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Corporate Sustainability

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My final project for NYU Stern unit for Corporate Sustainability. Using CBA as my case study with publically available information, I outlined the ESG issues facing the industry, I created a materiality matrix, stakeholder map, impact and connections to the global Sustainable Development Goals (SDG) and benchmarking against others within and outside their industry. Written and submitted in May 2019.

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Corporate Sustainability

  1. 1. Corporate Sustainability Recommendations for Commonwealth Bank of Australia (CBA) Prepared by Kirsty Hollis 10 May 2019
  2. 2. COMPANY BACKGROUND Commonwealth Bank of Australia (CBA) is Australia’s leading provider of integrated financial services, including retail, premium, business and institutional banking, funds management, superannuation, insurance, investment and share-broking products and services. CBA has been operating for over 100 years. * Source :https://www.commbank.com.au/about-us/investors/annual-reports.html
  3. 3. AN ASSESSMENT OF THE KEY ESG ISSUES FACING THE FINANCIAL INDUSTRY AND CBA. ESG issues facing CBA Environmental ¤ Beyond monitoring and reducing their emissions in line with the Paris agreement, there are no major Environmental issues facing CBA. Social ¤ Security and privacy: protecting customer data ¤ Providing financial support to vulnerable groups eg: Domestic Violence ¤ Access to and provision of affordable finance ¤ Compensating employees fairly ¤ Financial literacy for all Australians – acutely important as society moves away from ‘notes and coins’ to digital transactions. Governance ¤ Managing the non-financial risks as effectively as financial risk, to reduce loss for the customers, company and investors ¤ Combating financial crime ¤ Ensuring there are no conflicts of interests throughout its daily operations ESG issues facing the financial industry Environmental ¤ Not directly linked to the operation of a financial institution, however lending to/investing in businesses that don’t have environmentally responsible practices is an indirect issue. Social ¤ Customer security and privacy ¤ Customer transparency ¤ Responsible products ¤ Financial inclusion ¤ Community engagement ¤ Responsible supply chain management ¤ Recruiting talent Governance ¤ Managing the legal and regulatory environment ¤ Universal risk management ¤ Managing conflicts of interests
  4. 4. STAKEHOLDER MAP Stakeholder Type Impact Influence Value creation opportunities Customers Business Customers (from micro to Institutional), Retail Customers Large impact if they are unhappy and choose another bank who has stronger ESG practices Influential mainly as a collective based on sheer volume •  Promoting security and transparency so they feel valued and safe Shareholders & Investors ‘Mum & Dad’ investors, Superannuation investors, large scale and third party investors Will support good social and governance practices through their investments Positive influence with increased investments. On the flip side Class Actions at AGM’s •  Reporting on the Social & Governance improvements Community organisations Regional and remote communities, Customer Advocacy groups, Independent Community Groups. Providing vital services and support to the Australian population With the focus more on the customer post Royal Commission, their influence is increasing •  Engaging communities early when developing new product innovations that support financial wellbeing Suppliers Small to medium businesses. The ‘engine-room’ of the Australian economy Their supply chain and ESG practices has the potential to +/- impact the bank Low, however are important in helping CBA provide products and services to its customers •  Develop long term relationships and ESG related procurement processes Media Major media outlets include Fairfax, Newscorp and 3 x TV stations Media sentiment is a key driver when measuring brand health Highly influential when reporting on the behaviors and practices •  Transparency with financial, social and governance reporting Government & regulators APRA, ASIC - Australian Securities and Investments Commission, RBA - Sets the interest rates for the country Collectively governs & regulates the industry and promotes financial stability for the country Very high. The recent APRA findings given to CBA has fundamentally changed the way the entire industry will operate moving forward. •  Consistent engagement •  Attending & responding to commissions and inquiries in a timely manner Employees This incorporates the branch network and head office employees Nationally  Vital to the success of the operational, service and innovation of the company Influence ranks differently across the organisation depending on business unit and position. •  Embedding ESG into business strategy •  Innovative HR initiatives
  5. 5. MATERIALITY MATRIX Access to & provision of affordable finance (S)
  6. 6. CBA’S PERFORMANCE AND REPORTING ON THE PRIORITY ESG ISSUES DURING FY18 ¤ It was only in 2017 that CBA developed their first Climate Policy Position Statement, defining their approach to managing the response to Climate Change. This includes a target of $15 billion for funding low carbon projects such as renewable energy generation, energy efficiency projects and low carbon transport by 2025 was set. The 2018 spotlight from the Annual Report does share some updates as to the progress of this CPPS (refer to link in references page) ENIVRO ¤  Global 100 – a steady decline in three years! – in 2016 CBA Group ranked 4th, making it the #1Australian company and #1 bank in the world - in 2017 CBA Group ranked 6th behind ING Group who took number one bank position - in 2018 CBA Group ranked 24th with an overall score of 71% - in 2019 CBA Group do not rank at all in the Global 100 Methodology: based on up to 21 key performance indicators (KPIs) covering resource management, employee management, financial management, clean revenue and supplier performance GENERAL ¤ Supporting the vulnerable - The CBA Domestic & Family Violence Emergency Assistance Program launched in October 2017 and is continuing to grow due to customer need. In 2018 the bank conducted investigations into areas such as financial vulnerability, payment frequency, elder abuse and scams amongst others. The results are helping the Bank improve its products and services and increasing support for vulnerable groups of people. ¤ Security and Privacy – no recent recorded data breaches with CBA customer data ¤ Financial Literacy – Established Start Smart – a free financial education program that is curriculum- aligned and available to all students. Currently 568,000 students have completed the program. SOCIAL ¤  The APRA report* delivered in April 2018 highlighted the shortcomings of the bank across governance, culture and accountability frameworks. Regular public reporting on how the bank is addressing the 35 recommendations has been positive, however this is primarily due to the Enforceable Undertaking APRA has applied alongside the $1billion add-on to CBA’s minimum capital requirement. The improvements required include: Strengthening governance and oversight; Achieving better customer and risk outcomes; Building a more accountable, customer-focused, and transparent culture; Taking a proactive approach to risk. GOVERN * source: https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu
  7. 7. BENCHMARKING AGAINST OTHER COMPANIES WITHIN THE FINANCE INDUSTRY + ONE BEST-IN-CLASS OUTSIDE INDUSTRY. ¤  Global 100 ranking in 2019 was #8. Primarily due to its US$50 billion green loan book, which accounts for almost one third of its total loan book – the highest percentage for any bank*. ¤  The company’s vision and purpose implies ESG is at the core: To be the company that provides the best experience for people and to promote society’s development in an innovative, efficient and sustainable way ¤  Clear an transparent with their stance on a range of ESG related topics including: Climate, Data ethics, Deforestation, Energy, Food speculation, Human rights, Palm oil, Remuneration etc. ¤  Independent performance quantifies its consistent focus on sustainability including: Dow Jones Sustainability Index is 78 out of 100 in 2018; named to CDP Climate A-list in January 2019; Retains MSCI ESG ‘A’ rating in December 2018 * source: https://www.csrhub.com/CSR_and_sustainability_information/Banco-do-Brasil-SA) ¤  There is a reason Unilever is a Green Giant… Sustainability is at the core of it’s purpose, it believes business and society co-exist and strives for long term benefits. ¤  It has set three big hairy audacious organisational goals the whole company could support, these goals connect to the UN’s SDG’s
  8. 8. THREE KEY RECOMMENDATIONS - IMPORTANT FOR AUSTRALIA'S LEADING FINANCIAL INSTITUTION AND SOCIETY Recommendations A firmer commitment to sustainable lending practices. CBA is still believed to be Australia's biggest fossil fuel lender. Therefore a firmer commitment to the date it will cease to provide fossil fuel lending and a stronger link to executive remuneration based on this policy and the continued support of renewable lending. Improve its products and services and increase support for vulnerable groups of people. Increasing numbers of Australians are experiencing severe financial vulnerability and stress with elder financial abuse, domestic violence and financial scams on the increase. Taking the leadership position by creating products and processes to support those who need it most. Turning CBA’s undisputed financial strength into better meeting customer and community needs and expectations It has been reported that CBA has been hit by a total of more than AUD$1billion in anti-money laundering fines, customer remediation and royal commission costs. With a past culture of financial objectives and profits prioritised over customers, CBA has an opportunity to take a leadership position to change the culture by embedding CSR as core to the business strategy and to better understand what customers and communities need. Execution Plan Environment Social Governance ¤  Review the pathway and steps towards the agreed Environmental targets, creating variable executive incentives linked to key milestones. ¤  By When: Review complete by FY20 Q2 ready to implement in FY21 ¤  Moving CSR from a business function to an organisational strategy ¤  Regular customer panels created that provide a platform for customers voice to be heard, with executives actively listening ¤  By When: Customer panels established in FY19. New business strategy announced ASX Q4 FY20. Metrics ¤  Scope the development of a Tier 1 (Priority) education and support package for vulnerable groups across Australia including associated costs, impact analysis and proposed roll-out plan. ¤  By When: Scope delivered to CBA Board Q2 FY20
  9. 9. HOW COULD CBA TAKE A LEADERSHIP ROLE AND CREATE NEW BUSINESS OPPORTUNITIES BY TACKLING ONE OR MORE OF THE SUSTAINABLE DEVELOPMENT GOALS?  SDG #17. Strengthen the means of implementation and revitalise the Global Partnership for Sustainable Development ¤  Long-term investment is needed for sustainable energy, infrastructure and transport, information and communication technology. CBA’s contribution to this could be to further invest in the partnerships that will help achieve this and potentially enabling collaborative business models to be created such as the The Australian Sustainable Finance Initiative. ¤  Form partnerships that help achieve SDG goal #8 which will provide the banks customers with financial wellbeing and digital innovation but also provide economic growth. This requires consistent open and transparent conversations with the Government, governing bodies and broader community groups. SDG #5. Achieve gender equality and empower all women and girls ¤  Increase investment and partnerships into STEM programs for young girls. This will encourage the generations coming through to become educated and interested in maths and finance as well as providing CBA with improved trust and reputation scores, which lead to overall improved brand and business metrics. ¤  Provide equal paternity leave for men and women along with education and support so they can become equal carers of children. This could also have a positive impact outside of work in shifting the current imbalance regarding the amount of unpaid domestic work women currently carry out. (“Women spend about three times as many hours in unpaid domestic and care work as men.” Source: SDG Report 2018) SDG #8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all ¤  Contribute by reducing the wage gap within CBA between female and male counterparts. This will benefit the company in terms of culture, attract great talent, as well as the benefit the broader economy. It will also increase trust and reputation externally which in turn could lead to creating and building stronger partnerships. ¤  Consider initiatives that increase and improve the employment opportunities for those more vulnerable or experiencing bias eg: people leaving university, mothers returning to the workforce and people 50+. ¤  Contribute to vulnerable communities who need financial assistance eg: financial support for Domestic Violence victims and farmers experiencing drought – two huge issues that effect Australians.
  10. 10. WHY IMPLEMENTING THESE CHANGES MAKES SENSE If the culture, the business strategy, and products and processes changed, this would not only improve overall trust and reputation for customers and employees of CBA (which has been in decline since 2017 - post the APRA report, ASIC fines and Royal Commission findings), it could have profound effects on market share, improved margins, net income and return on equity. ¤  The APRA report stated that the culture of CBA in the past was to address certain shortcoming’s, interpreted as reactive. If CBA considered elevating CSR from a business function to it’s core purpose, the organisation has the opportunity to shift to a proactive stance and take a true leadership position that currently no other bank in Australia is taking. This could in turn provide significant improvements to stakeholder relationships and shareholder value. ¤  It was reassuring to read a spotlight climate report released in 2018* that CBA is strengthening their due diligence processes, considering their range of products and services, and expanding the coverage and depth of their climate scenario analysis. However, for CBA to take a leadership position, their actions need to be authentic and on a larger scale reflecting a shift in organisational behaviour, not just delivering to expectations. ¤  CBA reported that “In 2017 we became the first Australian bank to provide long term financing for large-scale domestic renewable projects.” In isolation this is commendable but if ongoing action and subsequent stories aren’t forthcoming, it could be perceived as tokenistic. Long- term investment and partnerships will help support this ¤  Measuring and reporting on what matters and being transparent about this with public, shareholders, government and regulators will lower reputational risk, encourage collaboration and best practice including investing in vulnerable communities and education.
  11. 11. Sources ¤  https://www.commbank.com.au/about-us/investors/annual-reports.html ¤  https://www.adviservoice.com.au/source/australian-sustainable-finance-initiative/ ¤  https://www.commbank.com.au/content/dam/commbank/assets/about/opportunity-initiatives/CBA- Spotlight-article-Climate-Change-FY18.pdf ¤  https://www.marketforces.org.au/commbank-getting-out-of-coal/ ¤  https://www.csrhub.com/CSR_and_sustainability_information/Banco-do-Brasil-SA ¤  https://hbr.org/2017/08/its-time-to-tie-executive-compensation-to-sustainability ¤  https://www.news.com.au/finance/business/banking/10000-cba-customers-answer-ceo-letter/news-story/ 49733c44ee0963814f1f7aa6f9747476 ¤  https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report- accepts-eu ¤  https://www.commbank.com.au/guidance/newsroom/our-climate-commitment-201708.html

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