Case study: How AUB takes action on its PRB commitments

2.1 Impact Analysis (Key Step 1)

Show that your bank has performed an impact analysis of its portfolio/s to identify its most significant impact areas and determine priority areas for target-setting.

As a signatory to the Principles for Responsible Banking (PRB), AUB is presenting its fourth impact analysis utilizing the UNEP-FI Portfolio Impact Analysis Tool (Version 3) to evaluate the environmental, economic, and social effects linked to the Group’s financing and investment activities. This impact assessment focuses on AUB Group by aggregating the financing and investment portfolios from all its subsidiaries. The Group has assessed the impact of its Retail Banking, Corporate Banking, SMEs (Business) Banking, and Treasury and Investment portfolios across various economic, social, and environmental impact areas.

The composition of AUB’s portfolio is as follows: Corporate Banking (41%), Treasury and Investment Banking (49%), Retail Banking (9%), and SMEs Banking (2%). AUB’s assessment primarily focuses on Bahrain, which serves as the headquarters’ main geographic location.

Geographically, AUB Kuwait has been excluded from the reporting year’s portfolio due to its merger with KFH through amalgamation. All other pertinent AUB regions and business segments have been included in the analysis. AUB conducted a new round of the PRB impact analysis tool, with no significant changes reported as a result.

The impact assessment encompasses 100% of the Group’s Treasury and Investment Banking, SMEs Banking, and Corporate Banking portfolios, which have been segmented according to the International Standard Industrial Classification (ISIC). AUB carefully tracks its portfolio composition internally and provides the data in this report as of March 31, 2024. Portfolio percentages have been calculated based on the financing amounts in USD. AUB focuses on identifying the most critical and key negative sectors financed across each business function and presents the main sectors financed under Treasury and Investment Banking, Corporate Banking, and Business (SMEs) Banking.

For the Retail Banking Portfolio, the segmentation process involved categorizing customers based on age, income, and gender. AUB can now leverage data related to current and savings accounts in Bahrain, Egypt, Iraq, and the UK. This marks a significant improvement, addressing a limitation noted in the previous year’s report.

Manufacturing now constitutes a larger share of the corporate portfolio compared to the previous year’s report, largely due to an expansion in the types of manufacturing being considered, including chemicals and basic metals.

In its analysis, AUB took into account its consolidated operations based at its headquarters in Bahrain. Due to the unavailability of context-specific data for Bahrain in the latest version of the tool, AUB employed additional resources and consulted with relevant stakeholders to assess the needs for each impact area. The key needs identified for Bahrain include Integrity, Security of Person, Health and Safety, Availability, Accessibility, Affordability, Quality of resources and services, Equality and Justice, Strong Institutions, Peace and Stability, Healthy Economies, Socio-Economic Convergence, Climate Stability, Circularity, Biodiversity, and Healthy Ecosystems.

AUB Group has identified Livelihood, Availability, Accessibility, Affordability, Quality of Resources & Services (Finance/Financial Inclusion), and Healthy Economies as its key areas of positive impact. In contrast, Climate Stability, Circularity, and Health and Safety have been recognized as its key areas of negative impact. AUB has chosen Climate Stability and Financial Inclusion (Finance) as the two most important impact areas for which to set targets in the coming years. The Bank is currently working on defining SMART targets and monitoring progress in implementing these goals, aiming to enhance its positive outcomes while mitigating the negative effects of its operations.

In 2024, AUB improved its methodology for tracking climate metrics and targets, including financed emissions. AUB is actively contributing to global initiatives aimed at reducing emissions from high-impact sectors. This strategy aligns with industry best practices, such as adopting climate risk management frameworks and incorporating sustainability principles into core business operations. These targets are consistent with the IEA’s Net Zero 2050 decarbonization scenario, which sets the stage for substantial reductions in AUB’s environmental footprint and supports global climate goals.

In 2023, AUB established its target related to Financial Inclusion, and in 2024, its Climate Stability target.

In 2023, the Bank identified key sectors within corporate banking that are linked to Climate Stability, including the construction of buildings, real estate activities, crude petroleum extraction, and wholesale and retail trade. The heat map presented in AUB’s PRB progress report for 2024 details other sectors that both positively and negatively influence Climate Stability. AUB has conducted an analysis of the primary sectors financed in its corporate banking portfolio.

In 2020, AUB became a signatory of the Partnership for Carbon Accounting Financials (PCAF) to measure scope 3 financed emissions associated with its corporate banking portfolio. Alongside measuring these emissions, AUB selected engagement and financial indicators to establish targets for both financial performance and client engagement, in addition to the impact targets.

AUB’s report presents a thorough analysis of the Bank’s portfolio, with particular attention to the corporate finance segment, based on portfolio data collected and reviewed as of March 31, 2024. The decision to highlight the corporate finance portfolio in this report stems from its substantial contribution to the Bank’s overall financial exposure, demonstrating the institution’s commitment to responsible and sustainable financing practices. AUB’s analysis will focus on corporate finance extended to various sectors, with particular emphasis on five key sectors:

• Construction of buildings (7.7% of corporate portfolio)
• Extraction of crude petroleum and natural gas (14.5%)
• Real estate activities (17.8%)
• Wholesale and retail trade, including motor vehicle and motorcycle repair (11.7%)

After reviewing the portfolio in 2024, AUB also identified Manufacturing as an additional significant sector (16.0%).

Regarding financial inclusion, 41.6% of AUB’s finance facilities are allocated to low-income clients, while 14.7% support female customers and 8.1% aid youth aged 18 to 30 years. Consequently, AUB set a target to improve access to credit and increase finance allocations to youth and women by US$ 5 million, a target that was successfully achieved by March 2024 across all retail categories (age, income, and gender).

2.2 Target Setting (Key Step 2)

Show that your bank has set and published a minimum of two targets which address at least two different areas of most significant impact that you identified in your impact analysis.

The targets have to be Specific, Measurable (qualitative or quantitative), Achievable, Relevant and Time-bound (SMART).

AUB has identified Climate Stability and Financial Inclusion (Finance) as its two most significant impact areas, establishing targets that align with the United Nations Sustainable Development Goals (UN SDGs), Bahrain’s Vision 2030, and Bahrain’s Nationally Determined Contributions (NDCs).

The Bank has established SMART targets and will provide updates on their implementation, aiming to enhance its positive impacts while minimizing the negative effects of its activities. In 2023, AUB defined its target concerning Financial Inclusion, and in 2024, set its Climate Stability target.

a) Financial Inclusion (Finance)

1. Understanding Bahrain’s Context and Alignment with UN SDGs

According to the World Development Indicators, in 2021 youth (aged 20-34) made up around 28% of Bahrain’s total population, and women represented 38%. The MENA Financial Inclusion Report 2020 ranks Bahrain second among eight countries in the region, with a financial inclusion rate of 39%. This success is attributed to a strong focus on financial literacy, targeted outreach to underserved populations, microfinancing for SMEs, and a robust push for digitalization. The report is based on four pillars: access to financial accounts (banking), savings, credit, and digital payments. The World Bank Global Findex Database indicates that 83% of Bahrain’s residents have financial accounts, yet credit access is only 30%. The Global Findex also shows that among credit card holders, those from low-income backgrounds, women, and youth represent 23%, 21%, and 21%, respectively. Moreover, the approach to financial inclusion directly supports UN SDGs, specifically Goals 1 (No Poverty) and 10 (Reduced Inequalities).

2. Setting Baselines and Priorities

Among AUB’s credit customers, 41.6% of its financing allocation targets low-income individuals, while 14.7% is designated for women, and 8.1% supports youth aged 18 to 30. Accordingly, AUB set a target to increase access to credit and allocate an additional $5 million in financing to youth and women. This goal was successfully achieved by March 2024 across all retail categories (age, income, and gender).

To help reduce indebtedness, AUB implements a maximum Debt Service Ratio (DSR) of 50% of monthly income, ensuring that customers’ disposable income, after accounting for finance repayments and other financial obligations, is sufficient to support themselves and their dependents. AUB maintains a minimum disposable income of BD150.

The Bank has collaborated with relevant internal and external stakeholders to formulate a plan for reaching its targets. This plan includes the following measures and actions:

• Better targeting for social housing through enhancing access to home and/or mortgage finance for the females and youth.
• Expanding digital banking services for young people and women.
• Improving credit and risk policies to prevent over-indebtedness, such as developing risk models to screen early signs of over-indebtedness, behaviour and income assumptions, appetite risk by vulnerable groups.

The Bank has established core indicators to measure its performance in achieving financial inclusion.

b) Climate Stability

In 2022, the Bank became a signatory of the Partnership for Carbon Accounting Financials (PCAF) to measure scope 3 financed emissions associated with its corporate banking portfolio. AUB has reported its direct (scope 1) and indirect (scope 2) greenhouse gas (GHG) emissions resulting from its operations, along with other indirect emissions (scope 3, category 15: investments) in accordance with the GHG Protocol. The Bank publicly discloses its financed emissions in its PRB report. In 2023, AUB broadened its reporting scope for financed emissions to include three additional asset classes relevant to its portfolio: ‘Commercial Real Estate,’ ‘Ijara Financing,’ and ‘Auto Murabaha.’ This builds upon the asset classes reported in the previous year, which included ‘Listed Equity and Sukuks’ and ‘Business Financing Facilities and unlisted equity.’ The methodology used to calculate financed emissions has improved its Data Quality score compared to the previous year, providing a more precise estimation of these emissions.

The International Energy Agency’s (IEA) Net Zero Emissions (NZE) scenario* underscores the vital role of the oil and gas sector in meeting global climate objectives and outlines a pathway for reducing emissions within this sector as part of the overall transition to clean energy. In alignment with these global trends, AUB is taking proactive measures to support international efforts aimed at reducing emissions from high-impact sectors. This approach is consistent with industry best practices, which include adopting climate risk management frameworks and incorporating sustainability principles into core business operations.

As part of its commitment to climate stability, AUB is utilizing its role as a financier to advance broader decarbonization objectives. The Bank actively engages in green financing by investing in various areas, including renewable energy, energy efficiency, water desalination, wastewater treatment, and green sukuks. AUB has not only met but surpassed its green financing target of $133.1 million established for 2024. The projected green financing target for 2025 is $163 million. The Bank ensures that its PRB report aligns with international climate risk frameworks such as IFRS S2 and TCFD.

In addition to measuring financed emissions, AUB has selected engagement and financial indicators to set to set financial and client engagement targets, alongside impact targets.

AUB has created an implementation plan and monitoring procedures to ensure that targets are achieved. Once the targets are set, progress on their implementation will be included in the quarterly reports submitted to the Group Management Risk Committee, Board Risk Committee, and Board of Directors.

3.1 Client engagement

Does your bank have a policy or engagement process with clients and customers in place to encourage sustainable practices?

Does your bank have a policy for sectors in which you have identified the highest (potential) negative impacts?

Describe how your bank has worked with and/or is planning to work with its clients and customers to encourage sustainable practices and enable sustainable economic activities. It should include information on relevant policies, actions planned/implemented to support clients’ transition, selected indicators on client engagement and, where possible, the impacts achieved.

In 2023, AUB actively engaged with its clients and customers to encourage sustainable practices and enable sustainable economic activities.

AUB’s leading clients from various sectors have been engaged on two areas:
• Gathering high-quality client data to support AUB’s measurement of scope 3 GHG emissions
• Identifying ways in which AUB can assist clients with their ESG financing strategies

AUB intends to implement its engagement plan gradually, which will also encompass awareness sessions, training programs, sustainable and green finance initiatives, as well as advisory services.

The AUB Group’s Social and Environmental Management System (SEMS) policy exemplifies its proactive strategy to integrate climate risks within its risk framework and management practices. This reflects the Group’s commitment to identifying, assessing, and managing environmental and social risks, including those associated with climate change, in its financial operations.

AUB Group demonstrates its dedication to environmental and social responsibility by meticulously screening and evaluating all funded projects against rigorous global social and environmental standards, such as the IFC Performance Standards and the World Bank Group’s Environmental, Health, and Safety (EHS) guidelines. The Group’s practice of excluding any project that does not comply with these standards or national environmental laws further illustrates its ethical and principled approach to finance.

5.1 Governance Structure for Implementation of the Principles

Does your bank have a governance system in place that incorporates the PRB?

Please describe the relevant governance structures, policies and procedures your bank has in place/is planning to put in place to manage significant positive and negative (potential) impacts and support the effective implementation of the Principles.

The Group’s governance structure consists of experienced board members tasked with planning and implementing effective processes and procedures to ensure compliance with all national and international commitments and requirements. Following the acquisition from Kuwait Finance House (KFH), AUB and its subsidiaries in Bahrain, UAE, Egypt, the UK, and Iraq have aligned themselves with KFH’s sustainability strategy.

The Board plays a critical role in establishing rules and governance provisions effectively, while promoting awareness of ethical standards and professional conduct guidelines. The Board’s strategy is articulated through a series of coherent policies that encompass the Group’s key activities and functions, including Credit, Risk Management, Anti-Money Laundering, Audit, Legal Affairs, Banking Integrity, and Human Resources, among others.

AUB’s commitment to leadership is demonstrated through its independent compliance function, which reports to the Audit and Compliance Committee. This committee oversees Risk Management, which currently includes Sustainability and ESG frameworks and standards, such as the Principles for Responsible Banking (PRB).

Furthermore, the Group Management Risk Committee and the Board Risk Committee review ESG-related reports on a quarterly basis and provide appropriate recommendations to the Board.

AUB has implemented a Corporate Governance Policy that outlines principles for effective governance throughout the Bank and its subsidiaries, in alignment with international best practices and regulatory standards established by the Basel Committee for Banking Supervision, Bahrain’s Corporate Governance Code, and the Central Bank of Bahrain (CBB). This policy thoroughly addresses the roles of the board and management, compliance, risk management, ethical conduct, and other essential topics to ensure efficient and transparent operations.

To better support the Executive Committee in executing AUB’s ESG strategy, a management-level ESG Working Group is being established. This group will be responsible for monitoring progress against sustainability targets, assessing key ESG risks and opportunities, and ensuring that ESG considerations are woven into all bank operations. Additionally, the Working Group will be instrumental in providing strategic ESG guidance and raising sustainability awareness across the organization.

An ESG Policy is also in development to articulate AUB’s commitments to environmental sustainability, social responsibility, and robust governance practices, emphasizing ethical business conduct throughout its operations and services. This policy will outline the Bank’s primary ESG commitments and serve as a guiding framework for incorporating ESG considerations into all business decisions and activities across the institution.

Lastly, AUB is aligning its remuneration practices with sustainability targets, ensuring that performance related to these goals directly impacts compensation.

 

UN Principles for Responsible Banking: Accelerating a positive global transition for people and the planet

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References:

This case study is based on published information by AUB, located at the link below. For the sake of readability, we did not use brackets or ellipses. However, we made sure that the extra or missing words did not change the report’s meaning. If you would like to quote these written sources from the original please revert to the following link:

https://www.ahliunited.com/wp-content/uploads/2024/11/Sustainability-Fourth-Report-2024.pdf