.At EY, we are committed to playing our role to enable a smooth transition for our clients and our people across our 14 markets."

Marcel van Loo, Regional Managing Partner, EY EMEIA Financial Services says: "I'm really proud of the work our people are doing for our clients, and with policy makers and governments on Brexit. This is exactly the kind of time where we need to live up to our purpose. It is a game-changing period for the industry, and we are in a position to help shape the future of financial services in the UK and across Europe. Our clients need us to react quickly with strong insight and act with integrity in advising them about the future of their businesses and that is what I am seeing our teams doing."

To gain more insight, please explore Brexit: a financial services perspective.

Advancing the sustainable finance system

On October 5, 2016, 109 of the 197 countries ratified the Paris Agreement to keep the world's warming under the necessary 2°C. The agreement came into force on November 4, 2016, with 130 financial institutions controlling US$13 trillion in investments firmly behind it. The financial services industry called upon the G20 countries to ratify the agreement on the basis that it would allow for better policymaking and improve investment opportunities in low-carbon technology. Specifically, they called for regulations that support renewable energy and energy efficiency, carbon pricing, and a plan for phasing out fossil fuels.

The financial services industry has a unique part to play, from integrated reporting to directing investments and lending toward activities and projects that support climate finance, adaptation, low-carbon impact investments and incorporating ESG throughout portfolios. This guidance is echoed throughout the industry, and we are seeing regulation and policy emerge: new EU Pension Fund guidance mandates that ESG be considered, and the Financial Stability Board (FSB) chaired by Mark Carney has created the Task Force on Climate-related Financial Disclosures, which recently launched its recommendations for the industry. These developments acknowledge that climate change risk and opportunities are global, that businesses need to investigate where they have exposure and that businesses need to report on their findings within the financial reporting structure.

There are, of course, opportunities here: being a first mover can be daunting, but in this scenario, lagging behind is a risk. As we see the increase in policy, the move from voluntary to mandatory compliance, the mounting public pressure and the threats of stranded assets, a real need to assess climate change and business has emerged in light of the Paris Agreement and the new developments from the EU and FSB.

EY is producing insights unique to the financial services industry, from investment perspectives on climate change to the economics of solar power.

Read more about how you can prepare your business on our FS Insights Hub.

About our report

At EY, we want to support the financial service industry's role in society. We do this by working with internal and external stakeholders to enhance sustainability in financial services dialogue, by integrating sustainability into different aspects of our business, and by placing emphasis on the SDGs and what they mean to financial services.

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At the same time, the increasing impact of the digital revolution — both the disruption and the associated innovation, is affecting the future of the financial services industry's business models as well as its people. We need the vision to see what that future will look like, and we need the insight that our people will be key to the transformation required, so that we can prepare ourselves and our clients accordingly.

We see corporate sustainability as the living example of what it means to build a better working world. This report brings corporate sustainability to life with a particular lens for financial services. It provides a platform for discussion on current and future trends within the industry, along with our response. This report also shows the progress we have made on our agenda across our three stakeholder groups — clients, people and communities — in a transparent manner, highlighting areas for celebration but equally acknowledging aspects where there is still more to be done.

Embedding sustainability into financial services is essential to achieving a successful business. Business leaders are more readily acknowledging that they need to do something to address not only the material financial impact, but also the environmental and social aspects of their organization.

Businesses accept that there is a moral, ethical, social and financial imperative to address sustainability risks and opportunities; actions must follow. In doing our part to build a better working world, EY EMEIA Financial Services has a clear role to play in helping our financial services clients address this issue, while at the same time making sure we take action to achieve our own sustainability goals.

Our global connectivity and local knowledge allows us to help our clients operate more effectively and efficiently, wherever they are. The scope of the report is the EY EMEIA Financial Services region, which includes 14 markets (Austria, Belgium, Channel Islands, France, Germany, Gibraltar, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Switzerland and the United Kingdom) and three sectors (Banking & Capital Markets, Insurance and Wealth & Asset Management).

This report covers FY16, from July 1, 2015 through June 30, 2016.

The FY16 data reported is internally assured by an independent business unit within EY specializing in providing assurance on sustainability reporting. The scope of the assurance includes the FY16 data in the Performance Snapshot except partner commitment and carbon emissions: scope 3 (and therefore total carbon emissions, carbon emissions per FTE and air travel emissions). A review for consistency with the data that was assured in FY15 data was conducted. We believe that the independent nonfinancial assurance process enhances the rigor of transparent reporting in line with sustainability reporting guidelines.

Top

Our clients

Any successful relationship is built on trust. And we deeply value our connections with everyone; from our clients to like-minded organizations and individuals. While delivering consistent, high quality service we offer industry-focused insights that promote increased trust and confidence in the financial system. Our aim is to serve as a leading voice for sustainability within the financial services sector, exploring new perspectives with our clients to support that what we do today counts tomorrow.

In an increasingly complex world our clients are dealing with interconnected issues, from global megatrends to sustainability-specific issues. Our global report in The Banker looks at the future of financial services in this context, covering topics such as purpose, digital transformation and regulation.

In our recent financial services materiality assessment, we unearthed a set of key sustainability issues which were on our clients' agenda: digital innovation and disruptive technology, regulatory compliance, ESG and climate change risk, culture, ethics and integrity, trust and transparency, and governance and risk. We too are striving to embed sustainability in our core services, at a time when the financial services industry constantly evolves its appreciation for sustainability as a source of material risk as well as new business opportunities.

Click here to view our climate change and sustainability services.

Digital innovation – the upside to disruption

Digital technology continues to disrupt and fundamentally transform the financial services industry. Customer behaviors and expectations keep changing, including their expectations of financial services organizations themselves. The industry needs to embrace the opportunities this change presents in order to succeed.

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The Fourth Industrial Revolution

In last year's report, we indicated that financial services organizations were zeroing in on digitalization, with a specific focus on the customer experience, digital privacy, cyber security and FinTech. This year, as we strengthen our digital capabilities with our clients, the Fourth Industrial Revolution, characterized by digital technology, automation, artificial intelligence, robotics, the Internet of Things and the sharing economy, continues to present the most significant challenge for financial services organizations. From a people perspective, financial institutions are currently focusing on the efficiencies they can gain through automation. What they are slower to consider is the resulting impact of large-scale unemployment on the economy combined with the skilled labor shortage necessary for the workforce of the future. In terms of disruptive business models, digital technology is creating nontraditional means of accessing capital outside the traditional banking framework. Similarly, the asset management industry is being disrupted by a new breed of "robo-adviser," which can replicate the strategies of human advisers at a fraction of the cost, and may be able to operate outside the traditional asset management regulatory framework. Going forward, we see a role for digital technology in financial reporting, transparency and compliance.

"Technologies such as robotics, artificial intelligence and machine learning have the potential to dramatically transform financial services. However, we do not yet have a thorough understanding of potential impact, not only on the industry but also on society as a whole."

David Ebstein, Head of Digital, EY Financial Services

How robots can help people understand humans

It is an exciting time to explore the opportunities that big data and analytical advances bring to the understanding of human behaviour.

Read the full report

Watch the film below to find out more about robotics process automation.

What is robotics process automation?

Cyber resilience

Cyber security remains a hot topic within financial services. As the digital world continues to create innumerable opportunities, financial services organizations are seizing upon as many possibilities as they can to better understand, analyze and connect with customers and create new markets and products to meet their needs. In the process, however, some may continue to be overlook the associated risks. Among respondents to our Global Information Security Survey 2016-17, 86% say their cyber security function does not fully meet their organization's needs. 62% say they would not increase their cyber security spending after experiencing a breach that did not appear to do any harm.

Risks around data privacy have also increased as the European Parliament and the Council of the EU came to an agreement on a new EU General Data Protection Regulation (GDPR). The regulation will have a significant impact on businesses in all industry sectors, including financial services. More information on the impact of the regulation is available online and in this report.

FinTech

FinTech products continue to offer alternative opportunities for access to a variety of services traditionally thought of as being part of the domain of the bigger players in financial services, from money transfers to financial planning. The biggest selling feature of these new online financial services for consumers is, in part, the ease of setting up an account. More attractive fees, access to different products and services, and a better online experience make them all the more enticing.

As FinTech becomes more attractive to consumers and technology prices continue to drop, banks are feeling the pinch as it eats into their market share. In response, financial services institutions may need to reassess how they attract and serve a demographic of consumers that is known to be unpredictable in its behaviors and holds limited value in loyalty. A more nuanced segmentation strategy and a better online experience may be needed to attract — and keep — the right customers. More importantly, reimagining their business models to compete more effectively in a digital world, though partnering with FinTech organisations, will enable established financial services organizations to remain competitive.

In EY's FinTech Adoption Index survey, 15.5% of digitally active consumers were using FinTech products

How collaboration with FinTech can transform investment banking

What should the high-performance investment bank of the future look like?

Read more about how collaborating with FinTech can transform investment banking here.

Watch the film below to find out more about how collaborating with FinTech can transform investment banking.

The way we bank now

Example:

Payment Services Directive 2 (PSD2) and the UK's Open Banking Initiative

Regulatory compliance – necessity and competitive advantage

Regulatory compliance has risen to the top of board and executive agendas in recent years as the cost of failures has proved financially and reputationally damaging and remediation of errors has consumed increasing management time. This material issue will remain a high priority for the financial services industry for the foreseeable future, and organizations will need to continually answer questions such as:

Are we adaptable and resilient?
Do we conduct ourselves appropriately?
Do we have the right governance?
Are we resolvable?

Regulatory compliance and questions such as these are not new. What's new is what it will take to anticipate, mitigate and manage new and existing regulatory expectations.

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The cost of compliance

Since the 2008 financial crisis, governments around the world have increased market intervention substantially, re-regulating banking and financial markets. These regulations, which continue to increase in both number and complexity every year, are fundamentally altering the financial services industry and imposing enormous compliance costs at a time when financial services organizations are seeking to cut costs in an effort to boost revenues in a low-growth environment.

Sustainability in the context of the financial services environment means preparing for an evolving and not always consistent global regulatory landscape, increased regulatory scrutiny and implementation of new regulations to ensure survival of the business over the long term.

It's difficult to focus on the future when you're running to stand still.

Our Managed Services offering helps clients to concentrate on moving their business forward, rather than looking back. We pair legacy systems with new technology, knowledge and experience to help financial services clients improve the efficiency of mandatory business processes at a lower cost.

The emergence of regulatory technology

Successfully complying with the multitude of financial services regulations can be complex, time-consuming and costly. In response, new approaches to risk and regulatory management practices across the financial services sector are emerging. Increasing regulatory requirements and a rapidly evolving FinTech sector are driving the financial services industry to innovate and utilize new technologies to help navigate these issues. The objective is to lower costs, improve effectiveness and disrupt the status quo around regulatory compliance. Regulatory technology (regtech) is at the heart of this new approach.

Operating as a key component of FinTech, regtech can help to support more granular reporting standards, scenario analytics and horizon scanning, providing better insights for financial services executives. Regtech can not only provide a more automated, cost-effective way of meeting compliance and regulatory reporting needs, but also enhance consumer confidence over the long term by providing a better customer experience.

In a recent EY survey, respondents suggested that confidence in key aspects of corporate reporting has fallen since the previous survey conducted in 2014. The biggest decline is seen in "confidence in degree of compliance." Only 55% say they are fully or somewhat confident, compared with 84% in 2014. Additionally, in 2014, 71% of respondents felt that corporate reporting was effective in securing the confidence of the board. Only 48% feel the same way today, as a result of increasing complexity, growing demand and resource pressures.

Innovating with RegTech

Turning regulatory compliance into a competitive advantage

Read the full report

Embedding culture, ethics and integrity into financial services

Culture defines how an organization operates — it influences employee behavior and the choices they make, and it affects how stakeholders perceive and interact with the organization. For financial services institutions to make inclusive growth a key contributor to their profitability, they must seek to address culture, ethics and integrity as part of their broader strategy. Culture is a key intangible asset that can help financial service organizations reduce risk, improve performance and deliver long-term sustainable growth.

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The value of culture in strategic operations

A recent EY report found that 86% of respondents believe that culture is fundamental or very important to a company's overall strategy and performance. In the same study, 92% of respondents indicated that investing in culture has improved their financial performance. Yet, as important as culture is, a significant portion of investors believe that companies do not provide information that allows them to assess corporate culture. Lack of a "culture audit" could be seen as a critical gap, particularly post-financial crisis, as financial services organizations have come under intense scrutiny for a perceived profit centric culture that average consumers feel is pervasive across the industry.

Ultimately, companies that are able to showcase their culture by constantly demonstrating their commitment to doing the right thing for customers, shareholders, regulators and the environment can achieve a competitive advantage.

The sector that registered the most news coverage around alleged unethical behavior was financial services with 97 reported lapses out of 376 news stories involving UK companies and multinationals with a UK presence (26%) . However, according to our recent research with Professor Roger Steare, Corporate Philosopher and Visiting Professor in the Practice of Organizational Ethics at Cass Business School in London, the moral norms of bankers aren't very much different from those of everyone else. In fact, according to Steare's research, "Their scores are about average and significantly higher than those (of people) working in politics, government and the media, who hold them to account." This indicates a gap between the morality of banking professionals and what is reported via the media. What happens in between needs to be explored more.

Rethinking risk management

On the basis of EY's 2015 risk management survey of major financial institutions, we know that a significant majority of executives surveyed around the world say that their organizations are in the process of changing culture. Yet, despite these efforts, 81% say that it's still a work in progress.

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Culture in the age of the gig economy

Although the notion of the contingent workforce, or "gig economy," has been around for decades, its rising popularity in the past 10 years has driven it into mainstream business consciousness. In a recent EY study, which surveyed both major employers and contingent workers in the USA, one in two employers reported increasing their use of gig workers over the last five years. Yet, what our survey also found is with that increase came concerns over the impact of contingent workers on the cultural fabric of the organization, with 37% indicating that contingent workers hamper the development of their permanent workforce.

As financial institutions increasingly focus on the number of full-time jobs they can eliminate by adapting, adopting and innovating, and replacing permanent workers with task-oriented contingent workers, they will need to keep in mind the effect these contingent workers may have on their remaining permanent workforce. This is particularly important given that contingent workers are more likely to be ambivalent about their employer's business objectives and less willing to go the extra mile. As financial institutions seek to use contingent workers to improve the efficiency and productivity of their workforce, they will need to place additional emphasis on creating a culture of trust that motivates and emboldens both permanent employees and contingent workers to be actively engaged in the sustainability of the business.

Solution

The National Equality Standard

Is the gig economy a fleeting fad or an enduring legacy?

The world of work is changing dramatically, and the shape of the workforce is changing with it.

Read the full report

People Risk 2.0 and the use of analytics to improve ethics and integrity

Many financial institutions understand that data and analytics, when harnessed correctly, can help them improve performance and manage risk. Some organizations also understand the human element: the need to create a culture that engages employees and improves people performance. However, few tend to link purpose, performance and engagement with sales targets, operational efficiencies, risk and compliance management, and other strategic business objectives. They don't connect the dots across the organization in such a way as to create tangible, transformational value that has a direct and visible impact on the bottom line. By automating the processes and creating analytic algorithms that can hunt for the patterns hidden amid the reams of data financial services organizations gather about their greatest asset — their people — they can unlock the people factors that lead to better collaboration, more robust risk management, and improved ethics and integrity.

For example, a financial institution that wants to prevent traders from going rogue can look for patterns using existing processes, such as traders logging in at odd hours, not taking holidays, or displaying anomalies in the quantity and quality of trades. Leveraging analytics and machine learning gives financial institutions the opportunity to search for correlations on multiple levels simultaneously in terms of how people are, what people do, the environment people operate in and what the outcome is. By leveraging the relevant data from across the enterprise, the financial institution's network can then automatically analyze the areas that appear to correlate most strongly to the red flags or alerts identified as necessary to trigger an investigation — and they can do it in near real time.

Supporting investment performance through ESG factors

ESG factors are increasingly important for financial service organizations to achieve stable and attractive returns for their customers.

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Banks and capital markets play a pivotal role in raising funds to support the infrastructure development needed for a low-carbon economy while insurers are reassessing the way they price products, develop new sustainable products and set premiums to account for property damage, legal liability, political risk, stranded assets and the economic effects associated with climate change. Impact investing is a relatively new concept, but it is quickly moving from niche to mainstream. Financial institutions are already recognizing the opportunity – large institutional investors are introducing new impact business divisions, acquiring impact-investment firms and launching impact funds. It is also becoming part of the fiduciary duty of wealth and asset management firms to incorporate ESG factors into their investment portfolios. Investors with US$45 trillion of assets under management have made public commitments to climate and responsible investment, and they are demanding that asset managers provide reliable, comparable, real-time ESG information so that they can make the right investment decisions. Organizations are starting to recognise the opportunity of managing these risks, and are changing how they do business accordingly.

Fiduciary duty and ESG

Although there is a popular belief that fiduciary duty creates a barrier for investors when it comes to embedding ESG issues into investment processes, a UN report strongly advocates otherwise. In fact, the report indicates that not only are there positive outcomes for institutional investors that take ESG issues into account in their investment decision-making, but also that "failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty." It seems that much of the resistance relates to outdated perceptions about fiduciary duty and responsible investment — what fiduciary duty means and what ESG integration means in practice. There is a misunderstanding that financial returns will be forsaken at the expense of achieving social or environmental obligations. By integrating ESG factors into processes, investors will be able to make better decisions, that improve investment performance, in alignment with their fiduciary duties. This, in turn, enables investors to contribute more effectively to a more sustainable society.

In what is being hailed as a "landmark moment" and a "breakthrough," the European Parliament recently approved the revised European pension fund directive, committing ESG obligations into EU law. The updated Institutions for Occupational Retirement Provision directive covers the €3.2 trillion European workplace pensions market. It contains clear requirements for European pensions to consider ESG issues, which campaigners say are "the strongest and clearest requirements" on such issues ever seen in an EU regulatory text. In addition, the European Commission has set up a panel of 20 sustainable finance experts with the remit to "hardwire" sustainability into EU financial policy, meaning it's only a matter of time before sustainability regulation increases.

Stranded assets and climate risk

As the debate over climate risks — and stranded assets in particular — grows, financial institutions are aware of, and taking action to mitigate the impact of climate risks on their portfolios, even if they can't divest the risk entirely. Countries are also taking action, with Ireland being the first to pass a law to fully divest public funds from fossil fuels. At the same time, however, both financial institutions and countries are beginning to understand the flip side: the opportunities that arise from the transition to a low-carbon economy. No one fully understands the complexities of climate-related issues yet, or the risks and the opportunities of how they are related to the stability of the financial system. However, financial institutions do understand that they have a key role to play in taking action, most specifically by incorporating the management of climate-related issues into their day-to-day activities. In doing so, they can help their clients to manage risks while taking advantage of opportunities, reduce the risk of a systemic financial crisis and create a competitive advantage amid a rapidly changing landscape.

Climate change: The investment perspective

Climate-related risks are too far-reaching for financial institutions to avoid entirely. They will impact all sectors, and require tangible actions to address these issues.

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From risk to opportunity

Solar photovoltaic (PV) energy is widely recognized as a crucial component in addressing our worldwide need for secure, affordable and renewable energy. Although many investors still see PV as a niche investment shaped by ecological rather than financial criteria, economic and environmental factors are creating a new set of mainstream investment opportunities in renewable energy. Between 2010 and 2014, more PV capacity was installed than in the previous 40 years and a record US$329 billion was invested in global renewable energy in 2015, of which solar assets accounted for 49%. This growth trajectory seems certain to continue. In fact, Bloomberg New Energy Finance forecasts that renewables will account for around 65% of an estimated US$12.2 trillion investment in all forms of energy generation between now and 2040. Over the same period, PV is expected to jump from 2% of installed global generation capacity to around 26% — more than any other source.

Many institutions and major investors are still only dabbling in this market, with solar assets typically representing less than 1% of total allocations. Given the sizeable opportunity, it may be time for investors to rethink their position on PV and incorporate solar as a part of mainstream asset allocation.

Capturing the sun: The economics of solar investment

Despite the environmental benefits, economic factors are the most important drivers of growing solar investment.

Read the full report

Solution

Incorporating ESG issues into business strategies

Building trust through transparency

Consumer confidence in financial services continues to face challenges. Building trust with customers and being transparent with stakeholders and the public about company operations – for example, pay, tax and employee representation – is more important than ever.