A snapshot of reporting practices in the Dutch fi nancial sector

July 2015

Rebuilding trust through public disclosure

www.pwc.nl

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Management summary

Rebuilding trust through public disclosure

Showing you listen Showing you take action Showing your results

Materiality Analysis

Translation into Strategy

Value CreationRisk

ManagementResponsible Investment

Integrity

Majority of financial institutions shows clear understanding of stakeholders’ issues page 3

Only few first movers integrate material topics in their strategy

page 4

Few institutions are transparent on how they create value for their stakeholders

page 5

Risk management is still largely skewed towards financial risks

page 6

Financial institutions build trust by showing commitment to responsible investment

page 6

Reporting on integrity holds strong potential to restore trust

page 7

Materiality matrices show tension between restoring trust and economic performance page 4

IntroductionReports produced by financial institutions in the Netherlands show that the sector listens to its stakeholders and tries to act on their needs

Lack of trust in the financial sector is often makes headlines and of high interest to both financial institutions and society as a whole. We would like to share our insights on how you as a financial institution can focus on rebuilding trust through a three-fold process: showing that you listen to your stakeholders, showing that you take action on their needs and showing the results. One way of doing this is through your reporting.

This is easier said than done! We see Integrated Reporting as framework that can help you rebuild trust through sharing relevant public information.

The framework is designed to tell the holistic story of the organization,and aims at combining financial and pre-financial elements. Sharing your full story will lay the foundations to show that your organization is trustworthy or at least has taken actions to restore this trust. Based on the principles of Integrated Reporting, we looked at the extent to which the financial sector is using public disclosure to rebuild trust. From our benchmark of the reporting practices of 24 organizations, we conclude that financial institutions in the Netherlands are willing to listen to their stakeholders and try to act upon their needs.

In this publication we present our high level findings and outline some key reporting trends in the Dutch financial sector. These are consolidated good practices (examples of trust-building through reporting) as well as

development areas where the potential of reporting is still underexplored.

The research was exclusively desk-based, and used information publicly available in the annual reports of 24 organizations spanning asset managers, banks, pension funds, real estate investors and insurers – a research sample intended to be representative of the financial sector in the Netherlands.

For more background information please visit the IIRC website www.integratedreporting.org/ orwww.pwc.nl/nl/integratedreporting/

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Figure 1. Showing you listen

Do not report amateriality analysis

21%

Report amateriality analysis

79%

Majority of financial institutions shows clear understanding of stakeholders’ issues

Organizations gain insights in the needs of their stakeholders by conducting a stakeholder dialogue and performing a materiality analysis. Through these means, they can prioritize the issues at hand in a materiality matrix. In our research sample,

19 out of the 24 financial institutions conduct a materiality analysis and are able to identify what is relevant to their stakeholders. As displayed in figure 1, almost all organizations report about their dialogue and materiality analysis.

Most of the organizations explain the analysis extensively and only four limit themselves to a simple enumeration of relevant topics. The extensive analyses include the following steps:

• engaging in stakeholder dialogue

• identifying the topics that are relevant for the stakeholders

• identifying the impact of these on the organization

• identifying to what extent the organization can influence the material themes.

With this type of materiality analysis, which is the backbone of Integrated Reporting, financial institutions show that they listen to the stakeholders and are aware of the topics relevant to them. Showing that you listen to your stakeholders is the first step in rebuilding trust.

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Materiality matrices show tension between restoring trust and economic performance

Only few first movers integrate material topics in their strategy

Figure 2. Materiality Matrix Financial Services

Figure 3. Showing you take action

RestoringTrust

CustomerSatisfaction

ResponsibleTax

Regulatoryenvironment

RiskManagement

ImpactInvestments

EmployeeEngagement

EconomicPerformance

Integrity

Transparency

Privacy

Remuneration

Rel

evan

ce fo

r St

akeh

olde

rs

Relevance for Financial Institutions

Separatestrategies

54%

One integratedstrategy

46%

We analyzed all the matrices available in our research sample, and we have summed up our findings in figure 2. This provides an overview of the most material topics.

Although the institutions have different business models, they consistently identify the same material themes: restoring trust as well as economic performance, transparency, customer satisfaction, integrity and risk management. Financial institutions indicate economic performance as being vital, while stakeholders pinpoint restoring trust as their highest priority. Financial institutions could balance out this tension by acknowledging the dilemma behind it and by explaining their decisions clearly and transparently. Financial Institutions can enhance your trustworthiness by showing that you listen to your stakeholders and keep their issues on your agenda.

The next step in rebuilding trust is to integrate the material themes in your strategy. By doing so you show to your stakeholders that you plan to take action on the topics that both you and them consider of utmost importance. Within our research sample, we noted that very

few organizations tailor their strategy to the expectations of their stakeholders. This is not specific to the financial sector. Most AEX-listed organizations find it challenging to integrate their material themes in their strategy.

Lack of integration is mostly visible when organizations have a so-called general strategy (mostly concerned with the financials), and an add-on sustainability strategy. Among the financial institutions surveyed 11 out of 24 indicate their commitment to uphold one integrated strategy, but fewer have taken actual steps to do so. Often, a sustainability strategy is presented as an effort running parallel to the core business. As result, not all issues raised by stakeholders are taken into account at strategy level and translated into day to day business. Only by supporting the shift from listening to acting, and by integrating the needs of your stakeholders in your strategy, can you eventually rebuild trust.

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Few institutions are transparent on how they create value for their stakeholders

Figure 5. Achmea shows its value creation model

Triodos Bank translates sustainability mission into strategic goalsIn 2014, Triodos reported that safeguarding the integration of mission in overall strategy is an important item for discussion at Board level, and one of the reasons why customers trust the bank. Triodos shared a table with an overview of key strategic objectives for 2015 and the extent to which these objectives are being met. The table enables the reader to check on Triodos’ progress in advancing a mission-driven strategy, and is designed as follows:

Figure 4. Based on Triodos Bank strategic objectives section; see Triodos annual report 2014.

Aligning mission and strategy is an important step, and it shows that Triodos is able to discuss performance as a holistic blend of financial and pre-financial matters. However, full integration of all material topics in the overall strategy has yet to happen.

To restore trust, you also need to explain how you use the input financial and non-financial capitals to create value. If you embed the material themes in the strategy and organization’s goals, then the value created will overlap with the expectations of your stakeholders. Value creation in our view is a circular process which depends on seven connected building blocks: stakeholders, their key messages, risk, strategy, value drivers (what activities influence the achievement of strategic objectives), performance (both financial and non-financial) and impact. Our view is based on the IIRC framework.Our analysis shows that 11 out of 24 organizations do include a value creation model in their annual reports. Few of those explain fully how the input capitals are used to create value. An example of visualising this process is outlined by Achmea, as shown in figure 5.

Our key strategic objectives Integratingmission and strategy

How we did in 2014 Our goals in 2015

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Reporting on responsible investment: Robeco presses Hon Hai for better governance and labor standardsAs a sustainable investor, Robeco engages with companies on their most material sustainability issues. In June 2014, Robeco expressed its concerns about governance and working conditions at Hon Hai, a Taiwanese electronics company that is a major supplier to many larger electronics companies, including Apple. At a Hon Hai’s shareholders meeting, Robeco addressed Hon Hai’s limited transparency and raised questions with regards to a series of severe incidents related to labor standards at the company’s site. In November 2014, Robeco followed up with Hon Hai to discuss how to further develop the company’s capacity to uphold higher standards in those areas. The CEO of Robeco and the chairman of Hon Hai then worked out a number of concrete suggestions for improvement.

Risk management is still largely skewed towards financial risks

Financial institutions build trust by showing commitment to responsible investment

Risk management lies at the core of a healthy and functioning financial sector. While all organizations in our research sample recognize that risk management is directly linked to opportunity management and improved efficiency, only very few of them are looking at risks from both a sustainability and a commercial standpoint.

The majority of financial institutions surveyed has set off on a journey to

As customers, citizens and regulators expect high levels of responsibility from the financial sector, responsible investment strategies are beginning to resonate with institutional investors, asset managers and private banks. In the Netherlands, a growing number of financial institutions acknowledges the need to be in control of the negative externalities of their investments.

Investors are looking for ways to apply internationally shared norms to their portfolios, and to reduce the risks of being linked to companies involved in business malpractice (corruption, bribery), negative impacts on the environment or human rights abuse.

17 organizations out of 24 report on their commitment to invest responsibly, and have dedicated significant reporting space to their activities in this area. Of these, 13 organizations disclose quantitative figures with the amount of assets responsibly managed (often a small portion of the overall assets under management), and mention the increasing and mainstreaming of responsible investment activities as one of their strategic objectives for the near future.

Within our research sample, exclusion accounts for a large proportion of responsible investment activities: all financial institutions screen and exclude investments in controversial weapons.

Besides, 12 of them report integrating ESG issues in their operations (albeit not across their entire portfolios), followed by 10 that report relying on engagement strategies – that is, by entering into dialogue with investee companies in order to achieve sustainability and good corporate governance. These two strategies are often combined, in an effort to better understand the business practices of investee companies.

7 of those surveyed report voting at shareholders’ meetings of the companies in which they invest. This is often complemented by public information on the voting behavior and an explanation on how they voted. Only 4 report being

identify their own set of pre-financial goals, but very few are reporting on where the pressures are likely to be and what needs to happen to ensure that the related risks are properly managed.

Successful risk management can only take place when risks have been clearly identified, adequately assessed and brought at the forefront of your strategy discussion. Environmental, social and governance (ESG) risks should not

constitute an exception to this rule. It is key to link them to your strategy, and to reflect on how to approach integrated risk management as part of your long-term plan for resilience.

Finally, by reporting on your efforts in this domain, you can keep your stakeholders engaged and show them how pre-financials are embedded in your way of doing business.

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Reporting on integrity holds strong potential to restore trust

Stakeholders indicate integrity as a high priority topic. This topic in relation to the culture within the financial sector has often been criticized in the media. So by showing results with regard to upholding integrity, financial institutions can contribute to rebuilding trust. In our benchmark analysis less than half of the organizations embedded integrity in their strategy. They do have various

operational practices in place, such as programs and online learning tools, training courses and workshops to enhance integrity awareness, corporate responsibility and integrity policies, compliance request for suppliers and partners or ethics committees. However, the high stakeholders’ expectations might not be fulfilled and rebuilding trust becomes a very slow process.

involved in social impact investing. Our research also shows that a number of Dutch financial institutions are working to meet the growing demand for sustainable financial products and services.

We also looked into the extent to which organizations in our research sample approach the potential negative impacts of their day-to-day actions. This includes the full spectrum of their operations, including those decisions and deals that are not directly linked to responsible investment initiatives. For example, we looked at whether the organizations

reported on how they address actual and potential adverse human rights impacts of their investment decisions, and whether their disclosure is strong enough to assess their response to the impacts identified. We found that while some have taken steps towards working with the UN Guiding Principles on Human Rights and Business and have adopted human rights policies (as in the cases of FMO or ING), formal reporting in the areas of adverse impacts and efforts to mitigate them is still work in progress.

Conclusion

Public disclosure is a powerful tool. The information you choose to share with society should be information that your stakeholders find relevant, and at the same time information that you as an organization can use to steer your way of doing business. At a time when trust in the financial sector is low, you as a financial institution can leverage on the model offered by the Integrated Reporting framework to keep your stakeholders engaged, share your full story – financial and pre-financial- and present how you create value for society as a whole. Being clear and transparent on how you listen to society, how you follow up on what you have listened and what tangible results you achieved can enhance your credibility and ensure you play your part in rebuilding trust in the financial sector.

© 2015 PricewaterhouseCoopers Accountants N.V. (KvK 34180285). Allrights reserved.PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see www.pwc.com/structure for further details.

To learn more about how integrated reporting could benefit your organization in the journey towards rebuilding trust, please see www.pwc.nl/nl/integrated-reporting.Want to learn more about the detailed findings of our research, and how you’re performing compared to your peers? Then get in touch with:

Joukje JanssenDirector Sustainability & Responsible Governance

T: +31 (0)88 792 59 28E: joukje.janssen@nl.pwc.com

Lex Huis in het VeldManager Sustainability & Responsible Governanc

T: +31 (0)88 792 59 53E: lex.huis.in.het.veld@nl.pwc.com

Anna BulzomiSenior Associate Sustainability & Responsible Governance

T: +31 (0)88 792 67 45E: anna.bulzomi@nl.pwc.com

Robert van der LaanPartner Sustainability & Responsible Governance

T: +31 (0)88 792 14 12E: robert.van.der.laan@nl.pwc.com

Hans SchooldermanPartner Sustainability & Responsible Governance

T: +31 (0)88 792 76 58E: hans.schoolderman@nl.pwc.com

Magdalena MateiSenior Associate Sustainability & Responsible Governance

T: +31 (0)88 792 45 11E: magdalena.matei@nl.pwc.com