January 2004

Corporate Social Responsibility and Finance: Forging a path ahead?


If there is any sector of the economy more in need of a proper sense of corporate social responsibility than financial services, for sale it’s hard to imagine. A succession of governance scandals has followed successive poor financial service advice, store repeated concerns about pay levels and agency problems in private equity companies, the usual short-term thinking from stockbrokers, obsession with shareholder value in companies at the expense of wider stakeholder concerns by fund managers and a host of other CSR issues particularly relevant to the financial services industry. Quietly lurking in the background is the unsaid supposition that financial services companies are not playing as prominent a role in the development of corporate social responsibility as they might. Governments worldwide are concerned, even the overly business friendly Bush administration is making some halting steps.

What’s new?

The UK Government has not been idle. Last year UK Government support was announced for the development of new guidance on CSR and Reporting for the Financial Services Sector. These guidelines will be the first of their kind to be developed in the UK and are being supported by DEFRA, DTI and DFID.

They build on earlier ‘Guidelines on Environmental Management and Reporting for the Financial Services Sector’ and launched in November 2000 and prepared by the FORGE (Financial Organisations Reporting Guidelines) Group which was responsible for both. FORGE comprises a number of the UK’s leading financial services institutions, led by CGNU and including representatives from Abbey National, Barclays, Legal & General, Lloyds TSB, Royal Bank of Scotland, Royal & SunAlliance and Zurich Financial Services. The British Bankers’ Association and Association of British Insurers are also in on the act, whilst consultants from PwC Global Sustainability Services practice are acting as advisors to the Group. So, how does FORGE shape up to the challenge as the Group prepares to issue its third set of guidelines?

What are the key CSR and finance issues?

1. Key issues facing finance industry

First, there are those which are held in common with other industries:

· All the corporate governance issues, such as non-executive directors, board procedures, accurate accounting frameworks and rules, anti-corruption measures

· Accuracy of advertising (including fair choice of statistics to demonstrate performance)

· Support for corporate volunteering and a measure of charitable giving by the firm

· Non-discriminatory and sound personnel rules, such as anti-racism, anti-sexism and anti-orientation rules, good health and safety provisions, and trades union rights. As commented in Financial World in November 2002, “With banks such as Lloyds TSB and HSBC under fire for exporting jobs to India and the sector as a whole a target for trade union activity, it is unfortunate that this is not covered in more detail in the FORGE guidance

· Basic environmental reporting for the firm itself such as internal energy use and efficiency, use of public transport by employees, extent of air transport use, paper consumption and so on

· Honest and transparent CSR reporting on at least an annual basis. How should financial service companies report?

In the recent past, financial service companies have rejected the idea of mandatory reporting – for example Zurich Financial Services’ response to the EU Green Paper of 2001 was “CSR needs to be seen as part of protecting and enhancing a company’s reputation. This recognition is already developing and any compulsory schemes, whether at the EU level or locally, may actually stunt this natural growth and could result in a backlash”. Zurich’s comments were evidently taken seriously by the UK Government – reporting remains voluntary.

2. Key issues specific to finance industry

Second, there are those CSR issues which are specific to the financial services industry. A by no means exhaustive list:

· Lending criteria, including the extent to which social and environmental benefits should be factored into the business case, should be made within banks for project or business lending as well as the impact of Green Economics on the proposed discount rate for project financing. Some academics argue that environmental credit risk assessment (ECRA) is positive for shareholder value, due to improved customer satisfaction, loyalty and market share. However, there is no overwhelming evidence yet and the biggest offenders in energy and aviation continue to remain valuable major bank customers

· Acceptable levels of profitability from individual financial product lines

· Decision-making over bankruptcy and loan call-ins, including the relevance of employment implications for customer firms

· Investment guideline issues such as lifecycle investing (as in the Ethics Code of the Chartered Financial Analyst examination) and the extent of customer recourse (as in the Barlowe Clowes case in the UK and many others)

· Investment choice issues such as ethical investment, Islamic banking and development investment issues, in which organisations such as the World Bank also have an important role. On this the Association of British Insurers (ABI) has prepared guidelines on ‘Investing in Social Responsibility – Risks and Opportunities.’ Included in this category, for example, are issues of child labour and human rights by investee companies – but armaments companies and nuclear power remain two examples where disputes continue to rage.

· Insider dealing questions and the extent of information privilege

The ABI guidelines claim to provide ‘practical action plans for internal functions such as corporate strategy, risk management, human resources and procurement; and business units such as life assurance, fund and asset management, property portfolio management, retail banking, corporate investment and commercial lending and debt recovery services’, but their plans are expressed in very general terms and they do not provide ‘rules of certainty’.

Go it alone is best?

As early as 2000 the Co-operative Bank argued that the FORGE guidelines should advocate a broad environmental policy in relation to commercial activity. In addition, external verification of data and commentary is noted as an optional extra by FORGE, and not a basic requirement for best practice. The Co-operative bank concluded that there was little value in pursuing the FORGE guidance, preferring to continue ongoing dialogue with the Global Reporting Initiative and a consortium of European banks with regard to the development of an appropriate set of triple bottom line indicators for the financial services sector. In the long term, indeed, this may be a more promising line of approach and it is certainly important to bring this ongoing work to the attention of the mainstream of the UK financial services industry.

SMEs and finance industry

There are issues relevant to SMEs which apply to the financial services industry. The FORGE group is focussed on the concerns and the abilities to respond of large companies, but a significant proportion of financial services, such as life insurance sales, mortgage, investment and pension’s advice, is carried out either by small firms or independent advisers. The latter’s position with respect to CSR is hazy if it exists at all. As the burden of CSR on larger companies grows progressively, so the competitive advantage of smaller firms may increase, but the time is fast approaching when even medium-sized (10-50 employee) financial services firms will be expected to have active CSR programmes.

Ideas which CSR advocates have already proposed include:

· joining forces to launch local environmental improvements and job opportunities

· providing workforce time for educational initiatives.

These more generic activities will have to partner sector-specific initiatives such as:

· a real commitment to the oft-expressed idea that the product should fit the customer

· joint provision of insurance – as UK travel agents do through ABTA, for example

· dedication to the publication of reliable comparative information

· interfirm training

· integrated social and environmental screening of investment companies, including blacklisting should this be necessary

So it is straightforward to conclude FORGE is a step in the right direction, but far from a complete answer. Much remains to be done before the UK financial sector has a developed CSR function.

Many of these topics will be investigated in depth in MHCi’s Masterclass on CSR and the Financial Sector, to be held in March 2004 [see advert above]. The Masterclass will provide financial service companies with a thorough briefing on contemporary best practice, and show the major pitfalls which currently exist in the implementation of a CSR policy by a financial services company. The seminar will also contain the latest conclusions by CSR experts on what the next stages in CSR for financial service companies will be.

[contributed by Julian Roche with comments by MH and IH]