The World Benchmarking Alliance’s (WBA) new Financial System Benchmark – launched yesterday at COP 27 covering 400 of the world’s leading financial institutions, including asset owners, banks, asset managers and insurers – highlights that the financial sector’s current approach to tackling climate change and protecting human rights is fragmented, siloed and insufficiently aligned to drive scale.

According to research conducted by WBA, a fifth (20%) of the financial institutions with the greatest ability to influence achievement of the UN Sustainable Development Goals have publicly acknowledged their impact on people and planet.

Only 2% of financial institutions disclosed their financing to low-income countries, despite $100bn worth of climate finance being promised to enable adaptation and mitigation of climate change in 2009 and going unfulfilled.

This is the first benchmark developed by the WBA that focuses on financial institutions. It covers governance, planetary boundaries as well as human rights and social issues, and provides insight on the progress (or lack of) in the finance sector.

It recognises the interwoven connection between all these institutions, the conflicting roles they play and the different power dynamics. The results provide guidance for financial institutions to improve their impact on people and planet, and a transparent and independent mechanism tracking their progress against global standards and peers.

Highlighting the challenges and complexity of aligning the financial sector with sustainable development, it also showed that less than 40% of financial institutions have disclosed long-term net-zero targets. Of these commitments, only 2% have been translated into interim targets, of which just 1% are backed by scientific evidence.

Financial institutions should set net-zero and interim emission reduction targets, and require clients and investees to do the same, WBA said.

Outside of the minimum legal requirements, less than 10% of the 400 institutions assessed disclosed the processes they have in place to identify human rights risks and impacts within their own operations, and less than 3% within their financing activities. Financial institutions should perform a comprehensive Human Rights Risk Due Diligence across financing activities, the WBA suggested.

Furthermore, less than 5% of financial institutions acknowledged they had a process to identify the impact of their financing activities on nature. Given the reliance of the global economy on natural capital, and the millions dependent on it, WBA said that financial institutions need to accelerate managing the biodiversity impacts of their financing activities.

Andrea Webster, WBA’s financial systems lead, said: “Different parts of the finance sector have different roles to play in triggering the powerful domino-effect that is needed to mainstream sustainable finance. Providing transparency shows us what is currently being achieved, what can be scaled and which areas need urgent collaboration.”

She said WBA has developed the benchmark as a tool for change. “Yes it shows a dismal picture overall of where we are now, but the intention is for it to provide a roadmap for companies themselves,” she added.

The release of the Financial System Benchmark will be followed by the publication of a full Insights Report in 2023.

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