The Strategic Implications of Corporate Responsibility and Sustainability in the UK Banking Sector

by

Milagros Caminade Amacanin

2005

A Dissertation presented in part consideration for the degree of Master in Business Administration Corporate Social Responsibility

Abstract
This dissertation is an explorative study of the interface between sustainability and banking. As corporate responsibility has become the buzzword in the banking industry, banks have been urged to actively engage in contributing to sustainable development given their intermediate position in the economic system. The primary research objective of this study is to identify the various facets of the response of banks to sustainability issues. To achieve a more comprehensive understanding of the activities of banks in the UK in the field of sustainability, a multilevel analysis was chosen to cover the industry-wide initiatives and firm-level initiatives towards sustainability through a triangulation of research methods and approaches (desk research, content analysis of published reports, secondary data from existing surveys and case studies). Six high street banks were chosen as subject of study in an attempt to draw an industry mapping of sustainability initiatives. The sustainability issues in the UK banking sector have been shaped and influenced by relevant stakeholders such as the government, competitors and consumers. The

competitive structure of the UK banking industry prompted the major banks to strengthen their competitive edge by building up a strong brand and reputation in corporate responsibility. As the UK government seems to be bound to re-regulate the banking sector, banks are prompted be more compliant with government regulations particularly in the aspect of treating the customers fairly. Some of the recurring issues in the financial sector such as financial exclusion, uncompetitive products, low quality of service, financing of projects with questionable social and environmental impact have been emphasised by the government, interest groups and media. The industry-wide sustainability initiatives in the banking sector which aim to lessen or manage sustainability risks in lending and project finance are found to be not effective enough to significantly influence the banks behaviour as the principles are non-binding agreements and banks are bound to self-regulation and self-reporting. The banks which

publicly signified their aim to be leaders in the corporate social responsibility field, i.e. HSBC and Barclays, appear to be more pro-active in adopting and promoting the high profile initiatives such as the UN initiative and Equator Principles. However, these high street banks did not signify their support to the London Principles which would entail higher level of sustainability innovations, except for Co-operative Bank which is seen as more advanced in

its sustainability goals. The challenge remains in urging the banks to report with quantitative data the outcome of their adoption of these principles. The results of the sustainability assessment of the six banks indicate that majority of the banks have reached the preventive banking phase (Barclays, HBOS, RBS, Lloyds TSB) while only two banks (HSBC and Co-operative Bank) have reached the higher phase of offensive banking. This is consistent with the results of the study of Jeucken (2004) which indicate that most banks in developed countries have exhibited preventive banking as they are bound to follow government regulations to avoid further regulations. Banks are also under pressure from interest groups and media to manage their sustainability risks to avoid reputation damage. Except for Co-operative Bank, it appears that the banks have to aim higher in their sustainability goals and actions as it was found that they still lack product innovations that would stimulate sustainability among customers and society at large. Nonetheless, most banks have generally expressed their commitment to move forward with their sustainability objectives and goals as they are aware of the increasing expectation of their stakeholders and the society at large. It is imperative for banks to be serious in measuring, improving and reporting their sustainability goals and activities as they will eventually be bound to compete on sustainability benchmarking with industry competitors. The government may also need to strengthen its partnership with the banking industry and revisit its regulatory regime in the sector to ascertain the effectiveness of its policy directions in promoting sustainability in the banking sector.

Acknowledgement

I would like to thank Dr. Wendy Chapple for her insightful comments and helpful advice that have significantly influenced the shaping and finalisation of this research. I would like to extend my appreciation to Ms. Jo Healy, CSR Director of Co-operative Financial Services, for providing valuable information about the Co-operative Banks sustainability initiatives. I am grateful to my family for their unconditional love and prayers. I am bound to express my heartfelt gratitude to Calvin, for his unfailing love and support, for always being there for me. Finally, I say wholeheartedly my sincerest Thank You to God for all of His blessing and grace, for granting my prayers.

Contents
Chapter 1 1.1 1.2 1.3 Introduction ...................................................................................................... 5

Background of the research subject ........................................................................... 5 Research objective...................................................................................................... 6 Structure of the report ................................................................................................ 7 Literature review.............................................................................................. 9

Chapter 2 2.1 2.2. 2.3

2.4

2.5

Banks and their function in the economy................................................................... 9 Role of banks in sustainable development ............................................................... 10 Banking and sustainability: An analytical framework at industry level .................. 12 2.3.1 Defining the nonmarket environment of the banking sector........................ 14 2.3.2 CSR as element of structural change............................................................ 16 2.3.3 A contingent and consumer-centric framework of CSR .............................. 18 Banking and Sustainability: An analytical framework at firm level........................ 19 2.4.1 Strategic Dimension of CSR ........................................................................ 19 2.4.2 Phases of sustainable banking ...................................................................... 21 Discussion on Conceptual Framework ..................................................................... 23 Methodology ................................................................................................... 26

Chapter 3 3.1 3.2 3.3 3.4

Research framework................................................................................................. 26 Research Questions .................................................................................................. 27 Research methods and approaches........................................................................... 28 Limitations of the research....................................................................................... 29 Banking issues and sustainability ................................................................. 31

Chapter 4 4.1 4.2 4.3 4.4

Dynamics in the UK banking sector ........................................................................ 31 Impact of government regulations............................................................................ 33 Relevant banking issues ........................................................................................... 37 Chapter summary and discussion............................................................................. 38 Drivers and effects of industry-wide initiatives........................................... 40

Chapter 5 5.1 5.2 5.3 5.4

Nature and differences of the initiatives .................................................................. 40 Drivers and motives ................................................................................................. 42 Implementation effectiveness and challenges .......................................................... 43 Chapter summary and discussion............................................................................. 44

Chapter 6 6.1

Sustainability initiatives of major banks...................................................... 46

6.2 6.3 6.4

Strategic dimensions of CSR of major banks........................................................... 46 6.1.1 HSBC ........................................................................................................... 46 6.1.2 Barclays........................................................................................................ 48 6.1.3 HBOS (Halifax and Bank of Scotland) ........................................................ 51 6.1.4 The Royal Bank of Scotland Group ............................................................. 53 6.1.5 Lloyds TSB .................................................................................................. 55 6.1.6 The Co-operative Bank ................................................................................ 56 Drivers and motives of the CSR strategies of major banks...................................... 58 State of sustainable banking at major banks ............................................................ 60 Chapter summary and discussion............................................................................. 63 Discussion........................................................................................................ 65

Chapter 7 7.1 7.2 7.3

Role of stakeholders ................................................................................................. 65 Drivers of change ..................................................................................................... 66 Challenges in sustainable banking ........................................................................... 67 Conclusions and Implications ....................................................................... 68

Chapter 8 8.1 8.2 8.3 8.4

Conclusions .............................................................................................................. 68 Implications for management................................................................................... 70 Policy Implications for government......................................................................... 70 Implications for future research ............................................................................... 70

Bibliography .......................................................................................................................... 72 Appendix 1 Appendix 2 .......................................................................................................................... 76 .......................................................................................................................... 78

List of Tables

Tables
Table 1 Activities of depository and investment banks Table 2 Leading UK banks by ratio of pre-tax profits to market capitalisation (m and %) Table 3 Leading UK banks by dividend cover (pence) Table 4 Chronology of deregulation and re-regulation in the UK Table 5 Summary of the industry-wide initiatives Table 6 HSBC CSR initiatives Table 7 Barclays CSR initiatives Table 8 HBOS CSR initiatives Table 9 Royal Bank of Scotland CSR initiatives Table 10 Lloyds TSB CSR initiatives Table 11 Co-operative Bank CSR initiatives Table 12 Summary of integral sustainability scores for major banks

Page
10 31

32 34 41 48 50 52 54 56 58 62

List of Figures

Figures
Figure 1 Integrated Strategy: market and nonmarket component Figure 2 Banks internal and external stakeholders Figure 3 The structural change paradigm Figure 4 A contingent framework of CSR Figure 5 How strategy is linked to corporate social responsibility Figure 6 A typology of banking and sustainable development

Page
14 15 17 18 20 22 24 26 36

Figure 7 Analytical framework of CSR/sustainability in the banking sector Figure 8 Research framework Figure 9 Regulatory pressures in the UK financial sector

Chapter 1 Introduction
1.1 Background of the research subject Sustainable development and how business translates this into corporate social responsibility (CSR) initiatives have been the driving force in society and business today. The active participation from the financial service sector on sustainable development is very critical as the sector plays a key role in the global economy. As indicated in the 2004 European Conference on CSR: The impact of the financial services sector on sustainable development is by and large indirect, through its impact on company behaviours and strategies. On the other hand, in their intermediary role and the stake in large investment projects, the role of financial markets can also be pivotal in driving corporate sustainability (www.csr2004.nl/english/content/session/session5_3.html, accessed 20 March 2005). There have been an increasing number of banks that actively strive to reach a higher level of CSR (e.g. Co-operative Bank, HSBC, Barclays, Royal Bank of Scotland, etc.), incorporating CSR into its organisations and operations. However, sustainability initiatives and CSR actions still have to be taken or improved in dimensions related to: management (culture, structure, governance, vision, ambition, codes of conduct, organisation, policies, management information systems); financial products and services (incorporate CSR in procedures applied to existing core activities, develop and market new products and services, create sustainable development initiated innovations); social involvement and business operations (internal and external initiatives related to local communities, environment, labour, human rights etc.) Banks are said to increasingly engage in CSR as a response to pressures from various stakeholders which have urged banks to act in a socially and environmentally responsible manner. Banks also face pressures from government bodies, multilateral institutions, interest groups, consumers and the competitors themselves to take on the challenge of contributing to sustainable development. There are various industry-wide initiatives that promote sustainable actions among banks and these include the United Nations Environment Programme Finance Initiative (UNEP FI), Equator Principles, London Principles, and FORGE Group Guidelines, among others. These initiatives are meant to provide framework and guidelines for banks to adopt environmentally and socially-sound lending policies and financial products. But the question is up to what extent are these initiatives influencing the banks operations? What are the factors that drive the banks to follow and adopt these initiatives? There is also a concern

on whether the banks CSR initiatives are merely meant to ensure long-term profitability and brand reputation enhancement as compared to how well these initiatives are contributing to sustainable development. It would thus be interesting to analyse how the industry-wide issues and initiatives impact on the banks CSR initiatives and how individual initiatives particularly the financial products and services are contributing not only to the achievement of the strategic objectives of the bank but more importantly to sustainable development as well.

1.2

Research objective The problem field of this dissertation is to provide an understanding of the current role

of banks towards sustainability and to understand the various forces at the industry and firm level that influence the banks actions towards sustainable development. As indicated by Jeucken (2004), there is hardly any scientific research available in this research field and thus this study is explorative in nature. As there has been little known about this research field both theoretically and empirically, a practice-oriented research is being adopted. This would be most interesting from a societal perspective as the role of banks towards attaining a sustainable development path become more evident. Verschuren and Doorewaard (1999) identified five sub-categories within practice-oriented research projects: problem finding, diagnosis, design, change/intervention, and evaluation (cited in Jeucken 2004, p.23). The research study thus attempts to define and clarify the practical issues of sustainability in banking. In the change/intervention research category, the interventions and changes within banks and banking industry players towards sustainable development are examined and subsequently evaluate these interventions and changes. The main research objective of this study can be formulated as follows: The research objective is to identify the facets of response of banks in the UK to sustainability issues at the industry and firm levels by providing an understanding of the current activities of banks and other banking industry players in the field of sustainability. Specifically, the study aims to: a) define the sustainability issues facing the UK banking industry; b) examine the state of sustainable banking initiatives in the UK at the industry and firm levels; c) analyse the role of various stakeholders and other forces that influence sustainable banking; c) analyse the various drivers and challenges of sustainable banking at the industry and firm levels; and d) recommend strategies and policy directions to steer sustainable banking in the UK.

1.3 Structure of the report The dissertation can be divided into three parts: the first part is a comprehensive discussion of relevant theoretical frameworks and analytical frames of the research study (Chapters 2 and 3); the second part is an exposition and synthesis of the social images of sustainability issues and responses in the banking sector (Chapters 4, 5, and 6); and the third part is the analysis and discussion of the driving forces, inter-relationships, challenges and implications of these images as banks move towards a sustainable development path (Chapter 7 and 8). Chapter 1 provides an overview of the research subject that underlines the relevance of the research study and a conceptualisation of the main and specific research objectives. Chapter 2 is a synthesis of the existing literature on the role of the financial sector towards sustainable development as well as the various stakeholders and forces that influence the banks sustainability initiatives. This chapter also put together the relevant theoretical frameworks on CSR and sustainable banking where the analytical frames are derived. Chapter 3 defines the research questions and their relevance in understanding the role of banks towards sustainable development. The research methods and approaches and their strengths and weaknesses are also discussed as well as the limitations of the research. Chapter 4 discusses the historical and current issues of sustainability in the banking sector as well as the forces and stakeholders that shape these issues throughout time. This illustrates that past and existing sustainability issues have surfaced, evolved, and stood out in prominence due to various actions and responses of industry stakeholders such as government, competitors and consumers. Chapter 5 looks at the initiatives and responses at the industry level to address sustainability issues. The cross-cutting themes, forces, drivers and effectiveness of these changes and interventions are examined. Chapter 6 examines the specific initiatives of banks, unveiling their motives and strategies towards sustainability. The responses of banks to industry-wide initiatives are assessed to determine the impact and inter-relationships of industry-wide initiatives to specific banks. Finally, facets of sustainability among banks are assessed using the model developed by Jeucken (2004) to determine the sustainable development phase of banks. Chapter 7 reflects on the salient issues, themes and findings on the role of banks in sustainability as discussed in the previous chapters. The inter-relationships of issues and

responses to sustainability at the industry and firm-level are analysed as well as the challenges of moving forward sustainable banking in the UK. Chapter 8 highlights the essential points of the dissertation and suggests implications for management and further research as well as policy directions for relevant stakeholders.

Chapter 2 Literature review

This chapter provides a synthesis of the existing literature on the role of banks towards sustainable development and outlines the various stakeholders and forces that influence the banks sustainability initiatives. This chapter also put together the relevant theoretical frameworks on CSR and sustainable banking, highlighting their relevance, strengths and weakness in fully understanding CSR and sustainability issues and concepts. Towards the end, an analytical framework is derived from these conceptual frames to guide the subsequent discussions of this report.

2.1 Banks and their function in the economy The lending component of a bank results in money creation and thus, affects the total money supply of the economy. In extending credit, the Bank also indirectly affects the allocation of resources across sectors and may boost the growth of essential sectors of the economy. Moreover, banks are responsible of the large volume of money transactions in the market. Banks bridge the financial transactions across important players in the economy

such as the government, international and local businesses, households and thereby create deficits and surpluses in the process (Jeucken 2004, p55). Banks thus play an important role in an economic system particularly through the financial market. In micro-economic terms, the existence of banks can be explained by the transaction cost approach (information asymmetries) which has two overlapping approaches: informational transaction costs and the theory of delegated monitoring (Freixas and Rochet 1998, cited by Jeucken 2004 p59). The first approach is related to the intermediary role of banks where they bridge money surpluses and deficits in the economy. Lenders and borrowers let the bank do the asset transformation because banks are more capable of reducing transaction costs. On the other hand, the delegated monitoring theory suggests that banks have comparative advantage in monitoring the activities of the lenders such as screening projects, preventing opportunistic behaviour of the borrower upon completion of the project, and enforcing sanctions to borrowers that failed to comply with contractual obligations (Hellwig 1991, cited by Jeucken 2004 p60). Saunders (2000, cited in Jeucken 2004 p50) cited two types of financial institutions: depository institutions consisting of commercial banks, savings institutions, and cooperative banks and credit unions; and non-depository institutions such as securities market institutions,

investment institutions, contractual savings institutions and multilateral financial institutions. The succeeding discussions in this study will focus on the activities of depository banks and investment banks as detailed in Table 1:

Table 1: Activities of depository and investment banks Services and institutions Depository Institutions Commercial banks
Current or transaction accounts Savings products Consumer lending Small businesses lending Large businesses lending Mortgage Lending Security Insurance Security trading Asset management Source: Drawn from Jeucken 2004 p62 X X X X X X

Saving banks
X X X

Non-depository institution Investment bank

X X X X

2.2. Role of banks in sustainable development Sustainable development was initially defined in the 1987 report of the World Commission on Environment and Development (WCED) entitled Our Common Future, which states that: sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs (cited in Jeucken 2004, p.46). This means that the pace of economic and technological progress should consider the absorptive capacity of the ecological system for in the long-term, environmental degradation would weaken economic growth. A comprehensive plan of action, called Agenda 21, was established during the Rio de Janeiro Earth Summit in 1992 where it was confirmed that development and environment are interdependent. Agenda 21 suggested financial strategies to fund socially and environmentally responsible investments which should be a key concern of governments, corporations and development banks (Peeters 2003). The implementation of Agenda 21 was reaffirmed in the 2002 World Summit on Sustainable Development held in Johannesburg, South Africa. In the 2002 Summit, the understanding of sustainable development was broadened and strengthened and highlighted the linkages between poverty, the environment and the use of natural resources. Peeters (2003, p4) reported that: The Johannesburg Summits Plan of Implementation is highlighting business including not at the least the financial industry as a key player in many aspects to forward sustainable development. Financial institutions are encouraged to further take up their social

10

responsibilities, through their intermediary role in the economic system and through partnerships and product innovation. In Europe, the European Commission (EC) adopted the European Union Sustainable Strategy in May 2001 which identifies challenges and opportunities to the community. The EC pointed out that Sustainable Development must be placed at the core of the mandate of policy-makers. () as the success of any sustainable development strategy depends critically on changes in peoples behaviour, governments must do more to educate and inform businesses and citizens so that they are more conscious of the costs their current behaviour impose on others, and are aware of alternatives (cited in Saraiva 2004, p3). In recent developments, some authors argue that sustainable development would mean a change from the usual bottom line approach (economic/financial criteria) to a triple bottom line view (social, environmental and economic criteria). Elkiston (1997) and Jeucken (2001) cited that sustainable business would thus be defined as triple bottom line consisting of (cited in Jeucken 2004, p79): People (social value): value for and development of employees, customers, suppliers, NGOs, etc inside and outside the company; examples are workplace health and safety, employee retention, labour rights, human rights and neighbourhood improvement projects; Planet (ecological value): a sustainable level of use of natural resources and environmental burden, now and in the future, locally and globally; Profit (financial value): a profit level necessary to guarantee the continuity of the organisations provision of products and services over the long run.

Since the early 1990s, environmental issues particularly the environmental risks of bank lending has been the focused of research in the banking and sustainability literature. Jeucken (2004) found in its synopsis of literature that the most numbers of published articles in the field emphasised environmental risk and environmental risk assessment of bank lending. The area of environmental issues and sustainability is categorised into: risk product development, new markets, internal environmental care,

management,

communication and organisation, and ideological activities (Jeucken 2001). However, as the concept of corporate social responsibility has evolved among various industries and disciplines, the UK financial services industry has recognised the strategic relevance of CSR as source of opportunities and risks (Decker 2004). Thus, there has been an increasing pressure on banks to develop, deliver, and demonstrate appropriate CSR practice. Banks have increasingly recognised the pressure from its stakeholders including shareholders and investors to do business in a responsible and ethical manner. Many banks noted that environmentally-unfriendly projects can have an impact on share prices and brand 11

reputation (Cowe 2002). More customers increasingly inquire on the Banks stance on CSR and its financial code of conduct, as cited by Ian Mullen, Chief Executive of the British Bankers Association. Fund managers have increasingly give importance on the issue of ethical investment particularly when the Pension Act of 1995 was amended in July 2000 that requires trustees to cover CSR in their annual policy statements. In recent years, socially responsible investors collectively voiced concern on corporations to take into account global issues. For instance, a group of international investors (holding 4trillion of assets) supported the Carbon Disclosure Project which is pressing the worlds 500 largest companies to publish their greenhouse gas emissions (Ibid, p4). It would be important to know how the banks in the UK are responding to CSR and sustainable development issues. Are the banks responding to both environmental concerns and social issues? What are their strategies and motives in undertaking CSR and how is sustainability embedded in their products and services? The succeeding section attempts to build up a frame of reference to contextualise the what, why, how and when of CSR and sustainability initiatives and responses in the financial sector.

2.3

Banking and sustainability: An analytical framework at industry level In recent years, a growing number of corporate managers and business consultants

cited the business case approach or the significant financial payback in the long-term as the primary reason for engaging in CSR and social and environmental accounting (Brown and Fraser 2005). Some groups such as the World Business Council for Sustainable Development (WBCSD), Business for Social Responsibility (BSR) and Business in the Community (BITC) have helped promote this notion in the UK and abroad. Several studies have linked business ethics, corporate citizenship, corporate social responsibility, and good governance to the corporations financial performance. A research conducted by Verschoor, et. Al. (cited in Verschoor 2004) has shown that companies which seriously take into account their ethical, social and environmental responsibilities have stronger long-term financial performance than the other companies in the S&P 500 index. In another study among US companies, the relationship of strong corporate governance and market value added (MVA) of a company was examined where the unit of analysis for corporate governance was whether the leadership of the companys internal ethics and compliance programs met the standards for membership in the Ethics Officer Association (Verschoor 2004) . The study found that the mean MVA financial performance of companies with designated superior governance attribute was higher than those of the remaining S&P companies. To further validate these findings, similar 12

research was conducted by Webley and More (2003) among UK companies. It found that companies which show ethical commitment have generated more MVA than those without ethical codes. Business ethics thus had been emphasised as vital element for the companys future, as noted by Dr. Patrick Dixon (2005): Failure in business ethics is a real threat to the future of every corporation (http://www.globalchange.com/businessethics.htm, accessed 20 April 2005). However, it is noted that some CSR researchers indicate that there is still no conclusive evidence on the direct link of CSR and strong financial performance as other empirical studies have shown no significant relationship between the two (cited in Peeters 2004). On the other hand, the dominance of the business case approach has drawn critique from different groups which expressed concern that the business case discourse appears to be a case of powerful elites steering society in a direction which solidifies their own dominance (Brown and Fraser 2005, Owen 2004). Some criticise the business case approach as mere corporate image-enhancing exercise whereby organisations engage in stakeholder dialogue for the purpose of voluntary self-reporting on their trustworthiness as part of a reputation building process (Owen, et.al. 2001, p.275). In contrast, the stakeholder-accountability approach is being advocated which adhere to the notion that corporations need to be more transparent and accountable in managing the conflicting interests of various stakeholders in the society to maintain its social license to operate. For this view, sustainable

development is unlikely to be compatible with the neoclassical economic paradigm and so there is always a concern for eco-/social justice aspect of sustainability (Brown and Fraser 2005, p11). In this respect, there is a call for corporations to be more transparent and accountable in their stakeholder engagement and respond adequately to the varying interests of stakeholders. Donaldson and Lee (1995) indicated that the ultimate managerial

implication of the stakeholder theory is that managers should acknowledge the validity of diverse stakeholder interests and should attempt to respond to them within a mutually supportive framework, because that is a moral requirement for the legitimacy of the management function (p.87). The business case for CSR and stakeholder engagement has been promoted widely in the financial sector in the UK. It would be important to examine the extent of CSR and sustainability initiatives in the sector and to analyse the drivers and catalysts at the industry level. Mapping out the stakeholders in the sector and the major forces that define the structure and dynamics in the industry would be a relevant approach.

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2.3.1

Defining the nonmarket environment of the banking sector Baron (1995) has emphasised the importance of aligning the firms strategies and

competencies with both its market and nonmarket environments, as shown in Figure 1, in order to improve the firms overall performance. The author argues that the most effective means of integrating nonmarket and market strategies is to focus both on specific nonmarket issues that affect market threats and opportunities and on nonmarket actions as complement to market actions (Baron 2003, p.33). The nonmarket environment of the firm consists of the social, political and legal arrangements that affect the firms interactions with relevant markets. This can be compared to a situation analysis (political, legal, economic, social and technological components) in the strategic management process (Dobson, et.al. 2004). However, Baron further dissects the interrelationships in the nonmarket environment as characterised by four Is: issues, institutions, interests and information. Figure 1. Integrated Strategy: Market and Nonmarket Component (Baron 1995)
market (competitive) analysis MANAGEMENT market strategy process nonmarket strategy process nonmarket analysis

Integrated Strategy
implementation coordination market environment nonmarket environment

Barons framework highlights the importance of defining and managing critical issues, interests and institutions affecting or influencing the nonmarket environment of the UK banking sector. In analysing the non-market environment, it would be necessary to determine the various stakeholders involved and the prominent issues and interests with regard to sustainability in banking. Freeman (1984) defined a banks stakeholders into internal (inside the gray zone in Figure 2) and external stakeholders (cited in Jeucken 2001). It can be viewed that the external stakeholders such as government bodies, media, NGOs, and competitors are critical institutions in the non-market environment of the banking industry. The government has a critical role in laying down the preconditions and regulations of the banks operations

14

and the government likewise can set enabling policies to promote sustainability in banking. On the other hand, the collective sentiment and action of consumers and general public which can be fuelled by media and interest groups advocacy can strongly affect the banks actions toward sustainability. For instance, ABN AMRO was heavily criticised for its involvement in destructive mining practices in West Papua New Guinea (Jeucken 2004). Another example is the scrutiny directed by international NGOs such as the World Wildlife Federation and Friends of the Earth to the financiers (including BP and Barclays) of the 800-mile BakuTbilisi-Ceyhan oil pipeline which runs through Azerbaijan, Georgia and Turkey and when completed will be an important source of oil by western countries (Hoare 2004). The project was opposed by environmental groups as the pipeline will cut across nationally protected wetland area and will cause displacements of local population. While the financing institutions led by BP has assured the public that the environmental and social concerns have been addressed, the campaign by environmentalists against the project has continued holding the banks accountable for any economic, social and environmental disruptions caused by the project (Baku-Ceyhan Campaign 2005). Figure 2. Banks internal and external stakeholders
customers suppliers competitors

BANK
judiciary board of directors

shareholders other financial institutions

employees management of business units

international governmental organisations national and local government

NGOs

media society at large

Source: Jeucken 2001, p64

Baron suggests that the nonmarket factors can be considered as the sixth force of Porters five forces and this would involve assessing the threats arising from government action, interest groups, activities, and public concerns. However, the weakness in this

approach is that the nonmarket strategy may not be integrated in some aspects of the market

15

strategy such as supply chain management. Nonetheless, Barons framework can aid in analysing the nature of the issues and interests in the financial sector at the system, industry and firm-level and how the financial institutions are integrating these nonmarket components in their overall strategy.

2.3.2

CSR as element of structural change Barons framework on the nonmarket environment of firms can be viewed as

consistent with the argument of Decker (2004) that corporate social responsibility, as a response by businesses to societys concerns, can be taken as an element of structural change which affects the firms strategy and the industry structure in the end. The author particularly refers to the structural change in the UK financial services sector brought about by industryspecific and firm-specific dimensions of CSR. Structural change is defined by Llewellyn (1990) as: structural change is about how the basic functions of a system are performed by markets and institutions, the business structure of component institutions and markets and changes in the markets and institutional mechanisms through which financial intermediation and other services are performed (cited in Decker 2004, p.718). To illustrate further the case of CSR as an element of structural change, Decker (2004) posits that structural change can refer to a disturbance, shock or discontinuity to the relatively stable elements in firms operating environment that affects the prescription for maximisation of the objective function of firms and leads them to alter their behaviour in order to realign and redefine their position within their operating environment (Ibid). The justifications for considering CSR as an element of structural change are as follows: a) as the CSR concept has evolved, firms have to respond as they interact with market forces such as consumer demands and powerful buyers; b) CSR, like regulation, can be perceived as a response to certain problems in the functioning of the financial system; c) CSR has potential to be a source of competitive advantage or a risk factor for firms; and d) the regulations impose on banks makes CSR an inherent part of banking system. Decker (2004) argues that the structural change paradigm can be used to illustrate the impact of CSR as an element of structural change which is depicted in Figure 3. The structural change paradigm has synthesised relevant theories of structure-performance relationships in the industrial economics literature which include: the structure-conductperformance (SCP) framework, the differential efficiency theory, and the theory of contestable markets. The SCP framework explains how the industry structure affects firm performance while the differential efficiency and contestable markets theories relate to the 16

effect of comparative advantages and real threat of competition to firm behaviour (Sloman and Sutcliffe 2001, Chap.11.4). In the banking industry, the firms performance is not

merely influenced by industry structure but more of the firms competitive strategies in response to environmental opportunities. If the firm has appropriate internal resources to match environmental opportunities, the firm will eventually have competitive advantage and its strategies will affect market structure. Thus, the defining element in the evolution of banking industries in response to structural change is firm behaviour (Decker 2004, p.720).

Figure 3. The Structural Change Paradigm

Industry Structure

Nature of Competition

Firm Strategy

Firm Performance

Regulation CSR
Source: Decker 2004 p720

Firm Specific Resources

One structural variable affecting the UK retail banking is government regulation and moral suasion scheme for mainstream banks to be more socially-oriented. One CSR implication emanated from the structural shifts in the retail banking sector in the 1980s and 1990s where the investor or shareholder owned-banks dominate the industry while the member-owned and social-oriented financial institutions such as credit unions, retail cooperatives, mutual insurers and building societies have become weak due to competitive pressures. The UK financial services have concentrated more on serving the more affluent clients that would enable investors to yield higher returns of investments and thereby marginalising the less affluent consumers. The UK government thus adopted a policy that encourages mainstream financial providers to address this issue of financial exclusion. By launching the Universal Banking Programme, the government banks to either set up basic accounts as part of their existing product range or participate in the Post Offices universal bank (Decker 2004, p.722). Although there is no clear cut regulation, the governments

17

formal communications to the British Banking Association regarding its expectations of banks to meet their social obligations have affected the banks behaviour and strategies. Deckers framework on structural change brings out relevant questions such as how government regulation and policies are affecting and influencing the sustainability stance and strategies of banks? Is the government a catalyst for sustainability in the banking sector? What are the various sustainability responses of banks and how is the nature of response affecting the competitive structure of the industry?

2.3.3

A contingent and consumer-centric framework of CSR While the foregoing two frameworks highlight governments action and industry

structure as drivers of CSR and sustainability in the industry level, Bhattacharya and Sens (2004) conceptualisation of CSR highlights important dimensions such as the impact of consumer perception and competition to a firms CSR initiatives. Apart from the usual notion that CSR strategy should consider the firm-specific attributes, the framework depicts the importance of understanding how and why consumers respond to CSR initiatives and the extent of CSR activities and marketing strategies of competitors. The framework expands the analysis by defining the moderators which have multiplier effects on the internal and external outcomes of CSR and these pertain to varying attributes of a company, consumers and competition. Example of multipliers that would lead to internal outcome for the company and the consumer would be the marketing strategy of the company, companys reputation, the distinctiveness and fit of the CSR initiative, the overall attitude of consumers to a particular CSR issue.

Figure 4. A contingent framework of CSR Company Benefits to Company CSR Initiatives Benefits to Consumer Benefits to Issue/Cause

Consumer

Competition

Source: Bhattacharya and Sen 2004, p.11

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The above framework implies certain implications for CSR strategy which may be useful in analysing the CSR in the financial sector. At the industry level, it underscores the need to understand the varying attitude and reaction of the consumers to certain CSR issues and initiatives and the degree of competition within the firm where CSR can be strengthen a firms competitive edge. It is found that consumers are more sensitive to negative CSR information than to positive CSR information. On the other hand, the consumers lack of awareness of a CSR issue or initiative hinders them from responding to a CSR programme. Thus, an effective marketing strategy linking CSR to the quality of the banks product and services may be needed.

2.4 Banking and Sustainability: An analytical framework at firm level A bank as an intermediary between borrowers and lenders of money has an important role to play in promoting sustainable development. Banks have comparative advantage in information about market trends, and economic and political factors and thus, make them capable of assessing environmental and financial risks in their lending products and services. In performing their intermediary function, banks reduce information asymmetry between different players in the market. In this respect, banks can apply interest rate differentiation in order to steer and promote sustainable development (Jeucken 2001). It would thus be interesting to examine whether banks CSR and sustainability initiatives are contributing to sustainable development or are these mere expression of the business case model to gain competitive advantage and long-term profitability. The emerging question is - are the banks CSR initiatives treated as means to an end which is increased long-run profitability or should banks treat sustainable development initiatives as an end in itself as espoused by governments, interest groups and society in general? There are relevant frameworks that would guide in assessing the sustainability and CSR strategy of banks as will be discussed in this section. 2.4.1 Strategic Dimension of CSR Business case proponents argue that CSR should be part of the companys core business activity to create value for the firm (Brown and Fraser 2005). Burke and Logsdon (1996) provide a sound framework on the strategic dimensions of CSR in order to determine the value-creation process for the company. The specific CSR initiatives of a firm can be

examined based on the following strategic dimensions: centrality, specificity, proactivity, voluntarism, and visibility. These strategic dimensions can be a useful tool to assess the

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relevance and motives of the CSR initiatives of a firm. For instance, it raises a question of whether the CSR programme is closely fitted to the firms mission and objectives, thereby resulting in value-creation for the firm. In some sense, the model also depicts the business case and risk management outlook of CSR as the authors suggest that CSR projects should be selected based on the opportunities, threats and associated risks for the firm. In doing so, the firm has to identify the critical stakeholders in the achievement of the firms objectives and determine socially valuable CSR policies and programmes that would address the needs and interests of these stakeholders. One important aspect of the model which is worth noting is that it highlights the proactive aspect of CSR over the often reactive stance of some firms.

Figure 5. How strategy is linked to corporate social responsibility strategy defined as goals, mission, objectives competitive advantage plan process pattern strategy dimensions centrality strategic outcome

specificity Value Creation

proactivity voluntarism visibility

Source: Burke and Logsdon 1996, p.497

The above framework draws out relevant questions on the motives and strategies of banks in their sustainability initiatives, such as: are the banks CSR initiatives integral to its core goals and objectives and thus provide competitive advantage? Are the banks CSR initiatives mere reactive responses to government and interest group pressures or consumers demand?

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2.4.2

Phases of sustainable banking Jeucken (2001) wrote in his book Sustainable Finance and Banking the so-called

Four Phases Theory in which he distinguished the development of the bank on its way to sustainable development in four phases: defensive banking, preventive banking, offensive banking and sustainable banking. In the first phase, the bank contests every government measure with respect to the environment since its direct or indirect self-interest is threatened. Environmental care is seen as an added cost. While banks in developed countries do not officially hold this position, certain individuals in banks still maintain this stance. In this phase, there is ignorance of sustainability issues as can be seen in most banks. In the preventive phase, the bank has identified the potential costs savings from sustainable development. These costs savings are mostly related to internal environmental care initiatives of banks such as reducing usage of energy, water, and paper and business travels. On the external aspect, banks look at limiting the losses from environmental and social risks associated in their products such as savings and loans. It is said that most banks in developed countries have reached this stage largely due to environmental laws and regulations relating to banking activities. Examples of these initiatives are those of NatWest Bank, Bank of America and Deutche Bank which have used more focused investment and credit policies such as environmental control lists for credit risk assessment (Jeucken 2004). In the offensive phase, the bank sees new opportunities in the marketplace, both in the area of specific products and new markets such as environmental technology. Examples of bank initiatives include the development of environmental investment funds, financing of sustainable energy, and the signing of the UNEP Banking Charter by organisations such as Bank Austria, Kenya Commercial Bank Group and Salomon Inc. Banks in this phase also officially communicate their sustainable stance to the public (for example through green marketing) as can be seen in the environmental reports of ABN AMRO, Bank of America and Barclays Bank. In the final phase, sustainable banking means that a banks internal activities meet the requirements of sustainable business (i.e., similar with industrial companies) and in which its external activities (such as lending and investments) are focused on valuing and stimulating sustainability among customers and other entities in society (Jeucken 2004, p134). In this phase, banks take a step further by having a vision for sustainable development and clearly defining its role in society to achieve that vision. The bank will put more emphasis on the highest sustainable rate of return even if it does not yield the highest financial rate of return (Jeucken 1998). Initiatives such as debt-for-nature swaps, micro-credits, and other 21

innovations within a bank such as Den Nordske Banks directed tariff differentiation, UK Cooperative Banks initiative not to invest in socially or environmentally damaging sectors can be considered as indicators that a bank is committed to sustainable development although these are not pure forms of sustainable banking. Figure 6. A typology of banking and sustainable development

Source: Jeucken 2004, p.132 As to the question of why companies pay attention to sustainability issues, Van der Woerd, Oosterhuis and Verbruggen (1990, cited in Jeucken 2004 p.117) cited three reasons: first is the existence of external business drivers such as new market opportunities, image improvement, comply with government regulations, improved relations with society/NGOs; second is the internal business drivers such as lower risks, lower costs, higher revenues, cheaper finance, and higher staff commitment; and third is the personal motivation based on ideological principles and commitment. Jeuckens framework can be used to analyse the extent of sustainability practiced at various banks and draw lessons on the differences and similarities in their sustainability strategies and practices. Jeuckens model was initially used in the analysis of the

environmental aspect of sustainability among 34 banks, for instance by examining the environmental policy statements of banks. Peeters (2003) noted that Jeuckens listing of proactive banks is based on a limited scope of indicators on the sustainability responsibilities of financial institutions and thus may not be consistent with the analysis of CSR research groups. Nonetheless, Jeuckens developmental paradigm depicts the changing role of banks in the society. As indicated by Moon (2003, p273), the model points to imperatives within business which encourage a more benign view of business-society relations not simply through

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community involvement the traditional philanthropic impulse but also through total business operations.

2.5 Discussion on Conceptual Framework The CSR and sustainability frameworks presented in the above sections offer varying insights and approaches in analysing the what, how, why and when of CSR and sustainability in the banking sector. It can be said that there are more complementation and consistency than contradictions in the basic assumptions and propositions among the frameworks. The frameworks of Baron (1995), Bhattacharya (2004) and Decker (2004) can be used to analyse the nature and dynamics of CSR/sustainability at the industry level highlighting the issues and drivers in the nonmarket environment such as government regulation and collective sentiment of the public/interest groups as well as other competitive market forces such as competitors and customers. Both the Bhattacharya and Decker models have emphasised the impact of competition on the extent of CSR approaches and initiatives and how these subsequently influence the firms performance. While Decker emphasised governments regulation and CSR-related policies as driver of CSR affecting industry strategy and performance Bhattacharya has highlighted consumers perception and response to the CSR initiative of firms vis--vis their competitors. These notions are consistent with the idea of mapping the nonmarket environment dimensions in an industry as derived from Barons framework. While the above three frameworks also depict CSR strategies at a firm-level, it is deemed more appropriate to use in this report the frameworks of Burke and Logsdon (1996) and Juecken (2001) in analysing CSR/sustainability motives and strategies of the firm. Burke and Logsdon framework has characterised specific dimensions of CSR initiative such as being integral to the core objectives and goal of the firm thereby contributing to value-creation. The framework, however, focuses more on value-creation for the firm itself and thus, Bhattacharyas dimensions of internal and external outcomes provide more clarity on the aspect of strategic outcome. On the other hand, Jeuckens four phases theory seems to be

consistent with Burke and Logsdons (1996) framework as it posit that banks reaches at the sustainable phase when its core mission and values specifically indicates its sustainability stance and how these values are translated and embedded into the products and services of the banks. Jeuckens notion of sustainable banking is anchored on product innovation and management/process innovation in banking operation. The essential element, however, in

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Jeuckens framework is that it raises the level of CSR/sustainability initiatives of banks beyond the business case approach as banks are expected to have their own vision of sustainable development within their sphere of business influence. This notion was indirectly asserted by Jonathan Porritt, Programme Director of the Forum for the Future when he argued that: The conventional business case for sustainable development is based on the precept that it is government that sets the legal and fiduciary parameters within which companies operate, and then its up to those companies to decide how far beyond those parameters they can go without jeopardising shareholder value. But theres an extra dimension to that business case that deserves greater attention: how active are those companies in lobbying proactively for change (in terms both of public policy and consumer behaviour) to accelerate the transition to a more sustainable economy? (Co-operative Financial Services Sustainability Report 2004, p.99) The essential elements of the above frameworks can be categorised into industry-level and firm-level. At the industry-level, the drivers of CSR and sustainability are being

emphasised and these include the government regulation/policies, level of competition in the industry, consumers perception, and interest groups advocacy. At the firm-level, what is emphasised is how the firm reacts or responds to these various forces at the market and nonmarket environment. The moderators for the firms action can be the nature of competition, the companys internal resources and capability, consumer demand and government pressure or incentives. Figure 7. Analytical framework of CSR/sustainability in the banking sector
nonmarket environment Sustainability/ CSR issues Industry initiatives /responses

Government Competitors Consumers interest groups

Competitors Consumers Company Government

Firm initiatives /responses

Outcome: Company Consumers Industry/ competition

Given the above frameworks, the key questions that can be asked are: what are the key drivers of CSR in the banking sector? How is the government, competitors and consumers reacting or acting on sustainability in banking? What is the impact of the industry structure to

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firm behaviour and vice versa? What is the nature and extent of CSR and sustainability initiatives of banks? Are the banks responding to industry-wide sustainability issues/pressures or are the individual banks have their own views and initiatives of sustainability? What are the gaps between industry-wide CSR/sustainability issues and stance and firm-level CSR stance and initiatives?

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Chapter 3 Methodology
This Chapter sets out the research methodology and design. Firstly, the research strategy and framework will be presented. Secondly, the research questions will be defined. Thirdly, the research methods and sources will be discussed and finally, the limitations of the research will be identified. 3.1 Research framework The research strategy adopted in this report follows a deductive and inductive track as adapted from a model by Ragin (cited in Jeucken 2004 p.29). Deduction involves the process of reaching specific results from generic ideas or theories (Ibid p.30). It involves a derivation of analytical frames from these generic theories to create images of social realities. As shown in Figure ___, relevant theories and frameworks such as banking theory, profit maximising theories of the firm and competitive strategies are expounded to contextualise the potential role and strategies of banks towards sustainability. The existing CSR and sustainability theories are also used to develop an analytical framework that would depict the various CSR approaches and the forces that drive the issues and responses to sustainability. These salient features of these frameworks have been synthesised to develop an analytical framework for this study as presented in Chapter 2.

Figure 8. Research framework

FRAMES Banking theory (Ch. 2) Profit maximising theories of the firm (Chs. 2 & 4) Competitive strategy (Ch. 2) CSR approaches and frameworks (Ch. 2) Banking and sustainability framework (Ch. 2) Analytical Framework (Ch. 2) IMAGES Sustainability issues in banking (Ch. 4) Impact of industry competition (Ch. 4) Impact of government regulation (Ch. 4) Industry-wide sustainability initiatives (Ch. 5) Firm-level sustainability initiatives (Ch. 6)

Discussion and analysis of initiatives of banks towards sustainability (Ch. 7)

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Meanwhile, the inductive track starts from evidence or data from the field that through synthesis result in images of the phenomena studied (Ibid p.31). In this research study, the various CSR initiatives and elements of sustainability present in banks operations are examined to define and validate social images on the nature and extent of banks initiatives towards sustainability.

3.2 Research Questions The banking sectors impact on sustainable development can be indirect through its intermediary role in financing investments of its clients. However, a bank can significantly influence the activities of its clients through its lending policies and procedures. Banks policies, products and services can be influenced by industry stakeholders such as government, competitors, international institutions and consumers. Nonetheless, the external sustainability performance of banks cannot easily be measured and thus a qualitative research approach is more relevant. Given the research objective and research framework, the main research question is: Which sustainability issues exist for banks in the UK and what have been the responses of the banking industry and specific banks? This question encompasses other areas as derived from relevant theoretical frameworks discussed previously and thus, sub-questions have to be tackled such as: a) Which overall sustainability issues do banks face in the UK and what are the relevant factors or forces that shape sustainability issues in the UK banking sector? This is relevant as sustainability issues may arise in varying forms and degree depending on the pressures from relevant stakeholders such as government, media, competitors and consumers, among others. This question has been partly dealt with in Chapter 1 and will be fully dealt in Chapter 4. b) What analytical framework can be developed to provide an understanding of the dynamics of the banking industrys initiatives and the responses of banks to sustainability issues? This question has been dealt with in Chapter 2 and will be revisited in Chapter 7. c) Which threats and opportunities related to sustainability exist for banks externally (i.e. in respect of their products) and internally)? This question will be dealt with in Chapter 4. d) What have been the initiatives at the UK banking industry to address sustainability issues and how do they influence specific banks? This question will be dealt in Chapter 5 and will emphasise the cross-cutting themes, driving forces, and effectiveness of the initiatives.

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e) What are the strategic dimensions of the CSR and sustainability initiatives of major banks? This question aims to deconstruct the nature and extent of responses of banks to sustainability to determine whether the CSR or sustainability initiatives are meant more to enhance the competitive advantage of banks and may possibly limit their real contribution towards sustainable development. The driving forces and motives of the individual initiatives and the banks extent of adherence to industry-wide initiatives shall be examined. This question is dealt with in Chapters 6 and 7. f) What is the sustainability stance of most banks in the UK? This question aims to achieve a deeper understanding of the banks responses towards external pressures to sustainability (e.g. in terms of product and process innovation to promote sustainable development). This will be dealt with in Chapters 6 and 7. 3.3 Research methods and approaches Being an explorative study, one objective of this dissertation is to develop recommendations and additional questions for further research. It is important to develop a thorough understanding of the variables and inter-relationships affecting the issues, responses and changes at the micro and meso level. Thus, a multilevel research approach has been chosen as the variables and dynamics at the industry level have an impact on the behaviour and responses of specific firms. There is also a difference on the realities and perspectives at the industry and firm-levels. This is particularly relevant in dealing with the subject of sustainability in the banking sector as a number of industry-wide sustainability initiatives have been promoted which may not necessarily reflect the realities at the bank level. The first parts of this dissertation thus involve an analysis of issues and responses at the banking industry and the latter part is an analysis of sustainability initiatives of six major UK banks. The six major banks were selected based on their relative market dominance and their active engagement on sustainability as indicated in their publicly stated policies and programmes. As the objective of this dissertation is both of an explorative and descriptive in nature, the interface among concepts, frameworks, social images and constructs are built through a triangulation of sources and methods including desk research on existing literature, document analysis of published reports, content analysis of existing surveys and published case studies. A thorough analysis of existing literature is necessary to appropriately develop an understanding of the concepts and frameworks on the role of banks towards sustainability. One advantage of desk research is that it allows the researcher to gather comprehensive materials on the field of study and subsequently screen and categorise existing materials into specific sub-areas to provide better understanding of the field. In this study, for instance, a preliminary research of existing literature has revealed that most of existing materials about banking and sustainability have focused more on environmental risk management and have 28

focused on few pro-active banks such as the Co-operative Bank (Jeucken 2004). There is thus a need to map out sustainability initiatives and CSR policies and programmes both at the industry and specific bank level to determine the extent of sustainability activities in the sector. Existing theories and frameworks on CSR and other related fields and sustainable have to be synthesised to develop an analytical framework that would provide a better understanding of this phenomenon. As indicated earlier, what lacks is an insight on how far sustainability has instilled throughout the UK banking sector. This dissertation attempts to provide an industry mapping of sustainability initiatives by analysing six major banks in the UK. The published sustainability reports of the six banks were analysed using qualitative research approaches such as discourse analysis, introspection, critical and deconstructive reading of texts. These approaches have been effective in unveiling multiple meanings of texts and statements in the report. Recent surveys and reviews conducted by the UK government, multilateral

institutions such as World Bank and other relevant institutions were utilised to provide evidence on the social images and constructs presented. In assessing the specific initiatives of the six banks, three general steps were undertaken. The first step is the assessment of the strategic importance of the initiatives in the marketplace, workplace, environment and community in achieving the goals of the bank. The second step is a cross-sectional analysis of initiatives across banks where similarities in product and process innovation were highlighted. The third step is assessing the sustainability dimension of each initiative on the sustainability scoring method developed by Jeucken (2004) to determine the sustainability path of each bank. As Jeuckens model had been more focused on the environmental dimension of sustainability, the criteria have been expanded to include social and economic indicators.

3.4 Limitations of the research While the published sustainability reports and recent surveys of relevant institutions have provided comprehensive and organised information on the subject field of study, there were specific data that would need to be updated or expanded on to better understand their strategic direction and value towards sustainability. For instance, most of the banks indicated in the report that their environmental management system (EMS) is based on the ISO 14001 standards but there is no explicit statement whether it is ISO-accredited. There were also banks that were not explicit in reporting their environmental loans and other products that promote sustainable development as some banks emphasised on the customer care aspect of 29

their CSR strategy. On the other hand, some banks indicated their involvement in renewable energy investments but it was not clear whether these were purely a banks initiative or guaranteed by the government which would lessen the risk for the bank. Thus, the analysis of the specific initiatives of banks was limited to the data presented in the banks sustainability reports and other relevant materials on the subject. Due to time constraint and non-availability of bank officers initially contacted, the planned interviews with relevant bank officers did not push through which would have been beneficial in providing more clarity and updated information on the banks sustainability activities. Nonetheless, the sustainability reports were relatively comprehensive as most banks have improved their social and environmental reporting throughout the years, except for the Royal Bank of Scotland (RBS) which first published its corporate responsibility report in 2003. The sustainability reports were relatively up-to-date which were published in 2004 except again for RBS which has not yet published its 2004 report.

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Chapter 4 Banking issues and sustainability

As indicated in Chapters 1 and 2, there has been an increasing pressure on banks to act in responsible manner. The sustainability issues in banking are shaped and influenced by the industry stakeholders as well as the economic, political and social forces in the country. This chapter aims to discuss the past and current issues of sustainability in the banking sector as influenced mainly by the following factors: the competitive structure of the UK banking industry and the changing trend of the UK government regulation in the banking industry. Specific issues in the banks lending operations as highlighted by prominent stakeholders shall also be examined such as the government, interest groups and consumers. What will be highlighted in the succeeding sections is that the industrys competitive structure and the UK governments deregulation and re-regulation of the sector pose significant threats as well as opportunities for banks to maintain their strategic position in the market.

4.1

Dynamics in the UK banking sector A few number of large UK banks are well-positioned in the UKs corporate world. In

2002, it was reported that five of the largest banks in the UK are among the UKs top 10 largest companies by market capitalisation (Key Note Report 2002). The big five include HSBC, Royal Bank of Scotland, Lloyds TSB, Barclays and HBOs and have earned pre-tax profits of more than 1Billion in 2001 as indicated in Table 2. The mean ratio of pre-tax

profits to market capitalisation among the largest banks and insurers is 8.3. This means that those banks with higher figures such as Barclays, HBOs and Abbey National would have to work harder to maintain their company value as compared with HSBC which maintains a good market value as well as with Lloyd TSB and RBS whose ratios are closer to the mean value. Barclays, however, has been able to maintain the highest dividend cover ratio which can be attractive to investors.
Table 2. Leading UK Banks by Ratio of Pre-Tax Profits to Market Capitalisation (m and %), Years Ending 31st December 2000 and 2001

A
Company Abbey National Alliance & Leicester Barclays HBOS Royal Bank of Scotland 1,975 447 3,496 1,715 3,373

B
1,938 396 3,608 2,630 4,275

C
14,172 4,050 37,917 28,390 47,811

D
13.7 9.8 9.5 9.3 8.9

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Lloyds TSB HSBC

3,886 6,544

3,550 5,497

42,104 75,398

8.4 7.3

A pre-tax profits in 2000 (m) B pre-tax profits in 2001 (m) C market capitalisation in 2001 (m) D ratio of pre-tax profits to capitalisation in 2001 (%) Halifax and Bank of Scotland merged to trade as HBOS in September 2001, therefore figure only relates to Halifax Halifax and Bank of Scotland merged to trade as HBOS in September 2001, therefore figure only relates to Bank of Scotland Source: Key Note Report November 2002

Table 3. Leading UK Banks by Dividend Cover (pence), Year Ending 31st December 2001

A
Barclays Royal Bank of Scotland Abbey National HBOS Alliance & Leicester Lloyds TSB HSBC 36.7 66.3 84.3 45.9 56.6 44.8 39.9

B
16.6 38.0 50.0 28.0 36.3 33.7 33.0

C
2.2 1.7 1.7 1.6 1.6 1.3 1.2

A FRS3 earnings per share (pence) B dividend per share (pence) C ratio dividend cover Source: Key Note November 2002

The HSBC remains to be the largest banking group based in the UK while the RBS group is the second largest. Barclays and HBOs have overtaken Lloyds TSB which used to be UKs third-biggest bank. These main high-street banks lead the provision of financial

services to the UKs professionals and managers. On the other hand, the Alliance and Leicester has been catering more to lower-income customers while Abbey is targeting customers on moderate incomes (Key Note 2004). Aside from segmenting target clients based on income-class, banks are said to market their products based on the strength of their brand. Thus, banks marketing strategy is not more on promoting specific products but more on brand development through emphasising important brand values such as trust, confidence,

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expertise and service reputation (Ibid). These core values are normally perceived as the core competence of banks and thus, cannot be easily replicated by other competitors such as major retailers (including TESCO, Sainsburys and Marks & Spencer) whose retail banking business is seen as a sideline and not as their core expertise. That is why TESCO and Sainsburys

have to tie up with RBS and Bank of Scotland (now HBOS) in providing financial services. The banking industry remains highly competitive with the six high-street banks continuing to maintain their competitive position. The industry seems to be not perfectly contestable as new entrants cannot easily penetrate the market. This trend seems to be consistent with the findings of previous studies on contestability of the UK banking industry. A study by Molyneux et. al (1994) found that a monopolistic competition existed in the UK banking market (cited in Ashton 2001, p.122). A consistent result was indicated in the study by Ashton (2001) where perfect competition is rejected for all sample of eight UK retail banks between 1992 to 1997. Given that competition is concentrated among few large banks with a seemingly non-contestable market, it would be noteworthy to examine whether CSR or sustainability plays a pivotal role in developing the brand and reputation of the banks to enhance differentiated offering in the market and secure their competitive market position. It would be critical for banks to create product and services differentiation as consumers in general appear to maintain the usual perception that all banks are the same. A study by Devlin (2002) on the relationship of customer knowledge and choice criteria in retail banking appears to support this notion. The study indicated that clients with low financial knowledge are inclined to choose a bank purely on location or by recommendation. On the other hand, those clients who have higher financial knowledge tend to consider the intrinsic attributes of a banks offering such as service features, rate of return and low fees in their choice. This poses a challenge to banks to engage with their customers in convincing them about their differentiated rates and services. This is particularly relevant as the Key Note 2004 report indicated that only 17% of customers indicated that the services of their banks and building society have improved for the last two years. Interestingly, more of the ABs than any other groups had noticed improvement in their banks and this may be a reflection of strategic targeting of major banks.

4.2

Impact of government regulations Among the European countries, the UK government was among the first movers in

deregulating extensively its financial sector. In 1979, the UK government (under Margaret Thatcher) paved the way for the abolition of foreign exchange controls which was followed 33

by the abolition of the mortgage interest rate cartel in 1984. To foster increased competition and limit the role of government, several policy changes were subsequently instituted including the 1986 Financial Services Act, the 1986 Building Societies Act and the 1987 Banking act. With greater competition in a free market environment, these policies were intended to enhance consumer choice and satisfaction. While new rules, usually referred to as conduct of business rules were introduced, the industry was largely self-regulating which resulted in the so-called big-bang across the UK financial services industry (Slattery and Nellis 2005). As indicated in the table below, deregulation was soon followed by re-regulation by tightening the business rules as the governments response to the pensions mis-selling scandal in 1994. Following the government and financial sectors promotion of new pension schemes, there were over five million people that opted out of the state earnings-related pension scheme (SERPS) and purchased new appropriate personal (APP) schemes between 1987 and 1993 (Ibid). However, the governments review of the new pension schemes in 1994 reported that over 1.7 million customers were found to have been sold products which do not suit their need and this was largely due to sales representatives remunerated with commission. Hundreds of firms were fined while their reputation had been badly damaged. Since 1994/1993, the number of new sales of APP plummeted which barely matched the number of terminations. While the pension mis-selling scandal was a result of the industrys negligence on the welfare of the customers, it can be argued that the environment that allowed the boom in personal pensions was created by the government.

Table 4.
Date 1979 1983 1984 1985 and 1986 1986 and 1987 1987

Chronology of deregulation and re-regulation in the UK

Nature of Reform Abolition of foreign exchange controls Introduction of Mortgage Interest Relief at Source (MIRAS) Abolition of the mortgage interest rate cartel Changes to employment and pensions law Changes to building societies and banking regulations Big bang implementation of the new regulatory regime of the Financial Services Act Introduction of National Insurance contribution (NIC) rebates for those opting out of state earnings-related Purpose of Reform To promote the free movement of capital internationally To improve the administration of the existing tax breaks To increase competition in the mortgage market To provide greater consumer choice in the pensions market To increase competition and consumer protection To increase competition and consumer protection To help promote personal pensions and reduce the governments pension obligations

1987

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pension scheme (SERPS) Introduction of tax exempt savings accounts (TESSAs) and personal equity plans (PEPs) 1991-2000 Phasing out of Mortgage Interest Relief at Source (MIRAS) 1994 Tightening of Conduct of Business Rules 1997 Merger of self-regulating bodies to form the new FSA 1997 Removal of tax relief on dividends received by pension funds 1998 Replacement of TESSAs and PEPs with individual savings accounts Source: Slattery and Nellis (2005, p.94) 1987

To create incentives for medium term savings To rationalise the tax system and allow reductions in the basic rate of tax Regulators response to pensions misselling scandal To strengthen the regulation of financial services To raise government revenue Reform by a new government of incentives for medium-term saving

The financial and banking sector has been facing considerable criticism from regulators, politicians, consumer groups and the media. The media reported that in December 2003, the Financial Services Authority (FSA) accused the banking executives of continuing to cause harm to consumersand in March 2004, the Treasury Select Committee of the House of Commons issued a report accusing the industry of causing a scandal (cited in Slattery and Nellis 2005, p.97). The governments regulatory regime is said to adopt two separate approaches: one is the FSA approach of regulating the conduct of business with customers (i.e. the sales process of product providers and distributors) and the other is the UK Treasury approach of regulating the nature and cost of products (i.e. the design features of financial products and their costs to customers). The governments active hand in regulating the sector can be further seen as the UK Treasury initiated four reviews of the sector which include: (a) The Cruickshank review: Competition in UK Banking (March 2000), (b) The Myners review: Institutional Investment in the UK (March 2001), (c) The Sandler review: Medium and Long-term Retail Savings in the UK (July 2002); and, (d) The Miles review: The UK Mortgage Market (December and March 2004) (Ibid). Of particular relevance are the findings of the Cruinkshank review which indicated that in all sectors of retail banking that had been examined (i.e. payment systems, current accounts, savings products, personal loans and mortgages and financing of small and medium-enterprises), competition was not effective and that banks have exhibited excess profits of about 2 to 3.5 bn a year. The report also claimed that there was an excessive pricing of products and the services were of low quality in these markets. The British government acted on most of the recommendations of the report and announced that a new regulatory framework shall be put in place to ensure effective competition between product providers with fair pricing and innovative services.

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Figure 9. Regulatory pressures in the UK Financial Sector

Political pressure FSA Conduct of Business Banks and Financial Services Companies Media Attention UK Treasury Nature & cost of products

Source: Slattery and Nellis (2005, p.98)

While the banking industry as represented by the British Bankers Association has expressed doubts on the validity of the results of the review, it has maintained a low criticism as the government has shown full endorsement of the report and the findings fostered public outcry against banks in the media. Wolgast (2001) asserted that the almost universal acceptance of the Cruickshank results in Britain owes more to the political context and should not be taken as evidence that the report actually provides a valid analysis of the British banking market (p.165). What is apparent is that the industry has been put under pressure by government regulators and the consumers through the media to provide competitive products and services. However, there is a view that the banks appear to succumb more to complying with government regulations than serving the real needs of the customers. Although the contention is that government regulators serve the best interest of the consumers, there is a counter argument that regulators are acting upon scrutiny by politicians and thus, banks should be aware of these pressures. The empirical findings presented by Slattery and Nellis (2005) indicated that changes in government policies affected product development of banks which has not always created value for customers. The authors thus posited that as the environment in which banks are operating has become more regulated, the less they have focused on the customer and the more they have responded to the demands of the regulator and government. This notion, however, has to be empirically tested. Nonetheless, the

challenge for banks is to regain trust of customers and the government as the customers have been losing faith in many of the traditional financial services arising from past scandals such as the pensions mis-selling scandal. The call is for the banking industry to exercise greater transparency with respect to business practices and product information, putting the customer first (Ibid).

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4.3 Relevant banking issues The mounting pressures from customers and institutions such as investors, community and the government have urged the banks and financial institutions to address CSR and sustainability issues. The Forge group, a collection of financial institutions, outlined the following issues in the sector which include: access to products and services, advertising and pricing, business ethics, customer service, privacy, terms of trade, supplier relationships. Key issues in the workplace, environment, and community have also been emphasised such as health and safety, materials consumption, waste management, forced and child labour in investee and/or borrower companies, involvement with the community, and investment in the local community, among others. Other issues which made banks a target of regulation relate to poor advice or product design, misselling, investment banking or trading malpractice, involvement in money laundering and tax evasion (Ambrose 2005). Project finance is another area where banks face both financial and reputation risk. On the other hand, a review commissioned by the London Corporation on behalf of the Department of Environment, Food and Rural Affairs regarding the role of the UK financial services sector in promoting sustainable development identified sustainability problems along the three functions of banks (Corporation of London 2005, p.5):
Bank Functions a. pricing assets and exercising ownership b. providing new finance Sustainability problems equity/debt prices not reflecting sustainability performance ownership not being exercised to promote sustainable asset use sustainability risks not integrated into credit risk assessment/due diligence access to finance difficulties for new technologies/processes access to finance difficulties for the poor lack of experience of risks and therefore insurance cover for key new environmental technologies threat to reinsurers and lack of insurance cover for business and households as a result of climate change contaminated-land brownfield redevelopment hindered by risks of unforeseen liabilities and clean-up cost overruns

c. risk management

Some of the sustainability problems which were extensively discussed in other government reviews such as the Cruinkshank review and Sandler review refer more to the banks function of providing new finance. These issues include financial exclusion and support to credit unions, non-competitive lending to SMEs, mis-selling of pension funds, and non-competitive product pricing and low-quality services of retail banks. The subject of

37

financial exclusion which is characterised as a situation where a portion of the population has no access to mainstream financial services has been the subject of increasing interest from the government and literature. According to the FSA, 1.5 million or 7% of households in the UK have no financial services while a further 4.4 million or 20% are on the margins of financial services (cited in Devlin 2005, p.78). The subject of the debate is that those who are financially excluded are often excluded in other areas, thus re-enforcing the wider social exclusion. Financial exclusion, according to the empirical study of Devlin (2005), is significantly influenced by employment status, household income and household tenure, and followed by marital status, age and educational attainment. Other explanatory factor can be marketing exclusion in which banks consciously do not target those unemployed, low-income class and those living in housing association accommodation and private rented accommodations.

4.4 Chapter summary and discussion The UK banking industry is characterised by strong competition among firmly established few high street banks that cater mostly to UKs middle to high income groups such as professionals and managers. It is observed that the banks marketing strategy is not on promoting specific products that cater to specific market segments but more on strengthening their brands and reputation with social and environmental-oriented values such as trust, expertise and service quality. It can be said that the pressure on banks to differentiate its products and services offering arose from the following factors: firstly, there is a need to promote among

consumers the innovative products of banks and their high-quality service particularly since research has shown that most consumers have the usual perception that all banks are the same; secondly, banks are aware on the strong scrutiny of the banking sector from

government regulatory bodies for banks to deliver competitive rates and pricing of products and improve quality of service; thirdly, banks are facing pressures from international bodies, government, consumers, trade unions, and pressure groups not only to do business in a responsible way but to contribute in addressing sustainability problems such as promoting sustainable asset use, providing new finance for new technologies and processes, providing finance for the poor, due diligence in managing sustainability risks, and concrete actions to address climate change, among others. As the UK government seems to be strengthening its regulation on the banking industry due to past scandals of pension mis-selling and financial institutions giving 38

inappropriate advice to customers on the risks of mortgage endowment policies, major banks are thus expected to be keen on supporting government policies and regulations. This means that mere compliance to government regulation and support to government programmes such as universal banking and financial inclusion may not render a competitive edge for banks. A bank would have to go beyond regulations and have to respond to specific needs of customers and various demands of interest groups and international bodies. Aside from sustainability issues, banks and the government are faced with a challenge of how to spur growth of longterm savings as present-day consumers tend to have short-term view on investments. As pointed out in a Key Note Report (2004): A consumer survey suggests a society that is living for today and that expects financial security in the future but does not want to pay for it. Short-term planning by government and business is paralleled by short-term thinking among consumers. The financial services that people most want are those giving them access to 'feel good' goods and services, i.e. credit. Mortgages come under this banner, as do credit cards and secured and unsecured personal loans. The banks responses to these issues would be critical on how it would further position itself in the industry given its highly competitive structure.

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Chapter 5 Drivers and effects of industry-wide initiatives

As discussed in Chapter 4, the UK banking sector has faced pressures not only to address corporate responsibility issues but also to take on the challenge of contributing to sustainable development. This prompted several initiatives in the financial sector to promote and institutionalise corporate responsibility and sustainability agenda in the UK banking sector. This chapter will examine these industry-wide initiatives emphasising the following key points: (i) the nature and cross-cutting themes of these initiatives; (ii) the drivers and institutions shaping these initiatives; and, (iii) the impact and implementation effectiveness of these initiatives.

5.1

Nature and differences of the initiatives Most of the initiatives at the finance and banking industry level arose from the

continuing global call for banks and financial institutions to contribute to sustainable development efforts. Among the prominent initiatives are the United Nations Environment Programme Finance Initiative (UNEP FI), Equator Principles, London Principles, and the FORGE Group guidance on corporate social responsibility management and reporting for the financial sector. These are primarily statements and pledges by a group of banks to consider the environmental and social impact of projects that they finance and other banking operations and strategies. The UNEP FI is a general statement among banks worldwide but there are no concrete steps to implement these values and aspirations. On the other hand, the Equator Principles have very tangible steps and guidelines for banks to adopt in managing environmental and social issues in project finance. The Equator guidelines are based on the environmental and social standards of the World Bank-International Finance Corporation (IFC) and apply globally to projects in all industry sectors particularly in emerging markets. The strength and teeth of the Equator Principles lie on the internal processes of project finance lending where banks will require customers to demonstrate in their environmental and social reviews the extent to which they have met the IFC safeguard policies. Banks are also expected to insert into the loan documentation covenants for borrowers to comply with their environmental and social management plans and banks will have the ability to declare the loans in default if these covenants are not fulfilled (www.ifc.org/equatorprinciples, accessed 14 August 2005).

40

While the UNEP FI and Equator Principles are initiated by multilateral financing institutions covering major financial institutions worldwide, the London Principles project and Forge Group guidelines are UK-based initiatives supported by the government, industry associations and financial institutions. The London Principles was initiated by the UK

government to lay down a framework and further stir sustainable development innovations in the financial sector as the UKs response in the Johannesburg Earth Summit in 2002. The London Principles, however, is a work in progress as the implementation guidelines have yet to be defined although several suggested innovations were presented in the study, entitled Financing the Future The London Principles (Waygood and Wehrmeyer 2003). On the other hand, the FORGE Group guidelines arose from the business case model of CSR and have presented a management framework and practical guidelines in making CSR an integral element of corporate strategy and other business operations of a bank.

Table 5. Summary of the industry-wide initiatives

Initiative/ Year UNEPFinance Initiative/ 1997 Scope of principles/guidelines Broad statements of support to promote sustainable development and environmental management. Themes - enhancing awareness on environmental risk management in lending operations Participating Banks in the UK Abbey, Barclays, Co-operative Financial Services, European Bank for Reconstruction and Development, HSBC, Lloyds TSB, Royal Bank of Scotland Group Barclays, HSBC, Citigroup, Royal Bank of Scotland, JPMorgan Chase, Standard Chartered, Rabobank, Credit Suisse Group, BBVA Group, ABN Amro Co-operative Bank Founder UNEP

Equator Principles/ 2003

Management of environmental and social issues in project finance lending using the social and environmental standards of IFC as guide.

- promoting transparency in the evaluation criteria for project financing by banks - managing the social and environmental impact of projects - product and process innovation among banks to promote sustainable development

IFC

London Principles/ 2002

The financial sectors role in promoting economic prosperity as well as its influence on environmental protection and social development along its three major functions of pricing assets and exercising

DEFRA, London Corporation

41

ownership, providing new finance and risk management British Abbey National, - Embedding the Guidance on Corporate Social FORGE Barclays, Lloyds Bankers CSR strategy and Responsibility Management Group TSB, Royal Bank Associati principles in every Guidelines and Reporting covering the on, of Scotland, areas of corporate strategy, risk aspect of banking / Associati Zurich management, human resources, operations 2002 on of facilities management, British procurement, general insurance, Insurers fund and asset management, property portfolio management, retail banking, commercial investment and corporate lending, debt recovery services Sources: UNEP FI report, BBA Forge Report, IFC Report, The London Corporation Report

All of the above guidelines and principles are non-binding arrangements although the members are encouraged to report what they have done to support the guidelines and principles such as the Equator Principles signatories. It would thus be up to the founding and participating institutions as well as the government bodies to promote the frameworks in order to raise the CSR and sustainability standards in the financial sector.

5.2

Drivers and motives The international bodies such as UN and World Bank-IFC are clearly the drivers on

sustainable development initiatives worldwide and their international presence was able to impress quite a number of major banks and financial institutions to support the initiative. This is particularly true with the Equator Principles as the number of signatory banks rose from 10 to 30 banks which accordingly control more than 80% of the project finance market (although HBOS is not yet a signatory). The UK government likewise is a strong mover in pushing the financial sector to contribute to sustainable development goals and objectives. However, as in the case of the London Principles, the UK government faces the challenge of forwarding the adoption of the principles beyond the Earth Summit. While the government through the Corporation of London conducted consultations with financial institutions in coming up with the principles, pledges of support to the principles were informal and mostly came from asset and fund management companies and insurers. The major UK banks have not publicly signified support to the London Principles although the UK Government signed a statement with UNEP to promote the principles worldwide. On the other hand, the FORGE Group guidelines has multi-partnership approach and are well-backed up by industry

42

associations, government bodies and think-tanks such as the British Bankers Association, Association of British Insurers, and members of the FORGE Group. The Equator Principles seems to be more advanced in increasing its adoption as several leading banks are adopting the principles. The IFCs intention is to have a critical mass of leading banks announce the adoption of the principles, so that they become the de facto banking industry standard (www.ifc.org/equatorprinciples, accessed 10 August 2005). Apparently, the impetus is top-down as CEOs, departmental heads made it clear that their reputation as equator banks is subject to attack. As HSBC head of environmental risk management, Jon Williams, said: The reputation of the bank is linked to the reputation of the clients. No one client and no one piece of business is worth risking the reputation of the bank. (Watchman 2005, p.16). This goes to show that the equator principles can be a part of risk management and reputation enhancement strategies for major banks. As with the equator principles, the emphasis of the FORGE Group guidelines on CSR management and reporting is the business case model of CSR and sustainability initiatives. This is somehow different with the London Principles ultimate objective of bringing forward sustainable development initiatives at a higher level though market innovations. The

challenge is thus for the government and multilateral institutions to raise the level of awareness and commitment by financial institutions to move forward to their sustainable development initiatives.

5.3

Implementation effectiveness and challenges All of the initiatives are voluntary statements of banks to uphold and adopt the

principles and guidelines but there is no obligation to report their conduct or performance in line with the principles and guidelines. For instance with the Equator Principles, banks will not be signing an agreement and each bank that adopts the principles will individually declare that it has or will put in place internal policies and processes that are consistent with the principles (Freshfields Bruckhaus Deringer 2005). But unlike the other initiatives, the adoption of the Equator Principles is based on clear-cut social and environmental standards of IFC so that the public and non-government bodies can independently assess whether projects financed by banks adhere to these standards. There seems to be a mixed opinion about the effectiveness of the equator principles. Chris Bray, head of environment risk policy

management at Barclays suggested that some of the equator banks do not take their commitments as seriously as others (Watchman 2005, p.16). However, some analysts indicated that the Equator Principles can be described as a shining beacon for responsible 43

banking as mentioned in the Environmental Finance review in March 2005. The adoption of the principles transformed social and environmental considerations from a last minute concern to a mainstream issue in planning new projects (Ibid, p.16). Nonetheless, there are challenges ahead for the future of the equator principles and these include: a) technical and practical issues, including legal liability of lenders have to resolved, b) growth of environmental standards in banking (i.e. some banks are leading in the development of environmental and social policies for critical industries such as forestry, mining and tobacco), c) perceived lack of transparency which is a common complaint among NGOs (for example, HSBC has published details of the number and value of transactions where non-compliance with the equator principles was contributory factor), and d) need to deliver the equator principles requirements in a consistently robust manner. The challenge for the other initiatives such as the London Principles and FORGE Group guidelines would be on how to translate the principles and guidelines into concrete implementation by banks and other financial institutions. The London Principles may have to create its own secretariat to shepherd the adoption of the Principles. On the other hand, there would be potentials for the FORGE Group guidelines as various stakeholders such as the British Bankers Association, government bodies such as DEFRA, DFID, and DTI, BITC are actively pursuing the promotion of the guidelines. The question, however, remains on the efficacy of the business case approach to promote a higher level of CSR and sustainable development in the financial sector.

5.4

Chapter summary and discussion The industry-wide initiatives such as the UNEP Finance Initiative (FI) Programme, the

London Principles, Equator Principles, and FORGE Group guidelines have been subject to critique and scrutiny as to their effectiveness in moving forward the sustainability agenda among financial institutions. The UNEP-FI merely consists of broad statements of support from banks to adhere to environmental and social guidelines in their lending operations. While the UN has encouraged regular reporting by banks on this initiative, the report shall not be subject to public scrutiny and there is no corresponding sanction if banks fail to comply with the reporting procedure. On the other hand, the FORGE guidelines seem to promote the business case model of CSR among the FORGE members and trade associations such as the British Bankers Association and Association of British Insurers. The guidelines provide a practical tool kit in making CSR an integral part of the banks operations but standards of

44

implementation are left to specific banks. Banks are not also required to report the extent of their implementation of the guidelines. With regard to the London Principles, it is recognised that the Principles has strong political back up from top UK government bodies as launched by the Prime Minister during the 2002 Earth Summit and endorsed by a number of financial institutions. However, there is skepticism on the efficacy of the Principles in moving forward the innovations for sustainable development among the financial institutions. As pointed out by Waygood and Wehrmeyer (2003, p.381), endorsement does not imply commitment to the products or ideas advanced in the report and there has been no public disclosure of any action taken by UK FIs along the lines suggested. The signatories are expected to report on progress annually but there is no corresponding sanction if they fail to do so. Thus, there may by a need for appropriate regulatory changes in order to fully achieve the objective of the Principles which is to ensure that there is continuing progress in the financing of sustainable development by banks in the UK. The Equator Principles seem to be moving forward as the 2005 survey among equator banks suggest that generally, the equator principles are regarded as a paradigm shift in the assessment of social and environmental risks and the importance given by commercial lenders to social and environmental considerations (Freshfields Bruckhaus Deringer 2005, p.5). Some supporters of the Equator Principles have indicated that the Principles have been a catalyst for change not only in project finance but also in other areas of banking operations. However, the real test for the Equator Banks lies in ensuring that the Equator Banks apply the Equator Principles fully and consistently as some stakeholders including NGOs point to the inconsistent interpretation and implementation by the Equator banks. The NGOs also criticise the implementation of the principle as being too slow and with weak accountability as signatory banks are not required to disclose information regarding their compliance with the principles. Nonetheless, the principles are not at all worthless but can be seen as a step to the right direction. Michelle Chan Fishel of Friends of the Earth (FoE) saw the merits of the Equator principles indicating that they are much more specific. And they oblige banks to do due diligence and environmental assessments when investing in large projects (Monahan 2005, p1).

45

Chapter 6 Sustainability initiatives of major banks

To build a multi-level analysis of sustainability in the banking sector, an assessment of the industry-wide initiatives was made in Chapter 5 where it was found that not all of the high street banks in the UK show the same level of involvement in adopting the initiatives. As indicated in Chapter 4, the UK banking industry is highly competitive that major banks need to build their competitive advantage mostly in marketing their brand. In this chapter, the focus of analysis will be at the firm level particularly the specific CSR strategy and sustainability initiatives of the six major banks (HSBC, Barclays, HBOS, Royal Bank of Scotland, Lloyds TSB and Co-operative Bank). The objective is not only to dissect the strategic dimensions of the CSR initiatives but more importantly to determine the banks extent of adoption of the industry-wide initiatives and to ascertain the banks path to sustainability. The strategic dimensions of the CSR initiatives of banks will be examined using Burke and Logsdons model. On the other hand, the extent of sustainability among banks will be assessed using the model developed by Jeucken (2004) to determine the sustainable development phase of banks, i.e., whether it is at a defensive, preventive, offensive or sustainable banking phase. The sources of the data used in analysing the banks initiatives are the 2004 sustainability reports of HSBC, Barclays, HBOS, Lloyds TSB and Cooperative Bank, the 2003 sustainability report of the Royal Bank of Scotland and other published materials such as small case studies on these banks.

6.1

Strategic dimensions of CSR of major banks Following the Burke and Logsdons model, the nature and relevance of specific CSR

initiatives of major banks including HSBC, Barclays, Royal Bank of Scotland, HBOS, Lloyds TSB and Co-operative Bank are assessed based on the following strategic dimensions: centrality (C), specificity (S), proactivity (P), voluntarism (Vo) and visibility (Vi). The aim of this exercise is to illustrate how the banks CSR initiatives become integral part of its competitive strategies. Within this context, the extent of the banks adoption and

implementation of the industry-wide sustainability initiatives shall also be examined.

6.1.1 HSBC HSBC clearly aims to secure its position as the leading financial institution in terms of financial success by adopting a sustainable approach and responding to various expectations

46

of its stakeholders. The banks strategic objectives include making HSBC one of the worlds leading brands for customer experience and corporate social responsibility (HSBC Corporate Social Responsibility Report 2004, p.4). As HSBC has wide operations in most parts of the world, it faces a range of social, ethical and environmental challenges such as dealing with corruption and cultural issues. It is thus understandable that among HSBCs CSR initiatives in the marketplace include the adoption of internationally recognised principles such as the Equator Principles, UN Universal Declaration of Human Rights and UN Global Compact. HSBC is building up its image globally as a caring and responsible institution as it makes decisive stance on global issues such as climate change. It is one of the few if not the only bank that is proactive in developing a series of sustainable risk guidelines on sectors that have high environmental and social impacts such as forestry, freshwater, and palm oil. HSBCs other initiatives in the marketplace are responding to social concerns such as providing microfinance, universal access to banking services, and Islamic financial services through HSBC Amanah which serves particular needs of Muslim communities. It can be viewed that majority of HSBCs initiatives in the market place support its strategic objectives of sustainable approach to finance and lending while some exhibit dimensions of proactivity and specificity. HSBCs initiatives in the workplace and environment can be categorised as more of the specificity dimension. Initiatives such as promoting equality and diversity, providing competitive reward package based on merit system and ensuring safety of employees would enhance employee motivation, loyalty and productivity. The efficient use of resources such as electricity, water, paper, travels would result into cost-savings for the bank. These initiatives at the same time would have positive spill-over effect to the environment as the bank aims to reduce wastes production and to be carbon-neutral by 2006. On the other hand, HSBCs initiatives in the community which involves giving grants and donations to communities and charity organisations and volunteer work by bank employees are voluntary acts and enhance visibility of the bank in the public. Overall, it can be said that HSBCs CSR initiatives are essential part of its overall corporate strategy particularly its strong stance and concrete measures on global issues such as climate change. HSBCs competitive edge in the international arena is being boosted by its proactive stance in addressing global issues such as being the first to declare of becoming carbon-neutral by 2006, establishing environmental guidelines for sensitive sectors and being the first to report the projects which were approved and rejected based on the Equator Principles. With regard to HSBCs participation to industry-wide initiatives, HSBC appears to 47

be one of the leading institutions in implementing the Equator Principles into its project finance functions. HSBC likewise gives a signal that CSR issues are being carried out at board level as a CSR committee of the HSBC Holdings plc Board was established in December 2003. HSBC Group Chairman, Sir John Bond, indicated that the CSR Committee have helped in shaping and enacting policies and programmes and have encouraged the bank to communicate more effectively than in the past (HSBC CSR Report 2004, p.3).

Table 6. HSBC CSR Initiatives

CSR Strategy/Initiative
a. marketplace - Developing a series of sustainable risk guidelines on sectors that have high environmental and social impacts - Applying the Equator Principles - Ethical and socially responsible investment portfolio - Responsible personal lending - Microfinance - Access to banking services - Islamic financial services - Adopting Principle 10 of the UN Global Compact on combating corruption b. Workplace - Equality and diversity - Competitive reward package - Health and safety procedures - HIV/AIDs and health education c. Environment - Reducing carbon dioxide emission (with a target of being carbon neutral by 2006) - Reducing energy consumption - Reducing waste production - Minimising travels - Reducing water and paper consumption d. Community - Community donations - Employee volunteering

C
X X X X X X X

S
X X X X

P
X X X

Vo
X

Vi

X X X

X X X X X X X X X

X X

X X

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility

6.1.2

Barclays It can be viewed that central to Barclays CSR initiatives are those that relate to the

marketplace which are reflected in the Banks products and services. These initiatives which include financial inclusion for the vulnerable group, microfinance for small businesses and social enterprises, and launching of universal banking initiative, are supportive of the Banks strategy of defending and extending UK banking. While providing affordable credit for the financially excluded may not provide higher profits, this initiative has been widely

48

acknowledged in the industry which earned Barclays a good publicity. For instance, Barclays financial inclusion and microcredit scheme was featured by the Ethical Performance Best Practice as a case on how companies are using CSR as a business strategy to achieve their goals (http://www.ethicalperformance.com/bestpractice/, accessed: 3 April 2005). Another initiative which is consistent with Barclays strategy on operational excellence is the Banks endorsement of the UN Universal Declaration of Human Rights and adoption of human rights policies to its workforce and supply chain. The foregoing initiatives thus reflect the centrality dimension of CSR strategy. On the other hand, Barclays involvement in the development and adoption of the Equator Principles in conjunction with World Bank-International Finance Corporation can be viewed as more of a proactive stance. The signatories of the Equator Principles have been widely recognised in the financial sector and viewed as a progressive move to ensure that financing of projects meets environmental and social criteria (Hoare 2004). However, it is not clear from Barclays CSR report how the principles are embedded in the business operations of the bank particularly in investment banking, although it was mentioned that the principles are incorporated in the Banks environmental management system. With regard to the CSR in the workplace, the initiatives are more of the specificity dimension. Barclays has promoted equality and diversity in the workforce which generally aim to maintain a productive environment in the office and has boosted the image of Barclays as an employer of choice (http://www.personal.barclays.co.uk/BRC1/jsp/, accessed: 4 April 2005). Further, a new pension scheme was introduced which is designed to provide greater levels of certainty at retirement, and thereby increases employees loyalty to the bank. On

the other hand, the Banks comprehensive HIV/AIDS Management Programme in Africa has been a voluntary act on the part of the Bank to to assist its employees in dealing with the impact of the HIV/AIDS pandemic. The Banks CSR in the community initiatives can be viewed as a voluntary move. Barclays has been very active in its community investment and involvement program through partnerships with local communities and charities and the banks employees volunteer works of its employees. Barclays reported that its 2003 global community investment totalled 32.8 million, including 30million in the UK which makes it one of the top contributors in the UK. Among the various community initiatives of Barclays, the Together IT Works, which is a scheme run with RNID - the charity for deaf and hard-of-hearing people in the UK, stood out as the program received a BITC award for excellence in 2003. The bank maintains that its community projects obtain positive effect for their communities, employees and business. 49

Meanwhile, the Bankss environmental programs relate more to specificity dimension. As in the case of HSBC, these are generally directed towards achieving cost-reduction in its business operations while having positive spill-over effects in the environment. However, the Banks report indicated that the bank was not able to monitor recently its paper consumption. The Banks environmental management system, on the other hand, can be viewed as both reflective of centrality and specificity dimensions inasmuch as the system was established mainly to ensure that projects are financed in an environmentally and socially responsible manner. As with HSBC, it can be derived that Barclays CSR is an essential part of its strategic positioning by creating brand differentiation and building up company image. This is beefed up by putting in place a good governance structure, engaging a company culture of voluntareesm and community involvement and creating innovative lending product and services. However, it can be noted that Barclays CSR initiatives are mostly focused on the UK retail banking which is only one of its business operations. With regard to Barclays participation to industry-wide initiatives, it appears that it is actively advocating the adoption of the Equator Principles. However, it is noted that there was no reference on the banks corporate responsibility report on the number of projects being approved or rejected based on the Equator Principles. The bank has yet to show whether adopting the Equator Principles has improved its structure and processes to ensure a sustainable approach in project finance.

Table 7. Barclays CSR Initiatives CSR Strategy/Initiative

a. marketplace - Financial Inclusion - Microfinance - Adoption of Equator Principles - Human Rights Policy in Lending b. workplace - Equality and diversity - New Pension Scheme - Tackling HIV/AIDS c. environment - Environmental Management System - Energy-saving measures - Control water and paper consumption - Recycling wastes d. community - Community Investment/Involvement - Partnerships with charity organisations

C
X X X X

Vo

Vi

X X X X X X X X X X X

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility 50

6.1.3 HBOS (Halifax and Bank of Scotland) The HBOS strategy is very customer-oriented as it aims to provide value-for-money products. The banks strategy promotes greater transparency in its services and emphasises the importance of employee motivation and commitment to deliver better value for money. For HBOS CSR in the marketplace, the objective is to promote Halifax and Bank of Scotland as the champion brands in UK retail financial services, through value for money, transparency and innovation (The HBOS Corporate Responsibility Report 2004, p.12). This innovation is reflected through its various product development initiatives which offer competitive interest rates and costs for each market segment. For instance, the Banks 2004 corporate responsibility report cited that its high-interest current account paid 40 times more interest than its main competitors and it was the first major high street bank to pay interest on business current accounts which was later adopted by other major banks upon pressure by the government. It is also noteworthy that the Bank appears to be proactive in responding to government regulators findings and recommendations. In response to the Sandler Review of Medium and Long-Term Retail Investment in the UK in 2002 which found that the British public are failing to save money because savings, investment and pension products are expensive and complicated, HBOS launched a range of no load investment funds with no initial or exit charges. The bank has also established a dedicated team to liaise with the Financial Ombudsman Service to ensure that mortgage customers who are incorrectly advised with regard to their endowment policies will be appropriately compensated. The other innovative products of HBOS are considered as proactive move as they respond to specific customer needs which were determined through regular customer and market research. For instance, the Halifax research which has revealed that there are around 860,000 empty homes in the UK led to the launch of a special mortgage product that enables borrowers to draw down sums for property improvements. HBOS has likewise offered social and environmentoriented financial schemes such as flood risk guarantee scheme, development of sustainable homes, and social housing and urban renewal schemes. The bank has also responded to financial exclusion issue through its saving gateway program and social banking for social enterprises and not-for-profit organisations. As with HSBC and Barclays, HBOS initiatives in the workplace and environment are more of specificity dimension. The policies on equality and diversity, flexible working practices, competitive reward package and recruiting people with disability are meant to motivate the employees thereby enhancing their productivity. On the other hand, the 51

initiatives in the environment are seen as cost-saving measures although the bank indicated that it is using FORGE guidelines to monitor the impact of the banks operations on the environment. Meanwhile, the banks initiatives in the community such as providing money advice and financial literacy programme through the HBOS Foundation and sponsorship of cultural and sports activities are voluntary acts of the Bank that would enhance its visibility in the community. Overall, it appears that HBOS CSR initiatives in the marketplace are enhancing its competitive advantage in terms of providing innovative products and services that cater to specific needs of various clients. The bank has also exhibited proactivity in responding to government policies and regulations as well as tapping market opportunities through social and environment-oriented financial products. As the bank promotes utmost transparency in its operations, it has reported that it has faced two regulatory sanctions by the Financial Services Authority that resulted in a fine of 750,000 in February 2003 for breaches of the FSA principles in the administration of its Pep and ISA business and another fine of 1,250,000 in January 2004 for breaches of the record-keeping aspects of the FSAs Money Laundering Rules. The bank, with this admission of guilt, is further highlighting its

commitment to gain the trust and confidence of its stakeholders particularly as it vows to learn the lessons of its past mistakes. With regard to HBOS participation to industry-wide sustainability initiatives, it appears that the Bank is not a signatory to the Equator Principles, London Principles and the FORGE Group. This shows that the Banks CSR initiatives are triggered through internal product and service innovation as well as in compliance with government regulations. The Bank appears to be silent in making a proactive stance in global sustainability issues such as climate change.

Table 8. HBOS CSR Initiatives CSR Strategy/Initiative

a. marketplace - Providing wide range of products with no initial or exit charges in response to the Sandler Review - Environmental supplier programme - Specialist lending - Flood risk guarantee scheme - Empty Homes Scheme - Development of sustainable homes - Engaging in Renewable Energy Projects - Social housing and urban renewal - Social banking for social enterprises and not-for-profit organisations

C
X X X X X X X X

S
X X

P
X

Vo

Vi

X X X X X X

52

- Saving gateway (for low-incomes) b. workplace - Equality and diversity - Total Reward Package - Recruiting People with disability - Flexible working practices and hours c. environment - Environmental Policy Statement (using FORGE guidelines in identifying impact) - Reducing energy, water and paper consumption - Minimising business travels - Reducing waste production d. community - HBOS Foundation providing money advice and financial literacy and community development program - Sponsorship of culture and sports activities for youth - Volunteering by employees

X X X X X X X X X X X X X X X X

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility

6.1.4

The Royal Bank of Scotland Group The Royal Bank of Scotland (RBS) Groups main objective is to provide superior

sustainable value for its customers, employees and shareholders. While the bank stressed the importance of these three stakeholders particularly in maintaining the confidence of the shareholders, the bank has recognised that it is imperative of a modern business to respect the environment and support the wider community. Central to the RBS CSR initiatives in the marketplace are its risk management framework which covers the different categories of risks including credit, operational and external market, liquidity and regulatory risk. Managing these various risks would mean greater protection of the banks customers and securing a sustainable business in the long run. The Bank appears to put emphasis on managing

regulatory risks as it highlighted its support and compliance with the FSAs regulations and policies such as by establishing a dedicated team to manage the potential impact of proposed regulation and legislation and integrate regulatory changes in the banks overall risk management framework. The bank indicated support to the FSAs new approaches to

mortgage regulation and its initiative called Treating Customers Fairly. Further, the Bank expressed support to external corporate responsibility commitments such as by being a signatory of the Equator Principles and the UN Global Compact, and a member of the FORGE Group. It is noted, however, that the Bank did not specify in its 2003 CR Report (the first CR report published by RBS) on how these principles and commitment are adopted and monitored in the banks operations. While the RBS published a separate paper called Implementing the Equator Principles which states how the Principles are

53

becoming increasingly embedded in the banks decision-making processes, there is no indication in the CR report on the structural mechanism in monitoring and reporting the extent of compliance to the Principles, unlike those of HSBCs. In its paper, the Bank admitted that it needs to build up its experience and associated training in the effective application of the Principles. Meanwhile, the bank seems be strongly supporting the low-income customers through its financial inclusion programme which has reported to have lent 548 million to 19,938 accounts which represent a leading 45% market share. RBS initiatives in the workplace and the environment are almost similar with those of the foregoing banks which are more of specificity dimension. One noteworthy initiative is the Banks Home Buyer Assistance Programme which has helped more than 700 employees bought their own homes since the launch of the programme in September 2002. On the other hand, the Banks initiatives in the community are more of voluntary acts that would enhance the banks visibility in the community. The bank has partnerships with charity organisations and government departments in promoting higher education among lower-income group and providing assistance to the homeless. Overall, the Banks CSR strategy can be viewed as integral part of its overall risk management framework that aims to protect and enhance the reputation of the bank and thereby maintain the confidence of its major stakeholders such as the shareholders, customers, and employees. The bank seems to be focusing on building strong relationships with the government regulator and manage regulatory impact to the banks operations. However, as the bank seems to focus more on compliance, there seems to be less of innovative products that would cater to specific needs of certain market segments.

Table 9. The Royal Bank of Scotland Group CSR Initiatives CSR Strategy/Initiative C S
a. marketplace - Equator Principles signatory - UN Global Compact signatory - FORGE Group member - Enhancing compliance and support to government regulations (e.g. FSAs Treating Customers Fairly) - Financial Inclusion b. workplace - Competitive remuneration package and pension plan - Best practice flexible working - Diversity - Home Buyer Assistance Program - Health and Safety Measures c. environment - Group Environmental Policy Statement X X X X X X X X X X X

P
X

Vo

Vi
X

X X X X

54

- Reducing energy consumption - Reducing waste production - Minimising business travels d. community - Give as you earn scheme for employees - Partnership with charity organisations to provide education and employment opportunities to the youth - Partnership with Department of Education to promote higher education among lower-socio economic class - Grants for the homeless in partnership with a charity - Enterprise and regeneration programme - Sponsorship of cultural events

X X X X X X X X X

X X

X X

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility

6.1.5

Lloyds TSB Lloyds corporate responsibility agenda promote transparency among its stakeholders

to enhance better awareness and understanding particularly among employees and customers. The bank indicated that its corporate responsibility initiatives are integral part of its core strategy to improve business performance. As the Deputy Group Chief Executive, Mike Fairey, explained: None of the programmes and initiatives outlined in this report were initiated because they are good corporate responsibility. They exist because they are vital to the improved performance of the business they are already core. (Lloyds TSB CR Report 2004, p.3). To differentiate itself from its competitors, the challenge for Lloyds TSB is to have a range of innovative products and very high quality of service. In line with this objective, the bank launched a programme called You First to enhance its service to customers. The bank also expanded its assistance to SMEs, rural business and financially excluded group not only because of social pressure but also because they represent a potentially lucrative market. The bank has taken particular attention to supporting the ethnic minority communities particularly when a research in its north and east London branches found that the bank was failing to provide adequate services to ethnic minority customers. Lloyds has also gained recognition with its special procedures to cater to the needs of customers with disability and has been awarded the Royal National Institute for Deaf People Chartermark in 2004. As with regard to environmental risks in lending, the Bank asserts that its environmental risk assessment system for all of its business lending has been firmly established and has improved through the years. While the bank is not a signatory of the Equator Principles as the banks project finance business is relatively little, the bank is monitoring the development of the Principles to gain lessons from its application.

55

Lloyds initiatives in the workplace, environment and community are almost similar in nature with those of other banks which exhibit specificity, voluntary and visibility dimensions. One noteworthy initiative in the CSR in the community is the provision of consultancy services by the banks senior executives to voluntary sector organisations in relevant areas of business development and strategy. The bank benefits from this initiative as its officers gain more experience in working with the voluntary sector and expand partnerships. With regard to the Banks participation to industry-wide initiatives, the Bank is not a signatory of the Equator Principles and London Principles but it is a member of the FORGE Group. It appears that the banks CSR initiatives are more directed towards addressing specific market demand particularly in retail banking and these are triggered through internally generated market research and innovation.

Table 10. Lloyds TSB CSR Initiatives CSR Strategy/Initiative

a. marketplace - You First programme - Transparency of charging fees - Assistance to SMEs - Financial Inclusion - Special banking procedures for customers with disability b. workplace -Equality & Diversity -Flexible working practices and hours c. environment - Reducing energy consumption - waste recycling - minimising business travel - reducing paper use

C
X X X X

S
X X X X

Vo

Vi
X X

X X X X X X X X X X X X

d. community
- Cash giving for education, charitable giving, community regeneration - Volunteering by bank employees - Consultancy work by senior managers to voluntary sector organisations

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility

6.1.6 The Co-operative Bank As the banking industry experienced reputation crisis and profitability issues in the 1980s, the Co-operative Bank sought to re-invigorate its brand through modern reinterpretation of its co-operative values which was based on a set of principles including 56

honesty, openness, caring for others and a commitment to social responsibility. This led to a new Mission Statement reflecting this ethical move which was published in 1988. Following a series of customer consultation, the banks first ethical policy was published in 1992 where the bank promised to invest customers money in companies that avoid damage to the environment. The bank went further by launching its Ecological Mission Statement in 1996 and a Partnership Approach in 1997 in which the bank commits to deliver value to all its stakeholders in a socially responsible and ecologically sustainable fashion. This partnership approach has earned strong support from the banks customers as found in the banks customer survey in 1997. The bank set up an environmental steering group to oversee work on the ecological priority areas (e.g. paper disposal, energy, transport) and monitor performance against targets such as reducing banks carbon dioxide emission by 20% by 2010 based on 1997 levels. In 2004, the Co-operative Bank and Co-operative Insurance Society was put together to form the Co-operative Financial Services with a vision of becoming the primary financial services provider for a broad range of co-operative customers accessed seamlessly through multiple channels. To continue to deliver value in a socially responsible business practice, the bank undertakes extensive stakeholder dialogue to incorporate their views particularly in relation to socially responsible investment. The bank put extensive support to small business and financially excluded group especially in deprived areas. What has been prominent in the banks initiatives were its strong advocacy on promoting human rights and animal welfare and proactive stance in reducing and mitigating emissions of greenhouse gases. In September 2004, the bank signed an eight-year power purchase agreement with energy provider ecotricity which ensures that new renewables capacity is created in the UK, and substantial cost savings are produced in comparison to brown (fossil fuel) alternatives (CFS Sustainability Report 2004, p.4). The bank has also invested on six new wind turbines at Bambers Wind Park, Lincolnshire which provide for a quarter of CFS current electricity demand. The banks initiatives in the workplace and environment are more of specificity dimension such as the equality and diversity, health and safety programmes as well as the environmental measures to reduce resource consumption and waste production. What can be considered as proactive stance is its initiative on biodiversity enhancement programmes. As seen in the Co-operative Banks ethical policy and corporate responsibility reporting, the bank takes seriously in monitoring and improving its performance in delivering value to stakeholders, social responsibility and ecological sustainability. The banks excellent 57

social reporting has gained wide recognition as its 2003 Social Responsibility Report was awarded both the UK and European Sustainability Reporting Awards and ranked as the worlds best in the United Nations Environment Programmes biennial global benchmark of sustainability reports. With regard to the Banks participation in the industry-wide initiatives, it is interesting to note that Co-operative Bank seems to be the only major bank that is a signatory of the London Principles. The Bank was acknowledged by the London Corporation for its contribution in developing the London Principles accompanying paper, Financing the Future, which outlines existing and potential innovative ideas to promote sustainable development (Corporation of London 2005). This seems to show further the Banks advance standing in sustainable finance and banking as its ethical policy and ecological initiatives have been developed initially in the 1990s in consultation with its stakeholders.

Table 11. Co-operative Bank CSR Initiatives CSR Strategy/Initiative

a. marketplace - Banks ethical policy on socially responsible investment - Anti-money laundering and financial crime prevention - Financial Inclusion - Small business support to deprived areas - Advocacy on human rights and animal welfare - Sustainable procurement (e.g. new wind turbines) b. workplace - Equality and diversity - Health, safety and welfare c. environment - Energy-saving measures - Reducing water consumption - Reducing, reusing and recycling wastes - Reducing paper consumption - Biodiversity enhancement - Reduce transport-related emissions d. community - Financial support to charity and depressed community (e.g. Black and Ethnic Minority Fund, Mind Infoline for mentally distressed) - Staff volunteering

C
X X X X X X

S
X X X X X X X X X X X X

P
X

Vo

Vi
X

X X

Legend: C- Centrality; S- Specificity; P- Proactivity; Vo- Voluntarism; Vi- Visibility

6.2

Drivers and motives of the CSR strategies of major banks Based on the survey conducted by Jeucken (2004), the drivers of sustainability among

banks are as follows: improved image, lower risks, higher revenue, higher staff commitment,

58

realising social value added, ethical values, market forces, improved relations with society/NGOs, among others. It is interesting to note that the six major banks being studied have indicated most of these drivers in their sustainability reports. Three of the six high street banks explicitly cited that as they want to attain and maintain their leading position in the industry, it is imperative for the bank to exhibit the highest standard of ethical behaviour. The assumption is that a bank would only be able to sustain long-term profitability if it is able to satisfy the expectations of its stakeholders including the society at large. This is explicitly expressed in the statements of HSBC Group Chairman, John Bond:
We continue to believe that our greatest social responsibility is to be a successful company. That is the best way of fulfilling our obligations to our customers, shareholders, colleagues and the world at large. However, we also know that sustainable success must go hand in hand with the highest standards of behaviour. (HSBC 2004 CR report, p.3)

It is also the assumption that for a bank to become an industry leader, it has also to achieve a leading position in the field of corporate responsibility. Barclays Group Chief Executive clearly stated this stance:
We believe that if we are to achieve our ambitious goals, we must be a leader in the field of corporate responsibility. Our decision to aim for leadership in CR was driven by two things: our dedication to good governance, and our commitment to improving the health of the Barclays franchise. (Barclays 2004 Corporate Responsibility Report, p.4)

While HSBC and Barclays appear to achieve the highest standard of corporate responsibility to meet societys expectations, three other banks, i.e., HBOS, Lloyds and RBS, seem to exhibit more the business case approach where the competitive value of CSR is emphasised to achieve better financial performance. Lloyds TSB Deputy Group Executive Mike Fairey seems to suggest that CSR is an integral part of change management strategy in his statement below:
None of the programmes and initiatives outlined in this [CSR] report were initiated because they are good corporate responsibility. They exist because they are vital to the improved performance of the business they are already core (Lloyds TSB 2004 Corporate Responsibility report p.3)

CSR can also be a part of the marketing strategy of banks, building their reputation and brand, as can be derived from the statement of Sir Fred Goodwin, Group Chief Executive of the Royal Bank of Scotland:
Since the early days of the Royal Bank of Scotland, we have built our reputation on our commitment to good practice, because we know this makes commercial sense, and because we know it is the right and proper way to run our business. (RBS 2003 Corporate Responsibility Report, p.3)

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In the case of HBOS, CSR is a strategy to promote loyalty, commitment and excellence among its staff, thereby increasing their productivity to provide value-for-money products and services to the banks customers. James Crosby, HBOS Chief Executive stated that: we put both colleagues and value for money at the heart of our CR programmes.Committed colleagues are motivated colleagues, keen to provide our customers with the best solution to their financial needs (HBOS 2004 Corporate Responsibility Report, p.2). On the other hand, the Co-operative Bank attempts to go beyond the business case model as it expressed its strong stance and advocacy on maintaining an ethical value and cooperative approach to its business operations. This can be derived from the statement of David Andersen, Chief Executive of the Co-operative Financial Services:
our passion to deliver an ethical, co-operative approach to customers will be hard for others to match. Looking back at 2004 and early 2005, it is evident that CFS has needed to make some difficult decisions, but given the challenges of fierce competition and fast moving regulation, all of these were necessary. (Co-operative Financial Services 2004 Sustainability Report, p.4)

6.3

State of sustainable banking at major banks The sustainability initiatives and activities at six major banks including HSBC,

Barclays, HBOS, RBS, Lloyds TSB and Co-operative Bank are assessed using the sustainability scoring method which was developed by Jeucken (2004) in his survey of major banks worldwide. The elements of sustainability are grouped into five categories, which are: communication (10%), generic published information (25%), generic financing (15%), special products (40%), and social issues and charity (10%). The scoring for some elements are further qualified based on the sliding scales developed by Jeucken (2004) as presented in Appendix 1. The detailed qualifications which were considered in scoring each sustainability element for each major bank are presented in Appendix 2. As can be seen in the summary of integral sustainability scores for the six banks (Table 12), all of the banks did not reach the minimum integral score for the sustainable phase range which is between 15-20 points. Two of the six banks, HSBC and Co-operative Bank, have scored 10.45 and 11.45 respectively, which are considered within the range of offensive banking category. The other four banks which include: Barclays (9.45 sustainability score), HBOS (7.8 sustainability score), RBS (6.4 sustainability score), and Lloyds TSB (7.4 sustainability score), have only reached the preventive stage range. This result appears to support the notion that a large group of developed countries banks have reached only as far as

60

the preventive banking phase (Jeucken 2004). Banks internal environmental care initiatives are geared toward cost-savings and their external environmental dimension mostly relate to environmental risk management to prevent investment losses and to protect their reputation. This is mostly apparent with HBOS and the Royal Bank of Scotland as these banks have emphasised their risk management framework in lending to sustain long-term profitability. These banks have also emphasised their compliance and cooperation with government regulation such as the FSAs programme on treating the customers fairly. There seems also to be a lack of formal stance to go beyond the existing environmental/social laws. For instance, aside from HSBC and Co-operative Bank, the other four banks did not indicate that they will avoid involvement on critical sectors or unethical businesses. Barclays, however, appears to show some characteristics of the offensive banking phase as the bank make its progressive standpoint concerning sustainable development known in its sustainability report. The bank has also shown pro-activity in encouraging other banks to more conscientiously adopt the Equator Principles. Also, Barclays is one of the very few banks whose core environmental management system is ISO-certified. It is transparent in the quality and comprehensiveness of the data presented in the sustainability reports of HSBC and Co-operative Bank that these banks have been progressing proactively in their sustainability initiatives. HSBC has taken a step further in developing environmental guidelines for critical sectors and had been reporting the extent of the banks adoption of the Equator Principles. HSBC has also made it public that it sector exclusion stance such as avoiding financing critical sectors such as weapon manufacturing. HSBC has also established ethical investment funds. On the other hand, Co-operative Bank has often been cited as a leading bank in the UK in developing and implementing ethical and sustainability initiatives. In some respect, Co-operative Bank can be viewed as nearing to

sustainable banking phase as the Bank has been consciously choosing and implementing policies to become sustainable in every aspect of its business through its partnership approach with its stakeholders. What is noteworthy in the Co-operative Banks approach is its

reporting of the impact of its sustainability initiatives and policies such as the estimated transactions loss and gains due to ecological impact, human rights, animal welfare and diversity concerns. The Bank in this respect exhibits a dimension of sustainable banking in which its external activities (such as lending and investment) are focused on valuing and stimulating sustainability among customers and other entities in society (Jeucken 2004, p.134).

61

It is noted, however, that the six banks surveyed have performed poorly in terms of providing special products such as environmental loans, environmental leasing, and other environmental and social products. Some banks reported that they have been engaged in financing renewable energy projects such as Co-operative Bank and HBOS. Most of the banks are engaged in social finance such as microcredits, specialised lending to SMEs and finance for the homeless and deprived areas.

Table 12: Summary of Integral Sustainability Scores for Major Banks

Elements of Sustainability ** HSBC A. Communication (10%) 1. Environmental policy (4pts) * 4 2. Environmental reporting (5pts) * 5 3. Signatory to UNEP Declaration 2 (2pts) 4. Signatory to Equator Principles 3 (3pts) 5. Signatory to London Principles 0 (3pts) 4. ISO-140001 certification (4pts) * 0 Subtotal Integral score 14 Percentage score 1.4 B. Generic published information (25%) 1. Quantitative data about internal 3 environmental care (4pts) * 2. Qualitative data about internal 1 environmental care (1pt) 3. Targets for internal 4 environmental care for future (5pts) 4. Quantitative data about external 1 environmental care (4pts) * 5. Qualitative data about external 1 environmental care (1pt) 6. Targets for external 3 environmental care for future (5pts) Subtotal Integral Score 13 Percentage score 3.25 C. Generic Financing (15%) 1. Environmental risk analyses 7 (8pts) 2. Sector Exclusions (4pts) 3 3. Adherence to World Bank 4 guidelines for financing (5pts) Subtotal Integral Score 14 Percentage score 2.1 D. Special Products (40%) 1. Environmental loans (2pts) * 0 2. Sustainable investment funds or 2 advice (2pts) * 3. Environmental leasing (2pts) 0 Barclays 2 5 2 3 0 4 16 1.6 2 1 2 1 1 2 9 2.25 5 1 4 10 1.5 0 2 0 HBOS 1 4 0 0 0 0 5 0.5 3 1 3 1 1 0 9 2.25 3 0 0 3 0.45 1 0 0 RBS 3 4 2 3 0 0 12 1.2 3 1 3 1 1 0 9 2.25 3 0 4 7 1.05 0 0 0 Lloyds 3 4 2 0 0 0 9 0.9 3 1 4 1 1 0 10 2.5 6 0 0 6 0.9 1 0 0 Co-op. 4 4 0 0 3 4 15 1.5 4 1 5 2 1 3 16 4.0 7 4 0 11 1.65 0 2 0

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4. Environmental Savings products (1pt) 5. Environmental damage insurance (2pts) * 6. Venture Capital for environmental innovations (3pts) 7. Microcredits (3pts) * 8. Debt-for-nature swaps (1pt) 9. Climate products (2pts) 10. Financing for Homeless and Deprived Areas (2pts) Subtotal Integral Score Percentage score E. Social Issues and Charity (10%) 1. Credit cards/cheques for gifts benefiting nature and the environment (4pts) 2. Community Involvement (8pts) 3. Internal employees care (4pts) Subtotal Integral Score Percentage score Overall Integral Score*** classification

0 0 0 3 0 0 0 5 2 4

0 0 0 3 0 0 2 7 2.8 2

0 2 3 1 0 0 2 9 3.6 0

0 0 0 2 0 0 0 2 0.8 0

0 0 0 3 0 0 0 4 1.6 4

0 0 3 2 0 0 0 7 2.8 4

6 4 14 1.4 10.15 Offensive

7 4 13 1.3 9.45 Preventive

6 4 10 1.0 7.8 Preventive

7 4 11 1.1 6.4 Preventive

7 4 15 1.5 7.4 Preventive

7 4 15 1.5 11.45 Offensive

* For quantitative data, distinction is made by applying a sliding scale as shown in appendix 1. ** The elements of sustainability and scoring system have been adapted from Jeucken (2004) and the London Principles accompanying paper, entitled Financing the Future (2005). *** The ranges along the four stances of banks according to Jeucken (2004) are: 0-5 integral points: defensive banking 5-10 integral points: preventive banking 10-15 integral points: offensive banking 15-20 integral points: sustainable banking

6.4

Chapter summary and discussion The CSR initiatives of banks are generally supportive of their corporate objectives and

strategies particularly with regard to those initiatives in the marketplace.

Most of the

initiatives are meant to enhance their brand and reputation which are associated to the values of transparency, integrity, commitment to customer and employee care, and providing valuefor-money products and services. What is apparent is the banks main adherence to the business case approach where the CSR strategies are meant to enhance financial performance, reputation enhancement and risk management. It can also be said that the banks main reason for supporting and adopting industry-wide initiatives such as the Equator Principles and FORGE Group guidelines is to enhance its internal risk management framework to avoid

63

future reputation damage. HSBC and Barclays seems to be more serious in implementing the Equator Principles as they aimed for a leading position in the field of corporate responsibility. On the other hand, Co-operative Bank and HSBC are leading in the sustainability phase as they have reached the offensive phase while the other four banks have only reached the preventive phase. This means that specific banks need to be more proactive in product and process innovations to achieve a higher sustainability path.

64

Chapter 7 Discussion
The succeeding discussion shall focus on reflections on the influential role of specific stakeholders in shaping CSR and sustainability issues and responses, the drivers of change at the industry and firm level, and the challenges faced by banks and other stakeholders to move forward with sustainable development objectives.

7.1 Role of stakeholders In defining the CSR and sustainability issues in the banking sector, the prominent stakeholders that have significantly shaped the issues and brought these to public sentiment are the UK government regulatory bodies (for instance through the reviews commissioned by the FSA and Bureau of Treasury), media, interest groups, other competitors in the industry, and the consumers through market survey. The UK government is particularly influential as its regulatory policies and advocacy programmes directly affect the operations of banks. Banks have exhibit conscious effort to comply with these regulations. For instance, due to misselling of pension schemes and ill-advice on endowment mortgage policies, banks have established specific teams to deal with these issues and so that customers having these problems would be appropriate compensated. The UK government have also put pressure on banks to provide competitive rates for its products and improve the quality of its services following the findings on non-competitive structure and rates of banks products and services in the UK. In response, banks have taken particular steps to reduce their interest rates and fees to gain competitive edge against its competitors. The role of the UK government is particularly important in protecting the customers as survey shows that the consumers generally are not well-informed of the advantages and disadvantages of specific lending and financial products. Banks appear to find competitive edge in strengthening its CSR brand by offering competitive products and services to customers and complying and supporting government regulations and programmes. However, banks have to increase consumers awareness and

appreciation of these initiatives and subsequently convince customers of their differentiated offering. With regard to sustainable development initiatives, the UK Government and multilateral institutions such as the World Bank and UN are putting pressures on banks to undertake social and environmental risk analyses in their lending operations and contribute to

65

sustainable development. Only a very few banks such as HSBC and Co-operative Bank exhibit proactive stance in meeting strategic goals on sustainable development. For HSBC, its sustainable development innovations in products and processes can boost its competitive position not only as the largest financial institution in the UK but also to be competitive in its international operations. Clearly, it is the government, interest groups, international institutions, and strong competitors that significantly influence the level of CSR and sustainability initiatives of major banks.

7.2 Drivers of change At the industry level, the various CSR and sustainable development initiatives in the banking sector have been promoted by trade unions (e.g. British Bankers Association), governments and international institutions with the objective of influencing the banks products, systems and processes to adhere to sustainability guidelines and approaches. It is interesting to note that those trade union-initiated frameworks and guidelines have highlighted the business case model of CSR in which risk management and social and environmental analyses are to be embedded in the various functions of the banks lending operations. On the other hand, the initiatives promoted by governments and multilateral agencies emphasised more the role of the financial sector in contributing to the achievement of sustainable development goals. Hence, the role of banks in achieving an ecologically sustainable society is the key driving point for banks to take proactive stance on global issues. Thus, there is a normative dimension as it is the moral and ethical responsibility of banks to act in a responsible manner and meet societys expectations. At the firm-level, the variety of banks responses can be seen in its varying degree of sustainability initiatives and the substance of its sustainability reporting. Majority of the individual banks initiatives are clearly founded on the business case model as their sustainability initiatives have focused more on risk management, cost-savings and market opportunities of CSR and the cost and benefits of complying with government regulations. Adherence to industry-wide initiatives, such as the Equator Principles, can thus be considered as a means to enhance their risk assessment system and thereby avoid environmental and social problems in their lending operations which can damage the banks reputation. Nonetheless, one good outcome of industry-wide initiatives is that banks are increasingly improving their systems and procedures to be at par with these industry-wide standards which have increasingly been recognised by major banks. Other banks, such as HSBC and Co66

operative Bank have moved forward with developing their own guidelines and have even influenced the development of industry-wide frameworks. Nonetheless, there seems to be a lack of stance among banks, except for HSBC and Co-operative Bank, to proactively enhance and monitor the progress of their sustainability initiatives. There is also a lack of innovations in products and services to promote sustainable development such as investing in external environmental care (i.e. renewable energy projects, biodiversity enhancements, debt-for-nature swaps). The reason can be that the profitability from these investments cannot be easily determined, and so governments incentives or regulations may be needed for these innovations to be widely pursued among banks. For instance, the London Principles have outlined the innovations in the banking sector that promote sustainable development. A number of banks expressed their support to these

innovations but actually enforcing and monitoring the adherence of banks to these principles and innovation is another matter.

7.3 Challenges in sustainable banking Adherence to industry-wide initiatives of CSR and sustainable development clearly entail costs for individual banks such as re-structuring systems and processes to adapt to these standards and training bank employees to appropriately implement these standards. Marketing these innovations to shareholders, investors and customers also entails additional resources on the part of banks. Thus, for CSR and sustainability initiatives where the

business case has been clearly established, banks are more inclined to adapt to these changes such as compliance to regulatory changes and risk management frameworks. It can be the case that leading banks such HSBC and Barclays can aim to be the lead institutions in the CSR field even if these would entail additional costs in order for them to sustain their competitive position in the industry. However, the challenge would be for governments, interest groups, and international bodies to pressure banks to be more pro-active in their sustainable development stance and initiatives. Governments and interest groups can also put pressure on institutional shareholders and educate the public on the critical role of banks to achieve sustainable development goals. This would subsequently increase societys expectations of banks. International organisations such as Friends of the Earth are collaborating to monitor a banks adherence to international environmental and social principles through a regular newsletter called BankTrack. The government may also need to revisit its regulatory regime in the financial sector to assess which reforms are needed to stimulate sustainability in the banking sector. 67

Chapter 8 Conclusions and Implications

This chapter will attempt to synthesise the main points discussed in the previous chapters, highlighting the nature, drivers, extent, challenges and facets of industry-wide initiatives and individual banks responses to sustainability issues. The implications for management and future academic research will be presented as well as policy directions for government.

8.1

Conclusions As illustrated in the analytical framework, the sustainability issues in the UK banking

sector have been shaped and influenced by relevant stakeholders such as the government, competitors and consumers. The competitive structure of the UK banking industry prompted the major banks to strengthen their competitive edge by building up a strong brand and reputation in corporate responsibility. It is particularly challenging for banks to promote their differentiated brand offering as survey has shown that consumers have a general perception that all banks are the same. As the UK government seems to be bound to re-regulate the banking sector after the pension mis-selling scandals when deregulation was then enforced, banks are facing the threat of tighter scrutiny from government regulators. This prompted the banks to be more compliant with government regulations particularly in the aspect of treating the customers fairly. Banks have thus become more conscious of managing the various sustainability risks in their lending operations which can be categorised into direct risks (banks own liability), indirect risks (clients solvency), and reputation risks. Some of the recurring issues in the financial sector such as financial exclusion, uncompetitive products, low quality of service, financing of projects with questionable social and environmental impact have been emphasised by the government, interest groups and media. The industry-wide initiatives were aimed to promote among banks the adoption of principles and guidelines that would lessen or manage sustainability risks in lending and project finance and promote sustainable development initiatives. However, the effectiveness of these initiatives in influencing the banks behaviour and operations is limited as the principles are non-binding agreements and banks are bound to self-regulation and selfreporting. It was noted that more banks pledged their support of the high-profile UNEP Finance Initiative and World Banks Equator Principles as compared with the London Principles which was initiated by the UK government. One reason can be that there are direct

68

benefits in adopting the Equator Principles as the clear-cut guidelines of World Bank will enhance the risk management system of banks in project finance. On the other hand, the innovations presented in the London Principles would entail large costs and the benefits might not be directly seen as these are special products and processes that would directly contribute to sustainable development. The banks who publicly signified their aim to be leaders in the corporate social responsibility field, i.e. HSBC and Barclays, appear to be more pro-active in adopting and promoting the UN initiative and Equator Principles. However, these high street banks did not signify their support to the London Principles which would entail higher level of sustainability innovations. It is not surprising that Co-operative Bank which is seen as more advanced in its sustainability goals is the only major bank which is a signatory of the London Principles. Most banks have also not clearly indicated in their corporate responsibility reports the extent of their adoption of the Equator Principles, except for HSBC. Thus, the challenge remains in urging the banks to report with quantitative data the outcome of their adoption of these principles. The results of the sustainability assessment of the six banks indicate that majority of the banks have reached the preventive banking phase (Barclays, HBOS, RBS, Lloyds TSB) while only two banks (HSBC and Co-operative Bank) have reached the higher phase of offensive banking. This is consistent with the results of the study of Jeucken (2004) which indicate that most banks in developed countries have exhibited preventive banking as they are bound to follow government regulations to avoid further regulations. Banks are also under pressure from interest groups and media to manage their sustainability risks to avoid reputation damage. Except for Co-operative Bank, it appears that the banks have to aim higher in their sustainability goals and actions as it was found that they still lack product innovations that would stimulate sustainability among customers and society at large. This notion appears to support Jeuckens observation, indicating that: At this time, the goal of pure sustainable banking appears to be feasible for only a few niche players, such as the Triodos Bank in the Netherlands or the Co-operative Bank in the UK (Jeucken 2004 p.134). Nonetheless, most banks have generally expressed their commitment to move forward with their sustainability objectives and goals as they are aware of the increasing expectation of their stakeholders and the society at large.

69

8.2

Implications for management Banks need to recognise that the increasing pressure from the government, other

stakeholders, and competitors would eventually prompt them to give high importance in achieving and measuring their sustainability performance. It would thus be important for banks to be serious in improving their key performance indicators not only with regard to their internal risk management system but also on the external sustainability dimension of their products and services. Banks should go beyond regulatory compliance and the business case model. They should exhibit more accountability and explore every opportunity for product and service innovations in order to stimulate sustainability in the sector and the society at large.

8.3 Policy Implications for government The UK government may need to strengthen its partnership with the banking industry such as the FORGE Group as well as multilateral institutions such as the United Nations Environment Programme and World Bank to promote more widely the adoption of the London Principles in the financial sector. By continuing close dialogue with banks, the government would be able to understand better which sustainability initiatives can be pushed through economic and market reforms or whether strengthening of regulatory reforms is more appropriate to achieve the countrys sustainable development goals. The government may also need to provide significant incentives or introduce appropriate policy measures to encourage banks to venture into sustainability product and process innovations such as green venture capital, debt-for-nature swap schemes, clean energy investments and others.

8.4 Implications for future research As the research strategy and approach used in this dissertation are limited in terms of scope, timeframe and methods and the field of banking and sustainability is relatively a new area of research, several recommendations for future research can be made. One interesting research area would be to provide an understanding of the relationships of banks and their clients with respect to social and environmental risk assessment. As assessment of the impact of the international codes of conduct (e.g. Equator Principles) for project finance activities would also be important. As there seems to be a lack of literature in understanding and analysing the product and process innovation of banks towards sustainability, a more detailed analysis of this area might be interesting. Finally, it would be interesting to do an in-depth

70

case study on the differences of the responses of banks towards sustainability as they operate in varying structural and cultural context.

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Appendix 1
Sliding Scales within the integral sustainable banking score method (Jeucken 2004, p.391)

The following criteria, as adapted from Jeuckens model, are used to score the sustainability initiatives of specific firms in section 6.3: Points for environmental policy: Comprehensive and formal policy 4 points Only a few policy remarks to the environment in the financial report 2 points Points for environmental reporting: Sustainability report (environmental and social aspects) 5 points Pure environmental report 4 points Social report only (with relatively small environmental section) 3 points At least one section about the environment in the financial report 2 points At least one section in the financial report about external social aspects 1 point Points for ISO-certification: National or worldwide system certified 6 points A few separate branches/locations certified 4 points Points for the publication of quantitative data about internal environmental impact: Absolute and relative data for most locations and subjects 4 points Absolute or relative data only and for most locations and subjects 3 points Data for a few sites only and for many subjects 2 points Data for a few subjects only 1 point Points for the publication of quantitative data about external environmental care: Data about several products and/or years in tables 4 points Data about several products but less transparent and complete 3 points Data about one or a few products only 1 point Points for environmental loans: Self-financed loan 2 points Loan with governmental guarantee or facilities 1 point Points for investment funds: More than one product and/or advisorial activity 2 points One product or just advice 1 point Points for insurances: Insurance product produced by the financial institution itself 2 points Distribution only (i.e. a product from another financial institution) 1 point 76

Microcredits: Activities in developed and developing countries 3 points Activities in developed countries only 2 points

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Appendix 2
Details of the Sustainability Scoring for Major Banks (HSBC, Barclays, HBOS, RBS, Lloyds TSB, Co-operative Bank)

Table 1: HSBC and Barclays

Elements of Sustainability A. Communication (10%) 1. Environmental policy (4pts) * HSBC 4 pts - comprehensive and formal policy: Published environmental risk standard 2002 5 pts sustainability report 2 pts 3 pts 0 pt 0 pt Barclays 2pts only a few policy remarks to the environment and no indication of formal policy 5 pts sustainability report 2pts 3pts 0 pt 4 pts- ISO14001 certified

2. Environmental reporting (5pts) * 3. Signatory to UNEP Declaration (2pts) 4. Signatory to Equator Principles (3pts) 5. Signatory to London Principles (3pts) 4. ISO-14001 certification (4pts) * b. Generic Published Information (25%) 1. Quantitative data about internal environmental care (4pts) *

2. Qualitative data about internal environmental care (1pt) 3. Targets and objectives for internal environmental care for future (5pts)

3 pts absolute or relative data only and for most locations and subjects; on paper use, HSBC has yet to measure usage; there is clear targets on reducing greenhouse gas emissions 1 pt

2 pts while there was quantitative data, usage of energy, transport and travels were not on track

1 pt

4. Quantitative data about external environmental care (4pts) * 5. Qualitative data about external environmental care (1pt) 6. Targets for external environmental care for future (5pts)

4 pts concrete commitments for 2005, such as establishing benchmarks for and report on performance of the environmental management system and publish global environmental performance targets on HSBC website 1 pt. there is no concrete measures aside from lending to forestry sector 1 pt

2 pts no clear targets on internal environmental care although EMS implementation has been monitored

1pt there is no concrete measure 1pt

3 pts statement to becoming carbon neutral by 2006

2pts five-year commitment starting 2002 to the UK Governments

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Emissions Trading Scheme C. Generic Financing (15%) 1. Environmental risk analyses (8pts) 2. Sector Exclusions (4pts)

7 pts adoption of Equator Principles in progress 3 pts clear statements of sectors excluded such as weapons manufacture 4 pts Equator principles is based on WB-IFC guidelines

5pts adoption of Equator Principles not very clear in its structure 1pt only vague statements of sectors excluded 4pts

3. Adherence to World Bank guidelines for financing (5pts) D. Special Products (40%) 1. Environmental loans (2pts) * 2. Sustainable investment funds or advice (2pts) *

0 no indication of environmental loans in the report 2 pts

3. Environmental leasing (2pts) 4. Environmental Savings products (1pt) 5. Environmental damage insurance (2pts) * 6. Venture Capital for environmental innovations (3pts) 7. Microcredits (3pts) *

0 0 0 0

0 no indication of environmental loan in the report 2pts ethical investment options thru Gerrard which was acquired by UK in 2004 0 0 0 0

8. Debt-for-nature swaps (1pt) 9. Climate products (2pts) 10. Financing for Homeless and Deprived Areas (2pts)

3 pts include microcredit programs in developed and developing countries in Asia 0 0 0

3pts include microcredit programs in developing countries in Africa 0 0 2pts bank accounts for homeless people, housing loans in support of community regeneration

E. Social Issues and Charity (10%) 1. Credit cards/cheques for gifts benefiting nature and the environment (4pts) 2. Community Involvement (8pts)

2 vague indication of support on environment 7 established network of community managers in the UK, community support focused on HIV/AIDS, education, people with disability 4

3. Internal employees care (4pts)

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Table 2: HBOS and RBS

Elements of Sustainability a. Communication (10%) 1. Environmental policy (4pts) * 2. Environmental reporting (5pts) * 3. Signatory to UNEP Declaration (2pts) 4. Signatory to Equator Principles (3pts) 5. Signatory to London Principles (3pts) 4. ISO-14001 certification (4pts) * b. Generic published information (25%) 1. Quantitative data about internal environmental care (4pts) * 2. Qualitative data about internal environmental care (1pt) 3. Targets and objectives for internal environmental care for future (5pts) 4. Quantitative data about external environmental care (4pts) * 5. Qualitative data about external environmental care (1pt) 6. Targets for external environmental care for future (5pts) C. Generic Financing (15%) 1. Environmental risk analyses (8pts) 2. Sector Exclusions (4pts) 3. Adherence to World Bank guidelines for financing (5pts) HBOS 1 pt only very few remarks on environment in the report 4 pts sustainability report 0 0 0 0 ISO 14001 accreditation has yet to be secured RBS 3 pts Group Environmental Policy updated in 2002 4 pts sustainability report 2 pts 3 pts 0 0 no reference of being ISO 14001 accredited in the report

3 pts quantitative data on electricity, gas and water consumption and CO2 emission are monitored 1 pt

3 pts quantitative data on energy-relate emissions and wastes 1 pt

3 pts targets for succeeding years not comprehensive 1 pt -

3 pts only very broad environmental objectives 1 pt not very clear data

1 pt

1 pt

3 pts vague statement on environmental risk analyses 0 no reference in the report 0 not a signatory of Equator Principles

3 pts vague reference on environmental risk analyses 0 no reference in the report 4 pts while commitment to adhere to WB guidelines is indicated, it is very specific how Equator Principles are applied to internal operations

D. Special Products (40%) 1. Environmental loans (2pts) *

1 support government programmes including joint energy and carbon management

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2. Sustainable investment funds or advice (2pts) * 3. Environmental leasing (2pts) 4. Environmental Savings products (1pt) 5. Environmental damage insurance (2pts) * 6. Venture Capital for environmental innovations (3pts) 7. Microcredits (3pts) * 8. Debt-for-nature swaps (1pt) 9. Climate products (2pts) 10. Financing for Homeless and Deprived Areas (2pts) E. Social Issues and Charity (10%) 1. Credit cards/cheques for gifts benefiting nature and the environment (4pts) 2. Community Involvement (8pts) 3. Internal employees care (4pts)

projects 0 0 0 2 pts flood risk guarantee scheme 3pts one of the leading players in renewable energy projects within the UK, Ireland and the US 1 pt lending to SMEs in the UK 0 0 2pts empty homes scheme

0 0 0 0 0

2 pts microcredits to SMEs in the UK 0 0 0

0 no reference of donation for environmental projects 6 pts community support to promote education, and financial literacy 4

0 no reference of donation for environment 7 points wide community support to promote education, social inclusion, arts , sports 4

Table 3: Lloyds TSB and Co-operative Bank

Elements of Sustainability a. Communication (0%) 1. Environmental policy (4pts) * 2. Environmental reporting (5pts) * 3. Signatory to UNEP Declaration (2pts) 4. Signatory to Equator Principles (3pts) 5. Signatory to London Principles (3pts) 4. ISO-14001 certification (4pts) * Lloyds TSB 3 pts formal environmental policy since 1996 4 pts sustainability report 2 pts 0 0 0 no reference of being ISO 14001 certified; only an indicative statement that its EMS follows the ISO standard Co-operative 4 pts sustainable development policy published 4 pts sustainability report 0 pts 0 pts 3 pts 4 pts EMS were certified to the ISO14001 standard in May 2003

b. Generic published information (25%)

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1. Quantitative data about internal environmental care (4pts) * 2. Qualitative data about internal environmental care (1pt) 3. Targets and objectives for internal environmental care for future (5pts) 4. Quantitative data about external environmental care (4pts) * 5. Qualitative data about external environmental care (1pt) 6. Targets for external environmental care for future (5pts) C. Generic Financing (15%) 1. Environmental risk analyses (8pts) 2. Sector Exclusions (4pts)

3 pts quantitative data on energy, travel, paper, waste and CO2 emissions 1 pt

4 pts comprehensive data and performance indicators on ecological sustainability 1 pt

4 pts specific objectives and targets on key environmental measures for 2005 1 pt not very clear data

5 pts clear targets and objectives on key ecological sustainability indicators 2 pt few data on biodiversity enhancement 1pt

1 pt

3pts biodiversity enhancement target programmes

6 pts environmental risk assessment system for all business lending 0 no reference in the report

3. Adherence to World Bank guidelines for financing (5pts) D. Special Products (40%) 1. Environmental loans (2pts) * 2. Sustainable investment funds or advice (2pts) * 3. Environmental leasing (2pts) 4. Environmental Savings products (1pt) 5. Environmental damage insurance (2pts) * 6. Venture Capital for environmental innovations (3pts) 7. Microcredits (3pts) * 8. Debt-for-nature swaps (1pt) 9. Climate products (2pts) 10. Financing for Homeless and Deprived Areas (2pts) Subtotal Integral Score

0 not a signatory of Equator Principles

7 pts environmental risk assessment system for lending and investment 4 pts formal avoid sectors and companies which exhibit unethical record/standing 0 not a signatory of equator principles

1 pt supports the UK Governments Low Carbon Vehicle Partnership Programme 0 0 0 0 0

0 no reference in the report

2 pts 0 0 0 3pts finance renewable energy projects 2 pts microcredits in the UK only 0 0 0

3pts include microcredits in developing countries (India) 0 0 0

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E. Social Issues and Charity (10%) 1. Credit cards/cheques for gifts benefiting nature and the environment (4pts) 2. Community Involvement (8pts)

3. Internal employees care (4pts)

4 pts supports Environment for All in partnership with the British Trust for Conservation Volunteers 7 pts wide community support including an initiative to support victims of the Chernobyl nuclear disaster in Russia 4

4 pts supports environmental projects

7 pts wide community initiatives

83