Corporate Social Responsibility (CSR) & Sustainability within Banking
According to the Economist, CSR have become mainstream in business activity. In recent years, we have seen a rise in businesses investing in social and ethical initiatives. But what is the fundamental reason for the increased adoption of CSR within business? Is the growth in CSR merely a case of firms using CSR as a way of building a stronger brand image? Or do firms have an honest concern for the environment in which they operate?
In this article, we will explore the benefits and challenges that a bank may face in implementing CSR practices and new processes.
Corporate Social Responsibility
Known as the Triple Bottom Line Framework (see figure 1), CSR is generally understood as being the method through which a company achieves a balance of economic, environmental and social practices whilst simultaneously fulfilling stakeholder expectations.
The rise in businesses implementing CSR practices has been mirrored by a rise in social responsible investments (SRI). SRI is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. SRI is based upon the premise that banks adopt new ESG practices in order to meet the expectations of potential investors and thus attract new investment.
CSR within the banking industry
UK & US Global Fortune 500 companies spend $15.2bn a year on CSR activities. In the wake of the global credit crisis, the banking industry has faced intensified regulatory pressures and public scrutiny.
The record level of regulatory fines and penalties as a result of banking malpractice has presented banks with the challenge of needing to restore public trust and establish clear and transparent business models. As a result, many top banks have begun to integrate CSR factors within their long-term investment strategy. This has served as a foundation not only for developing new products and new growth opportunities, but has also ensured better management of risk in the banks’ overall investment strategies.
For a bank, the integration of ESG is costly, both in terms of financial investment and in relation to organisational practices.
From a financial perspective, the costs of implementing CSR and sustainability within a bank may include:
- Capital costs of CSR initiative – cost of new equipment, new products etc.
- Recurrent cost: Continuous monitoring of compliance and CSR practices, trainings.
- Communication costs: Communication of ethical codes/conducts to all stakeholders.
- Staff costs: Recruitment of skilled employees, creation of dedicated team etc.
From a strategic perspective, banks will have to adopt new policies and practices within their organisational structure. This may include retraining staff, adopting new risk management practices and being highly selective with their investment portfolios.
Benefits of implementing CSR
Although the implementation of CSR is at a high cost to banks, the financial performance of companies that have successfully implemented CSR practices has historically been high.
The high performance of ethical firms can be explained by two logical reasons:
- Companies at the forefront of implementing CSR are healthy firms that strive to shape the future in light of new social and environmental challenges.
- CSR is a way to create new businesses, and has allowed firms to attract new investors and new growth opportunities
We can identify 4 benefits of implementing CSR, as illustrated in the diagram below:
However, we can also identify two main threats from the development of SRI and CSR.
- CSR and SRI may not always align and some companies may set-up CSR in order to meet SRI requirements instead of implementing CSR due to a genuine belief in its principles. If an investment is based on a company’s ESG rating, companies may seek to improve their sustainability performance to increase investor confidence.
- Regulation is supporting the growth. Nevertheless for new arising regulations, cost/benefit impact studies and in-depth assessment will have to be performed to ensure regulations will not harm business otherwise companies might turn away from CSR/SRI
In conclusion, regardless of whether banks have an honest ‘CSR strategy or are merely adopting ethical practices with the underlying goal of maximising profit, it is evident that within banking we are entering a highly demanding new environment where banks are faced with the challenge of trying to gain a competitive advantage within a highly regulated industry. This has been countered by the growth in ethical behaviour within business and as a result, has provided banks with new opportunities to remain competitive and attract new investment.
The Economist, “Special Report: Corporate Social Responsibility: just good business”, available on the following website.
United Nations Industrial Development Organization, “What is CSR” , available on the following website.