Environmental, Social Governance and Sustainability Policy

This Policy sets out Recognise’s approach to environmental, social and governance (ESG) and sustainability matters impacting on its business as well as how we impact on the wider environment and communities in which we operate.

Under the Climate Change Act in 2008 the UK committed to a 2050 target to reduce emissions by 80%. In June 2019, the then Prime Minister, Theresa May, stated there was a ‘moral duty to leave this world in a better condition than what we inherited’ and confirmed that the UK would cut greenhouse gas emissions to almost zero by 2050. Britain was the first major nation to propose this new target and the EU27 have now also signed up to the ‘Net Zero’ target.

Section 414C (7) of the Companies Act 2006 requires disclosures on the impact of the company’s business on the environment. Disclosures regarding principal risks and uncertainties may also be required under the Companies Act where climate-related issues are material and will likely form part of the newer section 414CB requirement to consider the principal risks that the company poses to the outside world more generally. In their Strategic Report, companies are now also required to make a Section 172(1) statement describing how directors have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act when performing their duties (section 172 (1)(d) specifically relates to the impact of the company’s operations on the community and the environment).

The Financial Reporting Council (FRC) published a statement in July 2019 saying that the effect of climate change on society and business is one of the defining issues of our time: ‘The Boards of UK companies should therefore address, and where relevant report on, the effects of climate change (both direct and indirect). Reporting should set out how the company has taken into account the resilience of the company’s business model and its risks, uncertainties and viability in both the immediate and longer-term in light of climate change. Companies should also reflect the current or future impacts of climate change on their financial position, for example in the valuation of their assets, assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities and financial risk disclosures.’

The Prudential Regulatory Authority (PRA) published a Supervisory Statement (SS3/19) in April 2019 which states it ‘expects firms to have clear roles and responsibilities for the board and its relevant sub-committees in managing the risk from climate change.’ Under the Senior Managers Regime (SM&CR) Climate Change has been added to the list of controlled functions from October 2019 and SS3/19 states ‘the board and the highest level of executive management should identify and allocate responsibility for identifying and managing financial risks from climate change to the relevant existing Senior Management Function (SMF) most appropriate within the firm’s organisational structure, enhancing banks’ approaches to managing the financial risks from climate change.’

Recognise is aware that it has a responsibility to the environment beyond legal and regulatory requirements. We are committed to managing the environmental impact of Recognise, both as a standalone firm, and in terms of the businesses that Recognise supports through its lending activities.

The scope of this Policy covers all Recognise employees and unless stated otherwise applies to those third parties and suppliers that we have considered relevant (as the services performed impact ESG Environmental, Social Governance & Sustainability Policy | Version 2.0 | March 2020 and sustainability activities). This Policy therefore applies to staff within those firms and any other persons engaged under a contract of service by or on behalf of the firm, whether on a permanent or temporary basis (hereafter “staff” or “employee”). Recognise has agreed with the relevant third-party providers that they comply with this policy throughout our dealings.

This Policy covers the financial risks that Recognise could be exposed to from climate change, how we as a business will operate and how we may promote positive environmental and sustainability activity through Recognise’s lending and savings products.

This Policy should be read in conjunction with the Commercial Property Backed Lending Policies, the Commercial Non-Property Backed Lending Policies, the Arrears Management & Debt Recovery Policy, the Provisions & Debt Write-Off Policy, Anti-Money Laundering Policy, Diversity & Inclusion Policy, Modern Slavery Policy, Vulnerable Customer (including Responsible Lending Statement) Policy and Bribery & Corruption Policy.

Each employee has a responsibility to ensure that they understand their obligations and are required to familiarise themselves with the Policy and associated policies and procedures to ensure compliance and be aware of the ramifications of non-compliance. If Recognise identifies that an employee has not properly followed the requirements of this policy, the matter will be taken seriously and can lead to disciplinary action, up to and including dismissal in accordance with Recognise HR policy.

All employees are reminded to be clear on the regulatory expectation in supporting ESG and sustainability.

Day-to-day responsibility for ensuring that the business adheres to the relevant regulatory rules and expectations is led by the CRO and the Risk & Compliance Team and will be embraced by employees at all levels and across all functional activity, including areas of outsourced operations.

3.1 Board

The Board is responsible for setting, owning and achieving the objectives of Recognise’s approach to ESG and sustainability matters impacting on its business as well as how we impact on the wider environment and communities in which we operate.

Section 172(1) of the Companies Act 2006 provides that a director of a company ‘must act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to various other stakeholder interests’. One of the six key considerations is number 4 ‘the impact of the company’s operations on the community and the environment’.

3.2 Executive Management (Exco)

Exco is responsible for the successful implementation of this Policy and the associated Action Plan & related activities ensuring appropriate horizon scanning and monitoring of ESG and sustainability developments and emerging risks.

It is critical for Exco to set the tone from the top in relation to ESG and sustainability and its decision-making should be mindful of the impact on the Recognise business as well as how we impact on the wider environment and communities in which we operate.

It will ensure appropriate training is provided at induction for all employees followed by more detailed training including periodic refresher training and knowledge testing.

3.3 Policy Owner

The Board and Exco have allocated responsibility for ESG and sustainability to the Chief Credit Officer (CCO). The CCO is an SMF18 and within this Senior Management Function will be responsible for identifying and managing financial risks from climate change. Responsibility will also extend to how we as a business will operate and how we may promote positive environmental and sustainability activity. The CCO will lead the creation, implementation and ongoing review and development of the Environmental and Sustainability Policy.

The CCO will ensure appropriate horizon scanning and monitoring of ESG and sustainability developments and emerging risks is maintained and implement the Action Plan and related activities as well as periodic reporting to Board and Exco (and relevant sub-committees) across these areas.

3.4 Climate Change Group

The Climate Change Group is made up of the CCO (who has the prescribed responsibility for climate change) supported by key employees with the requisite knowledge and experience to cover the 4 areas of Recognise’s ESG and sustainability approach. The remit of the Climate Change Group will include:

• Horizon scan and monitor ESG & sustainability developments and emerging risks through published information (regulatory and industry authored), discussion papers, consultation papers, guidelines and central policy changes understanding how they impact the Recognise business and our operations
• Supporting amendments to this Policy and Action Plan & related activities as a consequence of above developments
• Recommend for governance committee approval appropriate activities across the 4 Action Plan areas by presenting the business rationale
• Lead the implementation of the Action Plan activities within agreed timelines
• Prepare Management Information for periodic reporting to the Board and Exco (and relevant sub-committees) across these areas
• Provide a report to the Board every six months that outlines Recognise’s approach to managing climate change risks to it, the risk it represents, the progress being made and recommending any further actions

3.5 Employees

Appropriate and adequate training will be provided to all employees during induction followed by more detailed training including periodic (at least annual) refresher training and knowledge testing.

We operate within a culture where all employees are expected to comply with Recognise’s policies and therefore it is each employee’s responsibility to ensure all requirements under this Policy are adhered to, and to ensure that relevant training necessary for their role is completed as required.

If any employee considers there is a lack of clarity or believes the Policy could be improved, then we encourage them to speak to the Chief Credit Officer.

3.6 Risk & Compliance

The Risk & Compliance function will support the business in ensuring that the Policy meets not just prescribed regulatory requirements but also the spirit. The function operates as a second line of defence with responsibility for operational risk assurance undertaking planned reviews, reporting and escalation to ERC and the Board.

3.7 Finance

The Finance team will be responsible for appropriate and adequate ESG and sustainability reporting in Recognise’s Annual Report and Accounts and Financial Disclosures obtaining the relevant approvals for the content.

3.8 Internal Audit

As the third line of defence, the Internal Audit function is responsible for providing independent assurance of implementation of the Policy including the oversight of the appropriateness and effectiveness of systems and controls.

Internal Audit reports will be submitted directly to the Board to promote independence.

Climate change and society’s response to it present financial risks which may crystallise in full over longer time horizons as well as emerging now. Financial risks arise through two primary channels – i) Physical Risk (weather related or climate shifts), and ii) Transition Risk (process of adjustment towards a low-carbon economy).

It is important to note that the PRA expects a firm’s response to the financial risks from climate change to be proportionate to the nature, scale, and complexity of its business. As a firm’s expertise develops, the PRA expects the firm’s approach to managing the financial risks from climate change to mature over time. The PRA intends to embed the measurement and monitoring of these expectations into its existing supervisory framework.

From a Governance perspective the PRA expects a firm’s board to understand and assess the financial risks from climate change that affect the firm, and to be able to address and oversee these risks within the firm’s overall business strategy and risk appetite. The approach should demonstrate an understanding of the distinctive elements of the financial risks from climate change and a sufficiently long-term view of the financial risks that can arise beyond standard business planning horizons.

Recognise’s approach to environmental, social and governance (ESG) and sustainability matters will incorporate these financial risks as well as extending to how we as a business will operate and how we may promote positive environmental and sustainability activity. Effectively, this approach falls into 4 areas:

4.1 Physical Risk

Physical risks from climate change arise from a number of factors, and relate to specific weather events (such as heatwaves, floods, wildfires and storms) and longer-term shifts in the climate (such as changes in precipitation, extreme weather variability, sea level rise, and rising mean temperatures). Some examples of physical risks crystallising include:

• Increasing frequency, severity or volatility of extreme weather events impacting property and business insurance; and
• Increasing frequency and severity of flooding leading to physical damage to the value of financial assets or collateral held by Recognise, such as commercial property, business stock.

This can lead to increased credit risks in Recognise or to underwriting risks for liability insurers if it results in legal claims to recover financial losses from this physical damage.

4.2 Transition Risk

Transition risks can arise from the process of adjustment towards a low-carbon economy. A range of factors influence this adjustment including: climate-related developments in policy and regulation, the emergence of disruptive technology or business models, shifting sentiment and societal preferences or evolving evidence, frameworks and legal interpretations. Some examples include:

• Tightening energy efficiency standards for residential and commercial buildings impacting the risk in Recognise’s property lending books
• Rapid technological change such as the development of electric vehicles or renewable energy technology affecting the value of financial assets in the automotive and energy sectors
• Future regulatory policy changes that impact sectors e.g fossil fuels, emission levels, and
• Companies in the wider economy that fail to mitigate, adapt or disclose the financial risks from climate change being exposed to climate-related litigation which could impact their market value or trading income

4.3 Recognise – The Business

Recognise is seeking to minimise its carbon footprint by reducing our environmental impact and continually improving our environmental performance. Focus areas will include (but not limited to):

• Premises
• Energy and Water Use
• Recycling / Waste Management
• Office Supplies
• Printing
• Maintenance and cleaning
• Travel

This area will also pick up the financial reporting required in Recognise’s Annual Report and Accounts and Financial Disclosures

4.4 Products

Recognise will encourage positive ESG and sustainability activity through its lending and deposit products. By way of example this may include product development with ‘green’ credentials or improved pricing for our customers who positively contribute to sustainability or the environment.

The activities of some business sectors and/or businesses can have adverse environmental, social and ethical (ESE) impacts including the potential for human rights infringements. In response, Recognise will develop its ESG risk appetite defining the level of ESG risk it is prepared to accept and this will form part of the Board risk appetite statement.

We will then update the lending policies (both property backed and non-property backed) to reflect that risk appetite. We will complete the first of these by end of September 2020 and the second of these by end December 2020.

In order to bring Recognise’s Environmental and Sustainability Policy and approach to life the following quadrant Action Plan has been designed

The next step is to detail the related activities (governance committee approved) and monitor the progress of implementation to agreed timelines . Specific formats have been designed to report these internally.

Also in order to monitor and report on horizon scanning for ESG & sustainability developments and emerging risks specific reporting formats have been designed and agreed internally.

The Chief Credit Officer is responsible for periodic reporting to the Board and Exco (and relevant sub-committees). Reporting is quarterly or sooner if material developments emerge that should be escalated sooner.

The Climate Change Group will prepare Management Information covering:

• Action Plan and related activities
• Action Plan activities – progress on implementation against agreed timelines
• Exception reporting – outside of agreed parameters
• Horizon Scanning – developments and emerging risks

The Finance team will be responsible for appropriate and adequate ESG and sustainability reporting in Recognise’s Annual Report and Accounts and Financial Disclosures obtaining the relevant approvals for the content.

All employees will receive induction training on this Policy. The Policy will be readily accessible at all times via the Recognise website.

More detailed training including periodic (at least annual) refresher training and knowledge testing will be provided. Targeted additional training by employee or group of employees will be provided more frequently as informed in part by the results recorded from training MI as well as ongoing monitoring activity by first, second and third lines of defence.

Further training and communication will take place in the event of a regulatory change to ensure that employees remain up to date.

Where necessary the Chief Credit Officer and the Climate Change Group will provide additional guidance.