Walking the talk? Brazil's financial institutions still lagging on ESG practices

The newest policy assessment of the nine largest banks in Brazil is very timely. As the debate on social and environmental responsibility has gained momentum worldwide, the Covid-19 pandemic has made the case for sustainable development in Brazil even more urgent.

Although overall Brazil's banks have improved transparency and increased publicity for their sustainability policies, the scores indicate that they are not 'walking the talk'.

The Brazilian policy assessment evaluates the nine largest banks in the country, in terms of assets. Of these, three banks are public (Banco do Brasil, BNDES and Caixa) and six are private (Bradesco, BTG Pactual, BV, Itaú-Unibanco, Safra and Santander Brasil), with Santander Brasil being the sole representative of international capital. Together, they account for 78% of the total assets of financial conglomerates in the country and concentrate more than 80% of the credit portfolio for Individuals and Companies.

Fair Finance policy assessments are important tools in evaluating the sustainability polices and actions of financial institutions in society. The financial sector carries significant responsibility for determining the sustainable direction of national business, as it decides which companies receive financing and investments.  These latest policy assessments shed light on the ESG policies of Brazilian financial institutions and demand that they exercise greater responsibility through their actions. 

Each financial institution was awarded a general score on a scale of 0 to 10. For this purpose, 18 themes were investigated, which unfolded into 350 assessment elements. The themes concern urgent issues, present both in the public debate and in the agenda of public and private organizations.

The key scores:

The average performance of the nine banks stood at 3.2, with BNDES once again taking the lead, with 4.3 points, the same score as in the previous evaluation.

In second place is Santander Brasil, with 3.8 points, followed by Banco do Brasil (3.5), which rose two positions mainly due to improvements in its credit sustainability guidelines. Although the score was the same as for Itaú, the tiebreaker was given by the fact that Banco do Brasil has higher scores than Itaú on 10 of the 18 themes, mainly due to its sector policies. Thus, Itaú consolidates itself in the fourth position.

Following are Bradesco and Caixa tied with 3.3 points. However, Bradesco had higher scores than Caixa in eight of the 18 themes, while Caixa had higher scores than Bradesco in only six, with a tie in four others. Therefore, the fifth place was awarded to Bradesco and the sixth to Caixa.

The lowest scores were BTG Pactual (2.6), Banco BV (2.5) and Safra (2.3). The highest positive variation in the score was for BTG Pactual, as it became a signatory to the Equator Principles in 2020. BV falls shortly behind by scoring on relatively few elements beyond those covered by the Equator Principles. Finally, Safra, despite appearing as last placed, has made significant progress in recent years.

In general, all the institutions began to give more importance to the sustainability agenda. Although it varies from bank to bank, there has been a significant change in the role the issue plays in the internal structure of banks and their documents.

While in the 2018 assessments it was observed that social responsibility issues in most cases had less priority, in 2020 they became more present and widespread. The generation of positive impact and the creation of shared value gained prominence in the banks' annual reports and, in almost half of them, became the logical thread that unites diverse narratives, such as profitability, commitments and brand identity.

The increase in transparency and publicity in relation to their own policies is one of the consequences of this paradigm shift. If banks once saw these policies as "trade secrets," many now see the publication of ESG information as a comparative advantage and an opportunity to lead the market.

Although the change is welcome, the scores are much less encouraging and indicate that narrative and performance do not always converge. When observing what really happened of policy improvement in relation to 2018, banks have not advanced in the magnitude necessary for the urgency of socio-environmental issues or have focused on operational issues, internal to the institution.

However, the greatest impact that financial institutions have on society and the environment is a consequence of their core activities, i.e., the provision of financial services. In this regard, there are still relatively few published policies and their content tends to be quite generalist. Most policies of this order concern the granting of credit, while investments — whether made with the institution's own resources or those made with clients' resources — lack even more detail.

Assessment of themes

In addition to the evaluation by financial institution, FFG Brazil also examines the evolution and situation of each of the 18 themes proposed for analysis. Here, the result was quite varied, with some obtaining very low scores, while others had relatively good scores.

The 18 themes analyzed are grouped into three categories according to their nature: cross-cutting, when they present intersections in all economic sectors that the bank supports (the productive industry, extractive industry, agriculture and livestock etc.); sectoral, when they are linked to a particular area of the economy and, therefore, specific to that area; and operational, when they concern the bank's internal issues.

The most significant advances have been observed in the themes of Financial Inclusion, Consumer Rights and Gender Equality, even though the latter obtained an average score of only 2.0. Despite this, it is important to emphasize that progress is mainly due to the greater systematization and publication of policies for these themes. Engagement in continuous dialogue with Idec on behalf of FFG Brazil has contributed to improving banks scores, since there were mainly demands related to improvements in the offer of credit and financial services, among other consumer rights issues.

The figures prove that, at least for now, banks are looking more to themselves than at society as a whole. While in operational themes the average was 4.8 points, which can be considered a reasonable level, in cross-cutting themes the average was only 2.8 points. Not even the legislation points, which were automatically attributed to every bank, were able to save them from poor performance on issues such as Climate Change (1.4), Gender Equality (2.0) and Taxes (1.7).

When looking at the sectorial themes, the situation is even worse, with an average score of 2.2 points, making clear the need to establish improvements in this aspect. A first step for this would be to publicize the policies that already exist, but have not been made public.

While the ratings generally indicate a trend toward gradual improvement in banks' socio-environmental responsibility policies, their pace still falls short of what is needed. To make the necessary progress, it would be essential to move from the current average of 3.2 to a level of at least 5.

This is a perfectly achievable and realistic goal. In other countries, such as Norway, Sweden and the Netherlands, traditional banks, operating in several countries, meet at least 50% of the elements of the FFI methodology. In order to move in this direction, special attention must be given to those issues that have obtained the worst scores (2 or less): Arms, Real Estate and Housing, Remuneration, Gender Equality, Taxes and Climate Change.

Regarding taxes, for example, the main reason for low scores is the absence of published policies requiring certain criteria on tax transparency and payment of taxes by companies in which banks invest or finance. With the exception of the BNDES, no other bank scored on the elements referring to these companies. The presence in tax havens, despite being taxed in Brazil, demands additional safeguards.

The only theme where there was a general decline in the score was Remuneration (1.5). Although it is not possible to define with certainty the reasons for this, two hypotheses arise. The first is that there may have been changes in the calculation of the variable remuneration and that several socio-environmental variables have ceased to be considered. The other possibility is that details about this calculation have ceased to be published. Whatever the case may be, both point to the need for greater transparency.

Climate Change was one of the cross-cutting themes that had an increase in the average score compared to the 2018 edition. The advance is mainly due to the growing availability of products to mitigate climate change, with more attractive interest rates or incentives for less polluting activities, especially in the energy sector. However, the subject still requires more assertive measures, with specific, measurable, achievable, relevant and time-bound targets.

Of all the themes, Arms had the lowest average score (0.7). Brazil is the third largest exporter of light weapons in the world, and the weapons produced here contribute to conflicts, both domestic and international. Still, among the banks evaluated, only Safra and Santander publish and detail their guidelines for the sector.

With the second lowest score, Real Estate and Housing maintains the historical tradition of being poorly evaluated in FFG Brazil policy assessments. With the exception of Caixa, the other banks publish no specific policies for financing the sector. This is a case for concern, given the enormous importance of this theme to society. Still, there has been an improvement in the overall score as more banks now offer products at lower rates so that individuals and micro-entrepreneurs can make their properties more sustainable or energy efficient.

In conclusion, if several institutions have been advertising their ASG initiatives as a way of leading the market and adding value to the brand, it is worth remembering that sustainability cannot be seen as a product, but needs to be integrated into the entire value chain of the institution, becoming business-as-usual.

The full report is available in Portuguese here. 

The Brazilian Fair Finance coalition consists of four civil society organizations: Conectas Human Rights, Brazilian Institute for Consumer Protection (Idec), Instituto Sou da Paz (Pro Peace Institute) and World Animal Protection Brazil.

A note on the assessment:

The FFI methodology is a worldwide reference in terms of international standards and ESG initiatives. Unlike most other sustainability indicators — and this is one of the differentials of the FFI — it is not restricted to only risk criteria, but also covers aspects on economic, environmental and social impacts.

Moreover, because it has been built with a specific focus on the financial sector, it is able to capture specificities and evaluate the impact that these institutions generate from their investments and financing. Banks foster other businesses and, therefore, their policies should not only take into consideration actions that concern themselves, but also the companies they support.

ESG issues can be observed both from the point of view of risk and impact. In the former, financial institutions assess the possible environmental and social impacts of an investment from the financial and reputation losses it may generate. Although this approach has been privileged and is already incorporated into the Brazilian credit and investment market, it is not enough to deal with the issue of sustainability with the complexity and urgency it requires.

In its approach to socio-environmental impact, the bank must take into account the losses that its financing and investments generate on climate, nature and society. In other words, the financial return ceases to be the only decision criterion and its contribution to the population's well-being, preservation of biodiversity and maintenance of ecological services is also evaluated.

It is important to highlight that this type of evaluation is also positive for the financial institution itself, since it leads to lower risks both in the short and long term, in addition to reducing the chances of negative macroeconomic impacts, which jeopardize the profitability of companies. The relationship between the two approaches — risk and impact — is not one of antagonism, but of complementarity.

The incorporation of ESG criteria is fundamental to mitigate risks both for the bank and for society and the environment. Although it is a global trend, this debate is still incipient in Brazil, where the risk perspective predominates, with social and environmental risk management policies that focus only, or mostly, on financial returns.

The survey was conducted between May 2020 and January 2021. The entire FFG Brazil analysis is based on public documents that the banks themselves make available, consolidating and classifying the information. In total, more than 400 documents were consulted, covering a wide range of themes, including finances, governance and sustainability issues, among others. The information obtained was used both to score on themes, when they were sufficient details, and for qualitative analysis of policies.

As the nine assessed financial institutions have very different performance profiles from each other, this was taken into consideration in the scoring. Thus, when an investment or credit category is not relevant to that bank specifically, it is labelled as not applicable and therefore not considered in the score weighting, which prevents any institution from being harmed or privileged.

Banks are invited to participate and be involved in all stages of the process. Besides having the opportunity to contest and comment on their performance, they can also suggest changes in methodology, which is updated every two years. These proposals are taken to the FFI, which discusses them and decides whether or not they should be integrated into the methodology.

Although the engagement of each institution has occurred in various ways, it is important to emphasize that all of them began to adopt a posture of openness to dialogue, which led to establishing a calendar of debates throughout 2021 and opened opportunities for improvement in 2022, when the next policy evaluation will take place.