Corporate social responsibility, which in the past encompassed issues such as fair labour practices and environmental and sustainability concerns, is now increasingly focused on global financial accountability. Banks that comply early will see the benefits, advises Beth Ambrose.

Corporate social responsibility (CSR) in banking now means far more than fair labour practices and community involvement, although these are important localised issues; the concept of social accountability for financing decisions is now taking hold.

Regulators struggle with legal systems that apply only to a nation state or, at best, a region such as the EU, while banks increasingly operate on a global scale. Governments are concerned about tax evasion, currency speculation and the safeguards underpinning the global markets. Investors are concerned about their capital after numerous mis-selling and stock market debacles. Non-governmental organisations (NGOs) are concerned about the impacts of financing, particularly in emerging markets. There is therefore a groundswell of support on all fronts for financial institutions to engage in altering their approach to financing decisions and certain internal business practices.

Size matters

Performance on CSR and sustainability issues in the banking sector tends to vary with bank size, although strategic emphasis is affected by geographic location. Wherever they are located, the largest banks with the highest brand value risk and the greatest resources usually come out on top in terms of strategic commitment, management capabilities, community and stakeholder engagement, and employee welfare, as well as product range (such as environmental credit risk assessment, environmental loans, microfinance and socially-responsible investment funds). In small banks, the drivers to integrate sustainability are still weak, disclosure is poor and CSR management capabilities are lacking. One notable exception in Europe is FoereningsSparbanken, a small Swedish bank that demonstrates a high level of transparency, is innovative in applying stakeholder engagement and offers sustainable financing.

The downside for large institutions is that risks are higher, with greater incidences of regulatory problems and greater involvement in large-scale project finance.

With regard to regional trends, northern European banks seem, on average, to be more engaged with stakeholders and with sustainable finance. From the UK, Barclays and Standard Chartered have good capabilities from a strong set overall. HBOS is particularly good on sustainable finance and community investment. Standard Chartered also deserves praise for its support for HIV/AIDS management. Even HSBC, which is traditionally a laggard, announced in December 2004 that it would become carbon neutral (see page 58). ABN AMRO is a good example of a European bank that has been active in establishing stakeholder principles and integrating sustainability criteria throughout its business.

Southern and eastern European banks, particularly the smaller ones, are behind the curve and some have risk management and corruption issues to grapple with. However, the commitment of the numerous regional Italian banks to development of their local community and small and medium-sized enterprises is notable.

Citigroup and Bank of America (BoA) are advanced in terms of CSR in the US and have bolstered specific lending policies to protect intact forests and indigenous rights, and reduce carbon emissions. Community and diversity are also more emphasised in North America. Banks and agencies such as Fannie Mae, US Bancorp, BoA and Wachovia contribute considerable resources towards low-income housing as well as community capacity building. BoA, Fannie Mae and Bank One are all strong on employee welfare policies and initiatives, especially in relation to working parents and minorities.

Emerging markets banks have had to grapple with unpredictable economic/political environments, although some perform well on sustainability overall. Among the Asia-Pacific banks, only a few, such as Westpac and Kookmin banks, clearly seek to manage CSR risks and opportunities. Unibanco is a notable Brazilian bank that has been actively involved in driving the sustainable finance agenda in Brazil and that addresses its key CSR risks.

Despite much rhetoric and some genuinely good practices, the leading banks tend to fail repeatedly in certain CSR areas. Poor transparency in governance and excessive executive remuneration along with tarnished global business standards has damaged the reputation of many leading financial institutions. Senior executives of various banks have been in court on charges concerning dubious lending, director payoffs, tax evasion and fraud in the past couple of years.

Predatory lending targeted

Regulators have targeted many banks following poor advice or product design, mis-selling, investment banking or trading malpractice. Predatory lending has been a problem. Household International paid more than $400m to settle such a matter, prior to its purchase by HSBC. Total pay-outs to regulators over conflicts of interest in investment research were in excess of $1.4bn.

Banks can unwittingly act as conduits for money laundering or tax evasion, estimated to total $800bn annually. Even ABN AMRO, one of the sector leaders on CSR, recently had to close nearly 100 correspondent accounts that did not have the required controls. It was lucky to escape severe penalties.

Project finance and lending present both financial and reputational risk, despite the Equator Principles, the implementation of which NGOs criticise as being too slow, with no accountability. A common example of their limitations is the continued funding of the BTC (Baku-Tbilisi-Ceyham) pipeline, despite technical problems and human rights risks (see feature on page 60).

Recruitment, motivation and retention of the best employees are also key factors. However, widespread lay-offs have occurred repeatedly, so job security is low. The trend of outsourcing contributes to redundancies. In addition, a number of discrimination lawsuits have been brought in the sector.

The cross-border merger trend is resulting in the formation of ever-larger global banks. One major issue is the consistency of policy application across operations, particularly those in emerging markets, which often present a different and more complicated set of risks (and opportunities). Business ethics, human rights and environmental standards are lower or non-existent. Political and economic conditions can be unstable. To those on the ground, applying a CSR approach with integrity in China, for example, may appear difficult to implement in practical terms – but operating within certain risk parameters can help build capacity in local communities and governing bodies, and pave the way for more permanent changes.

Safeguard policies

Support is available from civil society. The International Finance Corporation is developing safeguard policies on human rights; NGOs and institutional investors are increasing in sophistication; and regulators and consumers are encouraging more responsible financial activity and disclosure. In an increasingly globalised environment, these issues are interlinked. Banking practices will be pushed into the limelight to a greater extent.

Five years may be too short for this process to be felt, but there is likely to come a time when sustainability controls on financing and investment form the foundations for economic growth and development. Forward-thinking banks currently engaging with stakeholders, developing and using adapted screening processes and offering sustainable financial products, will be well positioned to benefit.

Beth Ambrose is a banking analyst at Innovest Strategic Value Advisors

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter