1 The authors gratefully acknowledge the assistance of Tânia Duarte in the preparation of this chapter.
3 From a speech by Mark Carney, the Governor of the Bank of England, 21 March 2017 (at a meeting of the Banking Standards Board Panel).
4 The impact of globalization generally is considered in detail in Ch 17.
5 The precise meaning of ‘sustainability’ is considered in Section B of this chapter.
6 Weber and Feltmate, Sustainable Banking: Managing the Social and Environmental Impact of Financial Institutions (University of Toronto Press, 2016) (hereafter Weber and Feltmate, Sustainable Banking).
7 See epigraph from Mark Carney at the beginning of this chapter (n 3).
10 See Section B of this chapter.
11 The triple bottom line (TBL) thus consists of three Ps: profit, people, and planet. It was first coined in 1994 by John Elkington (founder of a British consultancy called SustainAbility). Elkington argued that companies should be preparing three different ‘bottom lines’: i) the ‘bottom line’ of the profit and loss account (corporate profit); ii) the ‘bottom line’ of a company’s ‘people’ account (social performance of the corporation); and iii) the ‘bottom line’ of the company’s ‘planet’ account (environmental performance of the corporation). Therefore, only a company that produced a TBL (over a period of time) was taking into consideration the full cost involved on doing business.
12 See s 172(1). These issues are to be taken into account in discharging the general duty to promote the success of the company.
13 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.
14 The first reports under the new requirements should be published in 2018, for financial years commencing in 2017. The non-binding guidelines on the methodology for reporting non-financial information is required by the Directive to be prepared by the Commission. These are expected to be published in the spring of 2017, in order to consider the work of the industry-led task force on climate-related financial disclosures established by the Financial Stability Board (FSB).
15 The NFR Directive requires companies and groups with more than 500 employees—classified as public interest entities, to disclose information on environmental, social, employee, human rights, anti-corruption and bribery issues, and diversity in their board of directors. It also introduces disclosures relating to business models, principal non-financial risks and non-financial key performance indicators.
16 In November 2016, the Financial Conduct Authority (FCA) made amendments to the Disclosure and Transparency Rules (DTR) to implement the requirements of disclosure of the issuers’ diversity policy in the corporate governance statement. Other aspects of the NFR Directive are expected to be implemented through changes to company law (as stated in Deloitte, UK Accounting Plus News, 21 November 2016).
18 Some of the phraseology, which tends to be somewhat ‘fuzzy’ in its meaning, is popular amongst politicians anxious to show their concern for ‘the community’. The UK government’s Coalition Agreement, published on 20 May 2010, states, eg, that there is to be a ‘new social responsibility levy on the financial services sector’ and that regulators are to be given new powers to ‘curb unsustainable lending practices’. In effect, this terminology simply foreshadows new tax and/or new measures related to the prudential supervision of banks but does so in a way that makes use of the popular sustainability and social responsibility agendas.
19 McCormick, ‘What Makes a Bank a “Sustainable Bank”?’ (2012) Law and Economics Yearly Review, Vol. 1 Part 1, 77 (hereafter McCormick, Sustainable Bank).
20 Richardson and Wood, Environmental Law for Sustainability: A Reader (1st edn, Hart Publishing, 2006) 373 (hereafter Richardson, Environmental Law for Sustainability).
21 The Report of the World Commission on Environment and Development: Our Common Future (Oxford University Press, 1987).
22 ‘Sustainable development’ became a crucial theme at the Rio Summit on Environment and Development, held in Rio de Janeiro, Brazil, in 1992. The Rio Summit produced two documents that immediately became the central text of Sustainable Development: the Rio Declaration (a pithy statement representing a global consensus on the core principles of sustainable development), and Agenda 21 (a detailed 800-page action plan for achieving sustainable development).
23 Weber and Feltmate, Sustainable Banking (n 6).
24 Weber and Feltmate, Sustainable Banking (n 6).
See also Vifell and Soneryd, ‘Organizing Matters: How “the Social Dimension” Gets Lost in Sustainability Projects’, (2012) Sustainable Development Vol. 20 No. 1: 18–27; and Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business (New Society Publishers, 1998).
25 Richardson and Wood, Environmental Law for Sustainability (n 19).
26 In December 2016, in a conversation at the inaugural symposium of the Sustainability Accounting Standards Board, McKinsey’s Tim Koller joined Jonathan Bailey to discuss how accepted principles of valuation apply. Koller has argued that ‘creating shareholder value is not the same as maximizing short-term profits—and companies that confuse the two often put both shareholder value and stakeholder interests at risk’. See Tim Koller, ‘When Sustainability Becomes a Factor in Valuation’ (McKinsey & Company, Corporate Finance, March 2017)
27 The last week of the month was dominated by the LIBOR rigging scandal—see further below and generally Ch 10.
28 Cm 8356. The White Paper does not refer to the ‘sustainability’ of banks as such—but it does refer to the need for UK banks to be ‘more robust’ and ‘resilient, stable and competitive’.
29 See generally Chs 13 and 14.
30 Delivered at the London School of Economics and broadcast on 19 June 2012.
31 See FSA Final Notice, FSA ref:122702, regarding a fine imposed on Barclays ‘for significant failings in relation to LIBOR and EURIBOR’. The fine of £59.5m was the largest ever imposed by the FSA and related to apparent attempts to ‘rig’ the LIBOR rate during the period 2006–8. Other penalties were imposed at the same time by US regulators. The day after the fine was announced, there was a significant fall in Barclays’ (and other banks’) share price (Barclays falling nearly 16 per cent) and many calls (including from the Financial Times) for the resignation of Barclays’ Chief Executive and/or Chairman. (The Chairman eventually announced his resignation on 2 July but the following day the Chief Executive and another senior officer resigned and the Chairman said he would stay on to help find a new Chief Executive). Many commentators speculated that the ‘rigging’ practice complained of was not confined to Barclays and this seemed to be confirmed by the FSA saying that it was still investigating other institutions. The Chairman of the House of Commons Treasury Select Committee said that the committee would be looking into the matter, commenting, ‘the corporate governance of Barclays needs scrutiny. We intend to provide it …’ The front page headline of the Financial Times the day after the scandal broke (29 June) was ‘Barclays firestorm rages’.
32 The relationship between the ‘culture’ question and standards is considered in Ch 12.
33 These principles have been adopted by the UK’s export credit agency, ECGD. In its questionnaire for applicants for assistance for projects that fall within the relevant parameters, the applicant must state how the project will: meet priority human developments; promote the inclusion of the poor in economic activity; build or rehabilitate essential infrastructure; promote economic growth; and promote development of the indigenous private sector.
34 The requirement only applies to certain poor countries and transactions of a certain size and maturity (more than two years).
35 The GABV Principles of Sustainable Banking which describe the fundamental pillars of values-based banking. Members are committed to social banking and applying the TBL concept to their core business.
36 A Green Investment Bank is a publicly capitalized entity established specifically to facilitate private investment in domestic, low-carbon, climate-resilient (LCR) infrastructure and other green sectors such as water and waste management. These dedicated green investment entities have been established at national level (Australia, Japan, Malaysia, Switzerland, United Kingdom), state level (California, Connecticut, Hawaii, New Jersey, New York, and Rhode Island in the United States), county level (Montgomery County, Maryland, United States) and city level (Masdar, United Arab Emirates). (See OECD Environment Policy Paper no. 06, ‘Green Investment Banks—Innovative Public Financial Institutions Scaling up Private, Low-Carbon Investment’, January 2017).
37 Recently, the UK Green Investment Bank plc (GIB) went through a privatization process and, on 20 April 2017, UK Climate Change and Industry Minister Nick Hurd MP announced in a statement to the Parliament that HM Government had agreed to sell GIB to a Macquarie-led consortium. Notwithstanding the private ownership, the safeguarding of the Bank’s green purposes (the environmental criteria which all their investments must meet) was assured by the Business Secretary. It was announced that the Bank would create a ‘special share’ in the company, held by a special shareholder (‘Green Purposes Company’) run by independent trustees, who would ensure that its green purposes could only ever be changed with the agreement of the independent special shareholder.
38 Citi states that their business efforts and values are also aligned with the Sustainable Development Goals.
39 See, eg, the report by the NGO, Global Witness entitled, ‘Undue Diligence’ (March 2009) which contains allegations concerning many well-known banks and their (alleged) involvement with corrupt regimes.
40 ‘Climate Change Litigation’ in Watchman (ed), Climate Change (Global Law and Business, 2008) at 229.
41 The concern of the NGOs here related to damage to the environment and western grey whales.
42 At the time of writing, UK Financial Investment Limited owns UK government shareholdings in Crisis-troubled banks such as The Royal Bank of Scotland Group plc and the UK Asset Resolution Ltd.
43 The seventeen Sustainable Development Goals—and 169 associated targets—were adopted by the General Assembly of the United Nations in September 2015 to inform a global action plan on ‘people, planet and prosperity’ through to 2030.
44 Sustainable Development Knowledge Platform, Transforming our World: the 2030 Agenda for Sustainable Development
45 As described by the UNEP FI itself in a ‘Position Paper’ presented at the 2012 Rio conference.
46 UNEP FI Position Paper on the United Nations Conference on Sustainable Development (Rio+20) titled ‘A Financial Sector Perspective’.
47 McCormick, Sustainable Bank (n 19).
48 Heal, When Principles Pay: Corporate Social Responsibility and the Bottom Line (Columbia University Press, 2008) 73.
49 On November 2013, the UNEP FI launched the Online Guide to Banking and Sustainability as a web tool developed directly out of the original report.
50 See Carney, ‘The Sustainable Development Goal Imperative’ Remarks Given at United Nations General Assembly, High-Level Thematic Debate on Achieving the Sustainable Development Goals, New York (2016).
51 The Task Force on Climate-Related Financial Disclosures published its Recommendations Report on climate-related financial disclosures on 14 December 2016. At the same time, the TCFD launched a 60-day public consultation period (closed on 12 February 2017), whose results will be incorporated into the Recommendations Report that will be delivered in June 2017.
52 UNEP Inquiry, ‘The Financial System We Need’, 2nd edn.
54 McCormick, ‘Towards a More Sustainable Financial System—Part 2: Creating an Effective Civil Society Response to the Crisis’ (2012) LFMR Vol. 6 No. 3 at 200.
55 Since its formation, the governments of Argentina, Austria, Chile, Colombia, Norway and Switzerland have become members. The Group is supported by the UNEP and GRI in a secretariat capacity.
56 It is the GoF47’s common understanding that these are key elements to enhancing the private sector’s contribution to sustainable development. See Charter of the Group of Friends of Paragraph 47 on Corporate Sustainability Reporting.
57 Edme, ‘Governments sustainability reporting efforts as key role in achieving the Sustainable Development Goals’ (2015) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting.
58 The GoF 47 countries have been actively engaged in the negotiation process of the Sustainable Development Goals.
60 See Section E of this chapter.
63 The GRI Financial Services Sector Supplement (FSSS) was issued in 2008 and developed based on the G3 Guidelines (2006). The use of FSSS became obligatory in 2010 for reporters who wanted to be recognized as a GRI ‘A-level (required to report on all criteria listed for G3: ‘Profile Disclosures’; ‘Disclosures on Management Approach’ and ‘Performance Indicators and Sector-Specific Supplement Performance Indicators’. Following the launch of the G4 Guidelines in May 2013, the complete Sector Supplement content is now presented in the ‘Financial Services Sector Disclosures’ document, in a new format, to facilitate its use in combination with the G4 Guidelines.
64 The GRI remain the most popular voluntary reporting guideline worldwide but use of GRI declined among the world’s largest companies (Weber and Feltmate, Sustainable Banking (n 6)).
65 As pointed out by the panel of experts, on Edie’s Smarter Sustainability Reporting Conference in London (March 2017): ‘Sustainability Reporting frameworks should be developed to encourage businesses to compete on performance and attract investors rather than simply being used as compliance mechanisms’.
66 ‘Investors, corporates, and ESG: bridging the gap’, Governance Insights Center, PWC’s ESG Pulse 2016 (October 2016).
67 The Sustainability Accounting Standards Board (SASB), a body backed by non-profit donors including Bloomberg Philanthropies and the Rockefeller Foundation, was launched in 2012 to draw up standards for reporting quantified measures of non-financial data that companies would include in annual reports and filings such as the annual 10-K review of the past year that is submitted to the Securities and Exchange Commission. These standards were developed with the purpose of setting industry-specific standards for corporate sustainability disclosure and with the view of ensuring that ‘disclosure is material, comparable, and decision-useful for investors’.
68 The IIRC stands for International Integrated Reporting Committee and is an international cross-section of leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society, and standard-setting sectors who developed the International Integrated Reporting Framework.
70 These impacts—categorized as ‘indirect impacts’, result from financial flows of the banking business, and currently, have less standardized measures and reporting frameworks. It is argued that the ‘indirect impacts’ that may cause material risks for investors and lenders (eg businesses that might be exposed to climate risk), should be measured and disclosed. This, not only provides an opportunity to the banks to be transparent with their stakeholders (and shareholders) but also, to influence borrowers to reduce their environmental, social, and sustainability impacts and, consequently, reduce risks for the financial sector. (Weber and Feltmate, Sustainable Banking (n 6)).
71 Barclays have developed a citizenship reporting process in 2013, which was informed by and aligned to their financial reporting; with further harmonization of reporting dates and processes between the Annual Report and Citizenship Report.
73 RBS Sustainability Report 2015 was prepared in accordance with the Global Reporting Initiative (GRI) G4 Guidelines, aligning to the ‘Core’ application level. In 2016, the Environmental data was prepared in accordance with the main requirements of the ISO 14064 Standard, the Department of Energy and Climate Change’s reporting guidance and the GHG Protocol Corporate Standard. The basis of the reporting for the data was presented in a small report (‘RBS Basis of Reporting 2016’) alongside a list of 11 KPI’s (social, conduct governance, inclusion, etc), for which performance is disclosed in the Strategic Report and on RBS’ website.
74 The disciplinary record for RBS (as well as for Barclays) is available on the notes of their Annual Report and Accounts.
75 RBS, ‘Strategic Report 2016—Creating a Simple, Safe and Customer-Focused Bank’ (hereafter RBS, ‘Strategic Report 2016’.
76 See Section E of this chapter.
77 RBS, ‘Strategic Report 2016’ (n 75).
78 Barclays has been publishing the Citizenship Report since 1998.
79 Previously called ‘Citizenship Data Supplement’ (for 2014 and 2015), the supplement includes definitions and measurement methodologies for their key citizenship performance metrics and a statement from their external assurance provider. The supplement was also prepared in accordance with the core option of the Global Reporting Initiative (GRI) G4 Guidelines. Barclays aim to align its disclosures with the new GRI Standards in 2016.
80 ‘Shared Growth Ambition’ is the Barclays’ new citizenship strategy and was launched in 2016. According to Barclays, the new citizenship strategy will allow a more holistic assessment and provide a better reflection of Barclays’ progress towards the strategic goals of the organization.
81 As disclosed in the Citizenship Data Supplement 2015, the most material issues identified were: ‘Financial performance’, ‘Risk to the financial system’, ‘Regulatory compliance’, ‘Governance, conduct and culture’, and ‘Remuneration’.
83 Incidents such as the LIBOR or FX scandals go against the sustainability principles and create backlash against the financial sector. According to Weber (Weber and Feltmate, Sustainable Banking (n 6)), as a consequence of the former scandal, UBS (and others) were removed from the Dow Jones Sustainability Index but other banks involved were able to stay.
84 The Dow Jones Sustainability Index (DJSI) was launched in 1999 and it was the first global indices tracking the financial performance of sustainability-driven companies worldwide (based on financially relevant Environmental, Social and Governance (ESG) factors and S&P Dow Jones Indices’ index methodology). It is considered the ‘gold standard for corporate sustainability’.
85 Windolph, ‘Assessing Corporate Sustainability Trough Ratings: Challenges and Their Causes’ (2011) Journal of Environmental Sustainability Vol. 1 No. 1 Article 5 (hereafter Windolph, ‘Corporate Sustainability Trough Ratings’).
86 See Ethical Indices, Business Ethics Briefing (2013), Institute of Business Ethics, Issue 33.
87 As Windolph (Windolph, ‘Corporate Sustainability Trough Ratings’ (n 85)) observed, the reliability of ratings is important for solicited ratings where the customers choose their own criteria and weightings (Finch).
89 The 2016 DJSI score was 84 out of 100 with the industry average at 61 out of 100.
91 Weber and Felmate, Sustainable Banking (n 6).
92 See Chiu ‘Standardization in Corporate Social Responsibility Statements’ (December 2010) Florida International Journal of Law Vol. 22 No. 3 at 361 and 390.
93 In the UK General Election of May 2010, the Green Party won a seat in the House of Commons for the first time.
94 See, eg, Pring and Noe, ‘The Emerging International Law of Public Participation Affecting Global Mining, Energy and Resources Development’, in Zillman, Lucas and Pring (eds), Human Rights in Natural Resource Development (Oxford University Press, 2002) at 52.
95 International Financial Organizations.
97 McCormick, ‘Towards a More Sustainable Financial System; The Regulators, the Banks and Civil Society’ LFMR Vol. 5 No. 2 at 129.
99 Weber and Feltmate, Sustainable Banking (n 6).
100 O’Sullivan and O’Dwyer suggested that EP were created also as a response to criticism from NGOs and affected communities. See also Balch, ‘Sustainable Finance: How Far Have the Equator Principles gone?’ The Guardian (15 November 2012).
101 O’Sullivan and O’Dwyer, ‘Stakeholder Perspectives on a Financial Sector Legitimation Process: The Case of NGOs and the Equator Principles’ (2009) Accounting, Auditing & Accountability Journal, Vol. 22 No. 4 at 553–87.
103 At the time of writing, according to the information available on the Equator Principles website, the Equator Principles Association members consist of 90 financial institutions drawn from 37 countries and covering over 70 per cent of international Project Finance debt in emerging markets.
105 The scope of the financial projects subject to EPIII implementation are: project finance, project finance advisory, project-related corporate loans or bridge loans.
106 Karen Wendt (ed), Responsible Investment Banking—Risk Management Frameworks, Sustainable Financial Innovation and Softlaw Standards (Springer International Publishing, 2015) 15.
107 For projects located in non-OECD countries, and in those not designated as high-income.
109 In April 2010, BankTrack responded to the BCBS capital adequacy consultation exercise with a paper suggesting that sustainability risks, impacts and factors should be taken into account in determing capital adequacy and in other aspects of regulation. The website also has a section on ‘dodgy deals’—financings where questions are raised on the issues of concern to the NGO. This gives details of bank involvement in those financings.
110 The Collevecchio Declaration on Financial Institutions and Sustainability was launched at the World Economic Forum in 2003 and is signed by a large number of NGOs.
112 The pressures for ‘responsible investment’ manifest themselves in a number of ways. A leading example can be found in the Report of the Asset Management Working Group of the United Nations Environment Programme Finance Initiative entitled ‘Fiduciary Responsibility’ (July 2009).
113 Wörsdörfer, ‘10 years’ Equator Principles: A Critical Appraisal’ in Karen Wendt (ed), Responsible Banking Investment Banking—Risk Management Frameworks, Sustainable Financial Innovation and Softlaw Standards (Springer International Publishing, 2015) 482–3.
114 See Vinter, Project Finance (3rd edn, Sweet & Maxwell, 2006) at 9-019.
115 See Marco, ‘Accountability in International Project Finance: The Equator Principles and the Creation of Third-Party-Beneficiary Status for Project-Affected Communities’, (2011) 34 Fordham Int’l LJ 452.
116 This is the project that is the subject of the ICJ judgment referred to above. See paragraph 11.42.
117 See ‘EP 2: the Revised Equator Principles: Why Hard-Nosed Bankers are Embracing Soft Law Principles’, LFMR Vol. 1 No. 2 at 85.
118 This expression is generally used to refer to direct involvement of citizens (as opposed to politicians) in public decision-making.
120 UNEP Inquiry, ‘Equator Principles’ (n 102).
121 Weber and Feltmate, Sustainable Banking (n 6).
122 UNEP Inquiry, ‘Equator Principles’ (n 102).
123 For example, the campaigns against the financing of ‘Dakota Access Pipeline’ and the ‘Trans Mountain Expansion Project’.
124 Thomson and Boutilier, ‘The Social License to Operate, in P Darling (ed), SME Mining Engineering Handbook (Society for Mining, Metallurgy and Exploration, 2011) at pp. 1779‒96.
126 See O’Brien, Gilligan, Roberts and McCormick, ‘Professional Standards and the Social Licence to Operate: A Panacea for Finance or an Exercise in Symbolism?’ (2015) LFMR Vol. 9 No. 4 at 283–92.
127 Carney, ‘Three Truths for Finance’ (Speech delivered at the Harvard Club UK, 21 September 2015).
128 See, for example, Haldane, ‘The $100 Billion Question’, BIS Review, 40/2010 (Speech delivered at the Institute of Regulation and Risk, Hong Kong, 30 March 2010), available at <http://www.bis.org/review/r100406d.pdf>.
129 Kurer, Legal and Compliance Risk: A Strategic Response to a Rising Threat for Global Business (Oxford University Press, 2015).
135 McBarnet, ‘Financial Engineering or Legal Engineering: Legal Work, Legal Integrity and the Banking Crisis’ in I MacNeil and J O’Brien (eds), The Future of Financial Regulation (Hart Publishing, 2010) 67–82.