Corporate Social Responsibility in Banks; What does it mean?

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Over the past few years, a rising emphasis has been placed on companies and financial institutions’ Corporate Social Responsibility. But what does Corporate Social Responsibility (CSR)" mean anyway? This is indeed one of the most frequently asked questions for all those dealing with CSR matters.

 CSR is also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance. Different organizations have developed different definitions and there is large common ground between them.

 A simple definition refers to CSR as how companies and financial institutions take into consideration the impact on society of their operational activities. Consequently, it requires a built-in, self-regulating mechanism whereby businesses would monitor and ensure their adherence to law, ethical standards, and international norms to produce an overall positive impact on society.

 It is not surprising to see that CSR is subject to considerable amount of debate and criticism. Advocates argue that businesses benefit in many ways by operating with a perception broader and longer than their own immediate, short-term profits. Opponents argue that CSR diverts from the basic economic role of business; others argue that it is nothing more than superficial window-dressing;

Largely, the banking industry in the Middle East does not realize the central importance of having a defined CSR policy. Many banks do not fully understand the worth of CSR. There are obvious and real gains on hand for banks which have well-designed and successful CSR strategies. They can promote their profile in the community they serve, enhance local, and cross-border economic performance, and enable community development, at the same time strengthening their profitability.CSR focuses more on how companies and financial institutions can contribute through their core business, in addition to traditional charitable donations.

CSR and Project Finance

CSR practices are often implemented in banks’ core business, which are credit and investments. Project finance is one of the methods to get capital for investment opportunities.      

Banks consider how to fairly balance the risk and interests of the various participating parties, including protecting the interest of those who are directly and indirectly affected - specifically the local community that reside within or close to the area impacted by the project.

It is recommended that banks recognize their responsibility to prevent or limit social and environmental harm that may have been caused by activities financed by them; they need to adopt appropriate analysis and verification procedures.

Banks have impact on the environment directly and indirectly. Lending and investments activities have an indirect impact on the environment. Therefore, banks should be encouraged to consider environmentally-friendly purposes in their credit decisions. To this end, banks may offer incentives to credit facilities for “green” investments such as improving a buildings’ insulation or more efficient lighting systems which use alternative energy sources. The bank may apply less stringent rules in relation to collaterals or offer discounted loans to such clients for these types of investments.

There are approaches that explore how banks are linking the traditional credit risk assessment with the borrower’s environmental risk assessment. In other words a bank can assess the environmental credit risk of the borrowing customer and then factor in the results of this assessment at some stage of the creditworthy assessment process.

Community involvement

Community involvement is the basis of all accomplished CSR policy initiatives and extends far beyond the standard charitable measures. Banks should introduce innovative schemes such as:

 - permanent  learning programs for disadvantaged sectors of society;

- sponsorship of young entrepreneurs; 

- provision of academic scholarships and research proposals;

- support environmental issues such as recycling and waste management;

- community support programs;

- health support programs;

- financial support for art and culture;

Banks may also support non-governmental organizations engaged in drug prevention measures for the youth with a mentorship and parental training programmes. Bank employees can be mentors for pupils at the senior level of the compulsory school during one school year.

Awareness and Transparency

It is essential that there should be a transparent and strong commitment to adoption of CSR practices. This can be reached through explicit reference to CSR activities adopted by banks through the following means:

- dedicating sections of Annual Reports to CSR matters;

- publishing of Sustainability Reports and/or policy statements on CSR; and web-based information.

It should be noted that corporate sustainability for banks is much more than mere charity. In this context, banks are encouraged to improve the future of the people in all communities they operate  through CSR programmes, which in turn will sustain their business in the future.

In Europe, a dramatic change has been in the type of CSR reporting which has changed from simply environmental reporting to sustainability (social, environmental and economic reporting which has now become typical among top listed companies). There has been an increase in the number of companies publishing CSR information as part of their annual reports.

Banks and the Environment 

Just like other business sectors, the business of banking has a direct impact on the environment through consumption of paper, energy, waste management and means of transport used. Direct environmental impact can be reduced by keeping environmental order in banks themselves, through limiting the consumption of energy and paper, ensuring good waste management and requiring suppliers’ to conform to environmental standards. A bank can minimize the impact in a systematic manner through implementing an environmental policy; it can even go further and apply for environmental certification in accordance with ISO 14001.

The ISO 14001 is a standard for environmental management systems that is applicable to any business. It aims to reduce the environmental footprint of a business and to decrease the pollution and waste a business produces.

Good examples from the banking sector include Deutsche Bank, Barclays Bank and Alpine Bank of Colorado. They have constructed a comprehensive Sustainability Management System in accordance with ISO 14001 and permitted an independent certification agency to monitor their commitment in the field of sustainability by making sure they comply with the requirements of ISO 14001 standard.

Financial Inclusion

The market in which banks operate today requires new range of products targeting new customer segments including groups who are not yet fully integrated in society, and not dealing with banks such as temporary workers, low-income families, and micro businesses operating in poor areas of the country.

This situation represents for banks a challenge in terms of designing suitable products for these distinct segments, and the opportunity to develop a new type of business beneficial to all. Some good examples of responding to the challenge would be microfinance and financial education.

Banks are encouraged to promote financial education projects involving different target groups. This is achieved in two ways. Firstly, by concluding agreements with strategic partners which are recognized by the target groups in order to inform them better on financial services and products which they will use in their daily life.  Secondly, by developing contacts with the local authorities towards certain target groups. These target groups include primary schools, secondary schools, higher education, universities, and the general public world.

Some initiatives involve surveys which provide insight into the challenges and opportunities related to financial literacy in the target groups of children, teens, students and young adults. Another consists of developing new products, educational materials and events intended to stimulate financial skills and knowledge. Perhaps the best example is an educational website with fun, online exercises for children, tips and advice for parents on how to educate children financially.

Conclusion

The key factors for a successful CSR policy can be summarized as follows:

- Continuous support of senior management and all staff

- Reporting CSR – internally and externally, on a long-term basis, with regular reviews

- Include CSR as integral part of corporate strategy of the bank

The advantages for banks in adopting well-designed CSR initiatives lie in the following areas:

- Encourages sustainable behavior by customers;

- Supports development of separate business models for various segments;

- Provides real benefits for the society as a whole;

- creates higher employee motivation, and superior performance levels;

- Makes banks more aware of their potential role in society;

- Creates positive publicity and/or increased brand recognition.

About The Author:

Hany Abou-El-Fotouh is Chief of Staff  & Group Board Secretary, CI Capital Holding - the investment banking arm of Commercial International Bank which is the largest private bank in   Egypt . He provides advice and direction to the Board and management with respect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENA region. Founder of the Middle East Compliance Officers' Forum (MECOF), he has been honored for his work in promoting compliance culture and awareness in the MENA region 

Hany writes articles to different newspapers and journals on a variety of subjects. He is a public speaker and professional trainer.  Previously, he worked in various senior positions in leading banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque Saudi Fransi among others

Hany is a certified member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and Certified Director by Egyptian Institute of Directors

http://www.linkedin.com/in/ hanyfotouh

hanyfotouh@yahoo.com