Sustainalytics’ Global Standards Engagement service involves entering into long-term dialogue with some of the largest banks in the world, assessing their performance on material ESG issues and encouraging best practices. An increasing trend toward higher regulatory penalties for business ethics-related matters peaked in 2020 when 40% of the total value of fines were issued over the past decade. Banks have come to recognize the critical role corporate culture plays in strengthening ESG performance and mitigating business ethics risks. We have seen an increase in the number of banks who are investing in their corporate cultures with an aim to shape and define their values and identities in the past five years more purposefully. Beginning with defining corporate culture, we will highlight some of the ways banks are advancing their cultures.
Corporate culture is an intangible concept and can be broadly defined as the prevalent norms, behaviors and expectations in a company, typically unwritten and sometimes unacknowledged. Corporate culture is not automatically positive, and elements of a company’s culture may provide certain benefits or disadvantages to a firm’s competitiveness. When acknowledged, corporate culture can be used as a tool to drive better business outcomes and manage conduct and compliance risk. Our discussions with companies show that corporate culture can have a dominant effect and influence behaviour over and beyond stated company policies and programs.
“Culture eats strategy for breakfast” as Peter Drucker said decades ago, and it still does. In 2012, Bain & Company surveyed 400 executives from large companies and found that less than 25% felt that culture effectively supported business performance at their company. By 2018 however, PwC's Katzenbach Center conducted a Global Culture Survey amongst 2,000 people in 50 countries. 65% of the respondents said that culture was more important to the performance of organizations than strategy or operating model.
Accordingly, we have noticed a promising trend in formalizing corporate culture development, specifically in some of the banks that have been subject to regulatory scrutiny in recent years. Among the fifteen banks that Sustainalytics engages with as part of the compliance-driven Global Standards Engagement, eleven (73%) have made significant investments and/or developments in understanding and enhancing corporate cultures as of the time of publication. We highlight below examples of companies within our engagement that influence their corporate cultures by directly linking employee incentives to conduct and ethics.
Before 2018, Wells Fargo’s board of directors seldom discussed corporate culture; now, the bank’s board specifically discusses corporate culture at every board meeting, intending to promote a more customer-centric corporate culture. Instead of primarily focusing on volume-centric sales goals, Wells Fargo’s executives are trying to incentivize employees to improve the customer experience.
Nordea’s Business Ethics and Values Committee, chaired by the Group CEO, was established in 2016 and now convenes several times a year to advise on ethical dilemmas, supporting sustainable decision making by the bank.
At ING Group, its “Orange Code” sets out the values and behaviours that define its culture. ING’s remuneration approach is significantly linked to a global performance management approach that consists of three dimensions, one of which is an assessment of how effectively an employee performs in line with the Orange Code behaviours.
Two of the largest Australian banks updated their codes of conduct, replacing a ‘Can we?’-approach with a ‘Should we?’-test. At one bank, behavior in line with its code of conduct was introduced as a prerequisite for the remuneration variable, and the company’s claw back policy was expanded to cover misconduct. Another bank updated its remuneration framework: unsatisfactory risk management behavior now negatively affects compensation, while employees who rate ‘exceptionally managed’ for risk are formally recognized and rewarded to reinforce a positive risk culture.
Overall, it is encouraging that corporate culture is increasingly not just a “nice to have” among leading global banks but is an important instrument in effecting change, defining values, and ultimately shaping corporate identities towards being a force for good. KPIs linked to culture and conduct and built into employee compensation are a concrete way of reinforcing that the company is serious about corporate culture and is something that we expect will increasingly become the norm.
Visit Sustainalytics' website to learn how Global Standards Engagement can help companies in your portfolio resolve incident-driven risk, potentially enhance future ESG performance and risk management.
 Penalties for breaches of regulation of AML (anti-money laundering) and KYC (know your customer) procedures worldwide totaled USD 25 bln between 2010 and 2020, with USD 10 bln issued in 2020 only. Source: https://www.fenergo.com/fines-report-2020/
ESG Stewardship: A Powerful Tool to Mitigate Greenwashing Risks
Amid fears of greenwashing claims and evolving reporting standards, sustainable investment assets have dropped as much as 51 percent. In this rapidly changing environment, ESG stewardship is one of the most effective ways to integrate genuine sustainability principles into investment management.
Regulating 'Forever' Chemicals: Examining Company Readiness and Investor Risk
Chemical companies face growing pressure to phase out some of the most hazardous substances from their product portfolios. Learn how well companies manage related risks and what upcoming regulations could mean for them and their investors.