Banks With Decarbonization Efforts Perform Better, Research Finds

Banks and institutions that have a greater focus on managing their value chain emissions have better environmental, social, governance and financial performance, new research from ISS STOXX and its ISS ESG unit found.

CIO is owned by ISS STOXX.

According to the research, banks that manage their corporate value chain emissions better than others tend to have higher ESG scores, as well as higher financial profitability scores.

The research evaluated more than 300 banks around the world according to three ISS ESG corporate rating indicators; the carbon footprint of the value chain, which assesses value chain emissions disclosure, their portfolio decarbonization strategies and their emissions monitoring and reporting.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The climate impact of the corporate value chain is measured on a scale of 1.0 to 4.0, with 4.0 indicating higher performance. ISS ESG measures banks’ ESG scores through a proprietary methodology, measured on a scale of 0 to 100.

According to the research, banks with higher scores on the climate impact of the corporate value chain indicator had higher ESG score performance. The research found a correlation of 0.79 between the two factors.

Large-cap banks tended to have higher scores across most metrics, which ISS attributed to the larger banks having more resources for implementing decarbonization strategies.

The research also found that banks with higher scores across the indicators had higher ISS economic value-added margins, or the profit margin after operating expenses, taxes and capital charges have been paid. These banks also had higher average financial profitability ratings, or the percentile score of the stock’s profitability level, based on its EVA as a percentage of sales and capital.

Banks with an average portfolio decarbonization strategy score greater than 2.0, on a scale of 1.0 to 4.0, had an average financial profitability rating of 2.84 and an average EVA margin of 7.50%. Banks with a portfolio decarbonization strategy score of less than 2.0 had an average financial probability rating of 2.72, and an average EVA margin of 6.16%.

“Banks that outperform others in managing their portfolio emissions not only tend to be rated higher in the ISS STOXX ESG universe but also tend to have a superior financial profitability score, according to our proprietary EVA metrics,” the report said.