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Part III The Conduct Crisis, 11 Sustainability, Responsibility, Public Trust, Ethical Drift, and the ‘Social Licence’ Concept

Roger Mccormick, Chris Stears

From: Legal and Conduct Risk in the Financial Markets (3rd Edition)

Roger McCormick, Chris Stears

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2021. All Rights Reserved. Subscriber: null; date: 15 April 2021

Subject(s):
Environmental liability — Equity

(p. 199) 11  Sustainability, Responsibility, Public Trust, Ethical Drift, and the ‘Social Licence’ Concept1

At HSBC we know how important it is that banks play a positive role in the global economy and society. We believe that a sustainable bank must be consistently profitable, but not solely concerned with making a profit.2

… banking has suffered twin crises of solvency and legitimacy … large banks are now stronger, more liquid and more focused. This immense progress has been overshadowed by a crisis of legitimacy … Multiple factors led to a tide of ethical drift … Bad behaviour went unchecked, proliferated and eventually became the norm … Repeated episodes of misconduct have called the social licence of finance into question.3

A.  ‘Sustainable Banking’

11.01  Banks operate in, and benefit from the existence of, a global market for their services.4 Whilst ‘global regulation’ of the global market remains somewhat elusive as national jurisdictions and their political leaders struggle to find agreement on (p. 200) regulatory strategies, the relative success of global ‘soft law’ quasi-regulation on so-called ‘sustainability’5 and related issues stands out as an area where there is a degree of consensus. The scope of the consensus includes the broad parameters of acceptable (and unacceptable) behaviour by banks—where, for various reasons, some harmonization appears to have been achieved much more easily than has been the case with, say, harmonized prudential rules on capital and leverage or the introduction of a common financial transactions tax. Banks appear to have felt able to accept ‘soft’ regulation in relation to the sustainability of their conduct—on a global basis—as appropriate and as a price worth paying for the benefits that the global market provides for them. However, conventional institutions address sustainable development in a ‘reactive’ way, focusing mainly on the ‘business case’ for sustainability (rather than the ‘sustainability case’ for business) and considering environmental and social issues as part of a financial risk assessment. Furthermore, it is still unclear whether these environmental, social, and sustainability issues are seen by banks as relevant to their business and how they ought to be integrated into their core business. The banks’ practices suggest, to some extent, that sustainability is to be embraced when it creates benefits for the financial institution, but it is not a concept that has been adopted with enough rigour to shift core banking practices in a more sustainable direction.6

11.02  The sustainability agenda fits well alongside the many calls for greater ethical awareness, a reversal of ‘ethical drift’,7 and, generally, better conduct at an individual level following in the wake of the LIBOR scandal.8 Further, sustainability questions also arise, albeit indirectly, in the context of the banks’ customers insofar as they require banks to follow procedures that relate to the customers’ activities. The ambit of soft law of this kind ranges from ‘corporate social responsibility’ (CSR) to more general issues associated with the ‘Environment, Social, Governance’ (ESG) agenda and, more recently, the scope of the so-called ‘social licence’.9 The combined effect, or objective, of observance of this body of soft law is often referred to as ‘sustainable banking’ and the relevant issues are often referred to as ‘sustainability issues’; but, as we shall see further in this chapter,10 the meaning of this phrase is not altogether clear and may vary according to the context. In addition, the banks’ acceptance of responsibility for compliance with the requirements of sustainability brings with it reputational considerations and may involve legal consequences. With the use of soft law in CSR we are seeing a (p. 201) much more complex stakeholder dynamic, one in which multi-stakeholder dialogue and collaborative governance are important.

11.03  In the twenty-first century, the idea that commercial enterprises should have some sense of CSR and policies to reflect that responsibility, has gained ground. Although there is no generally accepted definition of CSR, and its impact on different companies varies, the evolution of this concept and its motivations highlighted the need for consideration of new factors as to what constitutes sustainable corporate ‘performance’ and the so-called ‘Triple Bottom Line’11 approach. CSR, although essentially a soft-law creature, does have some relationships with formal law. The Companies Act 2006, for example, imposes duties on the directors of companies to have regard (amongst other matters) to the impact of the company’s operations on ‘the community and the environment’ and also ‘the desirability of the company maintaining a reputation for high standards of business conduct’.12 These duties would apply to directors of banks that happen to be English companies but banks have, generally, taken up the social responsibility agenda, to a greater or lesser extent, voluntarily, without the need for legal compulsion (although there has of course been social pressure on them). The recent EU Directive on disclosure of non-financial and diversity information and reporting (the NFR Directive),13 which took effect across EU in January 2017,14 brings some reinforcement to the transparency debate over materiality and non-financial reporting. The Directive aims to establish a minimum standard for ESG reporting across the EU and it will exert more pressure on large public-interest companies to extend their reporting on non-financial issues with relevant, material and useful information15 on their policies, main risks and outcomes relating (p. 202) to the company’s operations, and include any relevant non-financial key performance indicators.16

11.04  But what is ‘sustainable banking’? Is it the same as ‘responsible banking’? Is it related to the ‘culture’ of banks themselves (whatever that may be), or is it more concerned with how banks use their financial power, the role they play in the ‘allocation of capital’ in a global market? Are these, in reality, two distinct areas of concern or are they so closely linked that they should be considered together? Whatever may be the answer to such questions they clearly share the same practical difficulties insofar as they raise issues that are both inter-national and inter-generational. As a result, traditional (national) legislative measures—which emanate from legislative bodies populated by politicians whose agendas are dominated by national, and usually short-term, interests—are unlikely to be the source of a complete solution.

11.05  In the aftermath of a decade of scandals and crisis in the financial sector, which have led to widespread mistrust of the industry,17 it is surely imperative that the concept of sustainable banking, and what it encompasses, is taken more seriously. Responsible business practices are not only the backbone of sustainable banking but also vital to protect the financial system and its stakeholders. ‘Risk management’, ‘corporate governance’, ‘human capital management’ and ‘business ethics’ are some of the topics that are considered by banks and the financial sector more generally (as well as investors), as material. Banks ‘leading’ on sustainability have responded to these challenges by emphasizing the importance of cultural transformation to better control compliance failures. We have witnessed an anchoring of sustainability in the financial sector strategies and an increased adoption of policies, initiatives, and codes, which raise social expectations of financial system transformation and accountability. The global financial system, on the other hand, is becoming aware of sustainability as a competitive factor and the need for reshaping to achieve ‘sustainable development’.18 But, it is crucial to understand, (p. 203) ‘What does a “sustainable bank” look like?’19 To answer this question, we must, of course, consider the meaning of ‘sustainability’ itself.

B.  What is Sustainability?

11.06  Sustainability (or ‘sustainability development’) is conventionally understood to entail the simultaneous pursuit of three policy goals (which are often seen as competing with each other): environmental protection; social equity (and justice); and economic welfare.20 The Brundtland Commission of the United Nations21 famously defined sustainable development in 1987 as development that meets ‘the needs of the present without compromising the ability of future generations to meet their own needs’—which brought the term ‘sustainable development’22 into public discourse and provided an early articulation of the sustainable development agenda. The concept of sustainability thus has a prominent forward-facing focus which involves striking a balance between the needs of the present and the needs of the future. Examples abound. Timber production should be managed in a way that does not result in the rainforests being stripped bare, with potentially appalling consequences for the environment as a whole (not merely a shortage of timber for future generations). Fishing policy should not allow over-fishing that could result in endangering entire species of fish. Energy policy should recognize that the supply of carbon-based fuel is not infinite and that alternative sources of energy need to be developed for the future. And so on. Nevertheless, mitigating and adapting climate change is possibly ‘the most urgent global environmental issue’.23 The idea of balancing the needs of successive generations fairly is sometimes referred to as ‘inter-generational equity’. In addition to ‘inter-generational equity’, the concept of sustainability takes environmental, societal, and economic issues into account in a way that supports long-term opportunities and development.24 Therefore, (p. 204) sustainability ‘goes well beyond the scope of international environmental law, embracing the fields of international trade and economic law and policy, as well as human rights and social and economic development’.25

11.07  How then, should we apply the concept of sustainability in the context of banking? How can the financial markets (and those operating or participating in them) safeguard the principles of sustainable development? How does sustainability affect the value of companies?26 These questions are increasingly pertinent to financial market activity (and expectations of that activity) and, certainly post Financial Crisis, have continued to create uncertainty and present legal risk issues. As Patrick Jenkins (writing in the Financial Times ‘Sustainable Banking & Finance’ supplement of 14 June 2012) noted, in the context of the eurozone troubles:

At a time when several eurozone governments are battling to restructure their budgets and make their debt burdens more manageable, the topic of sustainable finance could hardly be more pertinent.

The following paragraphs explore legal and conduct risk issues as they relate to the sustainable finance concept.

11.08  In early June 2012,27 the UK Government published a White Paper28 on important bank reforms (mainly on the topic of ‘ring-fencing’ retail banking from investment banking (or ‘utilities’ from ‘casinos’)) that was sub-titled ‘Delivering Stability and Supporting a Sustainable Economy’29 and, in the first of his Reith Lectures for the BBC,30 the historian, Professor Niall Ferguson, appealed for greater inter-generational equity and asserted that current practices in government accounting are ‘fraudulent’.

There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon. No legitimate business could possible carry on in this fashion.

The essence of Professor Ferguson’s complaint, however, was not merely the dubious accounting practices but also the fact that modern representative (p. 205) government, especially when accumulating debt, does not look beyond the interests of the current generation of voters:

The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.

11.09  Those suffering as a result of extreme ‘austerity programmes’ introduced around the eurozone in order to allow governments to gain access to bail-out funds to refinance unsustainable debt might be inclined to nod in agreement. Campaigners for ‘sustainable development’ likewise. However, although Ferguson suggested that ordinary businesses could not be as unreliable in accounting practices as governments, he should perhaps have made an exception for banks, since his remarks carried echoes of an article published earlier in the month (5 June 2012, in Economia magazine) by Andrew Haldane (currently the Chief Economist at the Bank of England) when, calling for reforms to bank accounting, he said that accounting rules should ‘properly recognise the special characteristics of banks’ assets and liabilities’ and that:

to provide point valuations of banks’ assets, as at present, is to ask auditors to pin the tail on a boisterous donkey.

11.10  Various statements at around this time from regulators and others about banks’ balance sheets and solvency, particularly in the eurozone, could have led, were it not for depositor guarantee schemes, to a sharp loss of confidence on the part of the average citizen as to just whom they can believe. In his Mansion House speech (14 June 2012), Mervyn King (then the Governor of the Bank of England) remarked that, in the euro zone:

… liquidity is not the issue, because after a few months [following the ECB’s one trillion euro liquidity programme (known as LTRO—long term refinancing operation] we are back to where we were. The problem is one of solvency.

Where there are debtors who cannot afford to repay, there are creditors who will not be repaid. Until losses are recognised, and reflected in balance sheets, the current problems will drag on. An honest recognition of those losses would require a major recapitalisation of the European banking system.

The appeal for an ‘honest recognition’ implies that ‘the system’ is, shall we say, not entirely honest.

11.11  It is clear that we have to be sceptical about what we are told about the financial position of banks. But even if we could trust ‘the numbers’ that banks and regulators present to us, we know that they do not tell us anything like the whole story. Whatever new laws, regulations and codes of practice are passed, will the banks try to find ways round them and ‘game the system’? Will they honour the spirit as well as the letter of the law? How can we know if banks have changed since the crisis? Have they really started to take ethics and morality more seriously? Do they look at their long term sustainability or are they still swayed by the pursuit of short-term profit at any cost? Do the remuneration packages of (p. 206) senior executives still provide all the wrong incentives? These issues go to behaviour and attitude and, in the aggregate, to the ‘culture’ of the bank itself. If these have not changed, we can expect the ‘bad habits’ that brought us the Financial Crisis in 2007 to give us a re-run before too long. If banks continue to operate within amoral or immoral culture zones, the lack of responsibility that ensues will infect the financial system itself, as graphically demonstrated by the LIBOR rigging scandal that surfaced in late June 2012,31 which succeeded in shocking an already sceptical public and resulted in calls for resignations, police investigations and public enquiries. The question of bank culture,32 and how to correct it, suddenly became urgent for any financial market centre that valued its reputation. We can, of course, find any number of statements by senior bankers that tell us they have learnt their lesson and ‘turned a page’. We can see the growth of new committees and changes to organizational structures that suggest that changes are happening. But how can we verify that all this is not just window-dressing?

11.12  One approach to the question, ‘What is sustainability?’ can be found in the January 2008 set of principles and guidelines (revised in 2016) issued by the OECD and entitled, ‘Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export Credits to Low-Income Countries’. In this document, sustainable lending is defined as ‘lending that supports a borrowing country’s economic and social progress without endangering its financial future and long-term development prospects’. It is said that sustainable lending ‘should, inter alia, generate net positive economic returns, foster sustainable development by avoiding unproductive expenditures, preserve debt sustainability and support good governance and transparency’. The document sets out various principles,33 which include the requirement that export credit agencies seek (p. 207) assurances from relevant government authorities in a buyer country, for any financing that involves the public sector, that, in essence, the financing is affordable, in line with official budgets, etc.34

11.13  The main concerns are, manifestly, with public sector projects. It is said that, ‘private sector cases will usually meet sustainable lending assessment criteria, as by their nature they are designed to be commercially viable and self-financing’. Private sector banks tend to address sustainability issues in different ways to public sector institutions, with much emphasis on environmental and social issues. Within the private sector banks, there is a particular approach of banks (so-called social or ethical banks) that reflects the sustainability development on their core business. As an example, Triodos Bank (a Dutch entity with offices in the UK and elsewhere) which is at pains to assure its customers that it only deals with ethically conscious organizations (charities, community projects, etc) and even publishes details of all its borrowers. Triodos Bank won the Financial Times/IFC (‘Sustainable Bank of the Year’) award in 2009, the Queens Award for Enterprise in 2010 and the ‘Bank of the Year’ at the Better Society Awards in 2016. It chairs the Global Alliance for Banking on Values,35 an organization with a collective goal to change ‘the banking system so that it is more transparent, supports economic, social, and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy’. Additionally, green investment banks36 (GIBs) and GIB-like entities have been created in recent years by national and sub-national governments. As an example, the UK Green Investment Bank was created in 2012 to ‘back green projects, on commercial terms, across the UK and mobilise other private sector capital into the UK’s green economy’. With the motto of ‘Investing to build a stronger greener UK economy’, it presents itself as ‘the first bank of its type in the world’.37 A bank (p. 208) such as Citigroup, on the other hand, tells us through their mission and value proposition that they prioritize building an ethical culture (‘We strive to earn and maintain public trust by constantly adhering to the highest ethical standards’) and enable a growth mind-set within the organization (‘We ask our colleagues to ensure that their decisions pass three tests: they are in our clients’ interests, create economic value and are always systemically responsible’).38

11.14  Most banks would contend that they have some kind of ‘sustainable lending’ policy (by whatever name). The difficulty, of course, is that a sceptical public (especially interested NGOs)39 will examine in some detail how closely their lending operations in practice comply with such policies. If a major discrepancy emerges (say, because the bank funds an environmentally ‘dirty’ project) then the bank will, at the least, suffer reputational damage (not merely because it has lent to a bad project but because it has misled the public and appears to be hypocritical) and may find itself the subject of litigation. The risk of litigation is greater in this context as many environment groups and other NGOs see the publicity generated by court actions as an end in itself, regardless of the merits of the claim. The attractions of this strategy are only increased if the defendant bank is owned or partly owned by the government.

11.15  Cofre, Rock and Watchman cite40 various examples of court proceedings made against export credit agencies in connection with the financing of fossil fuel projects (including the judicial review proceedings brought by various NGOs in the High Court in the UK in relation to ECGD’s potential role in the Sakhalin 2 oil and gas project)41 and suggest that ‘it is clear … that judicial review is fast becoming a tool to address government action and inaction in the global sphere, a trend set to continue in relation to multi-jurisdictional climate change matters’. Perhaps mindful of the sensitivities in this area, UKFI42 adopted their ‘Sustainability Policy’ in February 2010. This stated (amongst other things) that:

(p. 209)

UKFI expects our investee companies to act ethically and sensibly on sustainability issues. We expect each investee company to set out clearly which of the ethical and environmental standards set by Governmental, advisory and regulatory bodies it has committed to adhere to and report against, and to explain why it has chosen these principles. We will meet with each investee company to discuss sustainability issues at least annually. Where they are not in line with this policy we will take this up with them.

C.  Aligning the Financial System with Sustainable Development

11.16  How has the idea of ‘sustainable finance’ (or ‘banking’) been developed? Over the past decades, there has been significant progress in the way banks think about and deal with sustainability: in the 1980s, banks began to manage their energy and water use—driven by increases in energy prices and the new environmental regulations; in the 1990s, the first sustainability mutual funds, indices and other sustainability-related products and services were launched; and, in the 2000s, carbon finance and impact investment started to gain ground.

11.17  In June 2012, as the eurozone continued to struggle with its apparently intractable problems, many of the world’s politicians and environmentalists, concerned about sustainability, were converging on Rio de Janeiro for The United Nations Conference on Sustainable Development (or ‘Rio+20’). The agenda was dominated by traditional ESG issues but the financial sector was able to make its voice heard (although not by saying very much about the financial sector itself). The Rio+20 resulted in a focused political outcome document—The Future We Want, which contained measures for implementing sustainable development and demanded a new vision and a responsive framework to apply from 2015. The Member States decided to launch a process to develop a set of Sustainable Development Goals (SDGs),43 which will build upon the Millennium Development Goals (MDGs) and converge with the post 2015 development agenda. The follow-up from the Rio+20 culminated in the adoption of the 2030 Agenda for Sustainable Development.44

11.18  Two decades before, in the context of the 1992 Earth Summit (or United Nations Conference on Environment and Development), there was established a ‘global partnership between the United Nations Environment Programme (UNEP) and the financial sector’45—the UNEP Finance Initiative with a mission to promote (p. 210) sustainable finance. The UNEP FI is ‘member-driven’ and ‘voluntary’ (with over 200 members, including banks, insurers, and investors). The ‘common vision’ shared by UNEP FI members is (they say) that sustainable development can only be achieved with ‘a stable and sustainable financial sector’ as the ‘backbone’ of a ‘more balanced, inclusive and green economy’. For Rio+20, the UNEP FI released its Position Paper,46 which consisted of six short paragraphs, mainly exhortatory in nature and encouraging the ‘governments of the world’ to do various things (including, it would seem, providing unspecified encouragement and incentives for the financial sector), and a summary of what the authors regard as desirable ‘key outcomes’ for the Rio conference. These outcomes (which ‘governments’ were asked to consider) were:

  1. (1)  highlighting the role of the financial sector, having regard to ‘its ability to promote the allocation of capital to those businesses and market players operating more sustainably’;

  2. (2)  incentivizing financial institutions to ‘integrate sustainability issues into their risk management policies and overall decision-making procedures’;

  3. (3)  promoting ‘the availability and accessibility of relevant and comparable sustainability information’;

  4. (4)  committing to ‘work closely with the financial sector in building markets for long-term sustainable lending, investment and insurance services …’; and

  5. (5)  calling for ‘all UN-embedded and UN-backed partnerships with the financial sector and the broader private sector to work closely in order to enhance their efforts in making sustainable finance a reality’.

In the aftermath of the Financial Crisis, and by June 2012, one might expect that, any paper or ‘commitment’ on sustainability by or on behalf of the financial sector would evidence awareness of the decidedly unstable conditions prevailing in the financial sector. This, however, did not appear to have been the case.47

11.19  The Initiative was based on the UNEP Statement of Commitment by Financial Institutions on Sustainable Development. The ‘commitments’ in question (set out in the UNEP Statement) include a number of statements of belief and opinion rather than undertakings to do (or not do) anything in particular. For example, the first ‘commitment’ is:

We regard sustainable development—defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs as a fundamental aspect of sound business management.

Any ‘commitment’ in the above statement, is at best, implicit and, as a result, somewhat imprecise. The second ‘commitment’ states that the UNEP FI members (p. 211) ‘believe that sustainable development is best achieved by allowing markets to work within an appropriate framework of cost efficient regulations and economic institutions’ and that ‘Governments have a leadership role in establishing and enforcing long-term priorities and values’. No ‘commitment’ in the ordinary sense is contained in this statement, which, at least in part, seems to reflect the bankers’ desire for free markets. In fact, the only clear commitment—such as would be recognized as involving a promise of some kind—is a commitment to comply with the law. The members state (in paragraph 2.2 of the Statement) that they ‘will comply with all applicable local, national and international regulations on environmental and social issues …’ When it comes to going ‘beyond compliance’, however, the Statement simply says that the members will ‘work towards’ integrating environmental and social considerations into operations and business decisions. Notably, banks that have committed to the Statement recognized that ‘sustainable development is an institutional commitment and an integral part of our pursuit of both good corporate citizenship and fundamentals of sound business practice.’ As with many other statements (and declarations) on sustainability, this is essentially aspirational with no substantive implementation steps.48

11.20  In order to provide a clear interpretation (and practical implementation) of the individual clauses of the UNEP statement, the UNEP FI developed, in 2011, a ‘Guide to Banking and Sustainability’,49 with a second edition published in October 2016. The second edition of the ‘Guide to Banking and Sustainability’ consists of nine chapters, covering topics from ‘leadership’ all the way through ‘sustainability teams’, ‘risk teams’ and ‘client-facing teams’ and aims to be a ‘tool to help bank employees actively integrate environmental, social and governance issues into their work by learning from best practice case studies’. Each chapter of this Guide contains business cases, guidance, and case studies taken from UNEP FI members’ institutions (of different types and across the globe) and reference to the ‘commitments’ of the UNEP Statement, helping the users to decide how to comply with the Statement in the specific context of banking.

11.21  Current developments, mainly about initiatives to integrate sustainability issues into the financial system and enabling the transition to a green economy, may arguably be seen as milestones in sustainable banking. The transition to sustainable development implies developing a new dynamic between the real economy and the financial system. The connection between sustainable development (particularly environmental risks) and the stability of the financial sector has already been addressed by the financial regulators. Recently, Mark Carney, Governor of the Bank of England (and Chair of the Financial Stability Board), argued that, (p. 212) ‘We need to build a new system—one that delivers sustainable investment flows, based on both resilient market-based, and robust bank-based, finance’. These remarks were part of his speech on the Sustainable Development Goals (SDGs) when he stressed that ‘We need a financial system that is Fair, Aligned, Inclusive and Resilient’ which is ‘ … critical to achieving the economic and moral imperatives of the SDGs’.50 But achieving such a moral and economic imperative will require a market reorientation of the destination of investments, more transparency, and improved disclosure. The industry-led task force—Task Force on Climate-Related Financial Disclosures51—endorsed by the Financial Stability Board (FSB), is taking steps towards a ‘consistent, comparable, reliable and clear disclosures around climate-related financial risks’52 for use by companies in ‘providing information to investors, lenders, insurers, and other stakeholders’.53 This is a significant step towards the acknowledgement of the materiality of climate risks and for the development of a global disclosure framework of those risks, which will ensure consistency and accelerate the implementation process.

11.22  Similarly, the aim of improving the availability of sustainability-related information that was both ‘accessible and comparable’ was set out in the UNEP FI Position Paper (key outcome 3), as stated in paragraph 11.18. The text describing the detail of the ‘outcome’ is unusually specific. It tells us that the objectives are to include:

  • •  Facilitating access to information on relevant sustainability-related norms and regulations, as well as on their enforcement;

  • •  Developing a convention that provides a global policy framework requiring the integration of material sustainability issues within the corporate reporting cycle on a ‘report or explain’ basis; and

  • •  Encouraging the regular evaluation of the sustainability impacts of commercial and residential properties …

If the objective of improving access to information on sustainability-related norms could be achieved and the result was the availability of information about ‘ESG performance’ that was both accessible and ‘comparable’ (enabling one to compare one institution with another) we would have taken a major step forward. The public would be able to compare companies (including banks) with each other in a way that does not require the filtering out of the inevitable value judgements (p. 213) that tend to come with data and assessments produced by NGOs currently. The difficulties caused by the absence of objective indicators in this area have been commented on in an article published by one of the authors in 2012.54

11.23  It would seem that the ‘outcome’ referred to above is reflected in part in paragraph 47 of the joint government statement (‘The Future We Want’) issued at the end of Rio+20:

We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments as well as relevant stakeholders with the support of the UN system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account the experiences of already existing frameworks, and paying particular attention to the needs of developing countries, including for capacity building.

This, in turn, was accompanied by a press release (June 2012) by a group of governments (Brazil, France, South Africa, and Denmark) calling themselves the ‘Group of Friends of Paragraph 47’55 (GoF47), that committed to ‘corporate sustainability reporting’ (SR). The GoF47 aims to strengthen the role of governments in fostering a culture of corporate transparency, accountability and trust, through the promotion of SR.56 Their objective is designed to be achieved through four work streams:57

  • •  enhance effectiveness of SR policies and strengthen SR quality;

  • •  encourage further governments to adopt policies/initiatives to promote SR;

  • •  maintain and promote SR agenda at international level;58 and

  • •  engage with strategic stakeholders.

These are, of course, worthy initiatives and ideas. What does seem to be clear, however, is that Rio+20 has not yet resulted in any initiatives that are specific to the sustainability of banks or the financial markets—or the sustainability reports of banks. Important questions remain unanswered. Do sustainability reports by banks, for example, really serve a useful purpose in their present form? Could (p. 214) they be made more useful if they provided more material that enabled the reader to make a judgement about the culture of the bank and how it compares with its peers? Should they contain more information about a bank’s conduct ‘track record’?59 In the UK, should a bank be required to explain and justify its plans for branch closures? These questions are at the heart of banks’ social role and, it may be argued, its ‘social licence’.60 CSR reporting is considered in more detail in the next section of this chapter.

D.  Sustainability and Citizenship Reports of Banks

11.24  In recent years, non-financial reporting has assumed more importance as customers, stakeholders, and investors are demanding more information about how companies manage their environmental and social impacts and how this will affect the company’s ability to create long-term value. Companies, on the other hand, want to demonstrate their commitment to sustainability (driven by corporate values or legislation requirements), their ESG performance (perceived as relevant to their key stakeholders), and their competitive edge.

11.25  Over the past decade, sustainability reporting has become mainstream for many large companies61 and, almost all the largest banks disclose more corporate responsibility information in their annual financial report than companies in any other sector.62 As the first effort to standardize sustainability reporting in the Financial Sector, the Global Reporting Initiative (GRI) Financial Services Sector Supplement63 was created as a tailored version of the GRI’s Sustainability Reporting Guidelines.64 According to the GRI, which has been widely adopted, ‘Sustainability reporting helps organizations to set goals, measure performance, (p. 215) and manage change in order to make their operations more sustainable.’ In theory, reporting frameworks improve business transparency. However, the large amount of discretion allowed in terms of what information to disclose does not diminish ESG information asymmetry and the lack of enforcement mechanisms affects accountability for sustainability.65 Additionally, there is a disconnect between what corporates disclose and what stakeholders’ needs are addressed in these reports.66 This raises the question of which sustainability frameworks are the most helpful and beneficial. For instance, the GRI focuses on developing disclosures relevant to a broad multi-stakeholder audience and the SASB67 focuses on defining industry-level standards that explicitly address investor needs. The International Integrated Reporting Framework (developed by IIRC68), on the other hand, aims to ‘guide organisation’s long-term prospects in a clear, concise, connected and comparable format’, which will ‘enable those organizations, their investors and others to make better short and long-term decisions’.69 These, and other available frameworks, provide a representation of the different focus of sustainability reporting.

11.26  To study a bank’s CSR (or sustainability) report is to study what a bank says about itself. It is not, to any material extent, a study of objective, and verified, data save to the extent that certain data in the report may, in somewhat obscure language, be the subject of a limited form of assurance by an independent third party set out at the end of the report. Still less can it be considered a study of a bank’s culture, although a comparison of a report with known facts about a bank’s behaviour can be instructive.

11.27  No one could criticize the banks for shrinking from the task of presenting material about how sustainable they consider themselves to be. The difficulty arises (p. 216) when one tries to analyse the large amount of material made available, separate the hard facts from the statements of opinion, acknowledgements of room for improvement (which tend to be scarce) from self-acclaim (which tends to be plentiful) and find any kind of data that enables one bank to be compared with another. There is also, in the post-Financial Crisis world, a serious shortcoming that such material needs to address: the absence of any significant information that enables one to assess the sustainability of the bank in question as a viable, long term financial market participant and contributor to society and its stakeholders—and form a view about its culture and its approach to ethical questions (evidenced by practice rather than stated policy). Moreover, banks’ public disclosures of business impacts on sustainable development largely focus on the banks’ direct impacts of its operations. For example, there are often details of how the banks manage their use of environmental resources (energy, water, paper, and other resources) and their generation of emissions (as result of business travel for example), emphasizing how they are carried out in a sustainable way (having environmentally certified buildings) and how they create positive impacts internally. These impacts, when compared with other industries, are relatively minor and currently have a refined and standardized level of measurement, management and reporting. This, however, appears to be at the expense of more meaningful disclosures on how a bank’s investments and lending activity impacts the environment, society, or sustainable development.70

11.28  To illustrate the extent of the difficulty, it is instructive to compare the 2016 Reports (and provide some insight from the previous reports) of two of the UK’s largest banks, RBS Group and Barclays (both of whom signed up for the UNEP FI statement of commitment referred to above). Although they (apparently) moved towards a similar approach—integrated reporting—bringing together financial and non-financial performance, they used to cover similar ground with two different approaches. In 2015, RBS published a standalone ‘Sustainability Report’, whilst Barclays, who have already moved towards integrated reporting,71 also published a ‘Citizenship Data Supplement’.72

11.29  RBS has been reporting annually on its sustainability performance since 2003 and, throughout these years, its reports have become more structured, showing (p. 217) a clearer strategy towards its business model and stakeholders (eg customers). In the 2015 Sustainability Report73—‘How We Make a Difference’, some of the most material issues identified were: ‘culture and ethical conduct’ and ‘customer service’ (as one would expect, in view of the bank’s previous failings).74 Despite ‘trust’ being identified as one of the material issues in the 2014 report, it did not feature in the 2015 matrix as a separate issue, being recognized as strongly linked with these material issues. The 2014 report presented a list of the ongoing and past investigations, enforcements and litigation facing the bank, which stressed a desire to provide ‘transparency and accountability’ to the stakeholders on ongoing and past issues. In 2016, RBS took steps to integrate the reporting of financial and non-financial performance by combining its Sustainability Report with its Strategic Report, with more detailed sustainability-related information available on its website. This new approach is said to promote its efforts in ‘building a more sustainable bank to deliver long term value to all our stakeholders’.75 Additionally, the bank disclosed the key influences (which were briefly described in the report) that might affect RBS’ ability to serve customers and the creation of value for the long term. In 2016, ‘ethics, culture and integrity’ were considered the most critical influences—which would (always) determine its ‘Licence to Operate’,76 whilst ‘trust in the banking sector’ and ‘conduct’ are considered two of the ‘current priority considerations’. RBS emphasizes that the progress made in 2016 will reinforce its capacity for achieving its goal of being No 1 for ‘customer service, trust and advocacy’ and will maximize value for its shareholders.77

11.30  Barclays, on the other hand, moved towards integrating its citizenship disclosures within its Annual Report in 2014 and no longer publishes a standalone Citizenship Report.78 However, and as a recognition of specific stakeholders’ interests in more detailed technical information, it published an Environmental Social Governance (ESG) Supplement,79 which acts as a guide to supporting (p. 218) information in the Annual Report and other disclosures. The ESG supplement discloses relevant information about environmental, social and governance topics that were identified as material to Barclays and its stakeholders, and reveals its new citizenship strategy—‘Shared Growth Ambition’.80 In 2016, and identical to the issues in 2015,81 the most material ones were mainly focused on ‘Governance’, ‘Financial Performance’, ‘Conduct and Compliance’; ‘Regulatory Change’ and ‘Remuneration’. The materiality process description and the prioritization of relevant topics are narrated in the ‘General Standard Disclosures’ of this supplement.

11.31  The documents of the two banks raise mostly comparability-related issues not only with previous years—particularly for RBS as it replaced the use of the GRI framework82 and changed substantially the format and accessibility of the information, but also between them (and/or with other banks). It also suggests that there is room for improvement (and refinement) of the information disclosed that underpins how a bank creates value, such as the indicators of sustainability performance and its reporting against frameworks, the efficiency of stakeholder engagement and outcomes, and its policy and practice on financing ‘unsustainable practices’.

11.32  Through the lens of sustainability indicators, properly adapted for the peculiarities of banks, we could, if we wanted, start to learn a great deal more about bank behaviour and attitudes than currently comes into the public domain. The sustainability reports, could become engines of change for the better, and ultimately, help to establish a shift towards a more sustainable financial industry. It seems inconceivable, after all, that a bank that had participated in something like the LIBOR scandal, for example, could be considered a candidate for ‘Sustainable Bank of the Year’83 by Dow Jones Sustainability Index84 (DJSI). In addition to DJSI and FTSE4Good—the best-known indices for UK companies, there are various sustainability indices which assess ESG performance and can be used as sustainability benchmarks. These indices are particularly useful for investors, as they aim to highlight those companies that are doing well and improving their (p. 219) performance in ESG terms. Notwithstanding their growth in popularity, the indices are often criticized for:85

  • •  lacking standardization—DJSI and FTSE4Good, for example, use different criteria to measure the corporate sustainability performance of companies;

  • •  lacking credibility of information—it has been suggested that ‘indices reward the companies with the greatest capacity to respond to the questionnaires rather than those with the best socially responsible practices and that they are more of a reflection of successful marketing than proven sustainability performance;86

  • •  bias—some ratings put special emphasis either on the environmental, social or economic dimension, or more emphasis where they have special interest;

  • •  lacking transparency—the methodologies of many sustainability indices are opaque and their reliability may be questioned87 as lacking independence—in some cases, the ratings are conducted by financial service providers which have or intend to establish further business relations with the companies.

11.33  The inclusion (or not) of some banks in those indices might not be a reflection of their improvement (or deterioration) in comparison with others and a deletion from the indices might be an opportunity for a bank to review its sustainability performance against its peers. Furthermore, the core business activities, such as financing and investment are left out with no real analysis of banks’ lending or investment portfolios. This, on the other hand, generates a certain controversy among the banks’ stakeholders (eg NGOs) about the inclusion of some banks in sustainability indices (eg DJSI) and even their classification as ‘sustainability leaders’. Bank of America, which was added to the World and North America indices of the DJSI in 2013 and claimed to support environmental responsibility, was underwriter for Coal India’s 2010 Initial Public Offering and has maintained its relationship with Coal India,88 the world’s second largest producer of coal. Additionally, RBS (when compared with the previous year) achieved the best score89 in the 2016 DJSI and was ‘benchmarked with the top 10 per cent globally’,90 even though it had been struggling with conduct-related litigation and conduct costs for several years. Therefore, one might ask whether the sustainability indices gauge the sustainability performance of those banks (and others (p. 220) on their list) in a comprehensive way and whether they form evidence of sustainability outcomes.91

11.34  The use of ‘soft law’ pressure is more likely to bring about change in an arena that looks both across jurisdictional boundaries and down to generations as yet unborn. Traditional law-making is ill-suited to dealing with the difficulties that the differing time and space dimensions present. But a greater level of consensus needs to be developed on what the objective indicators are of good and bad sustainable behaviour for a bank. Such indicators then need to be regularly updated rather than set in stone. The reporting requirements need to reflect that consensus. And banks should not feel free to pick and choose which ones they report on, entering ‘NR’ if they find the matter too embarrassing or inconvenient. The reports should then be backed up by clear and unambiguous assessment statements from independent third parties. These would, as a result, carry some weight, rather than merely ‘perform a function of ritualistic comfort’92—as now seems to be the case.

11.35  ‘Soft law’ is not necessarily all that soft in its effect. While soft law initiatives may not have the full force of law, their genesis is principles-based, underpinned by well-established legal concepts and often sponsored at an international level. They can have legal risk connotations to the extent that they represent (or have the potential to embody) best practice—the breach of (or non-adherence of) which will have evidential value in any litigation. Even if this might be viewed with some circumspection, the growing influence of the sustainability concept (and the soft-law initiatives discussed) is clear in the conduct and reputational risk sphere. The moral pressure that can be exerted by it can result, ultimately, in (to borrow from the Financial Times’ lead editorial of 29 June 2012, commenting on the LIBOR scandal) ‘shaming the banks into better ways’. According to that editorial, the LIBOR scandal shone an ‘unsparing light on the rotten heart of the financial system’. If we can get the senior officers of banks to understand that society expects sustainability reports to provide both information on, and commitments relating to, a bank’s culture, and that egregious incidents showing that such commitments have failed and would generally be expected to lead to a resignation at the highest level, we can start to believe that some worthwhile change has at last been achieved. Making changes to reporting practices involves relatively small steps, and relatively easily achievable objectives. But small steps—if in the right direction—can have a big effect. If we can, through better reporting, insist that light is shone on what happens inside banks on a more regular basis and get out of the habit of taking bankers at their word when they tell us how good their ‘culture’ is, we will start to make progress on meaningful reform.

(p. 221) E.  Environmental and Social Issues, Voluntary Codes, and the ‘Social Licence’ Concept

11.36  Running alongside the movement to demand ‘corporate social responsibility’ and ‘sustainability’ has been the desire for greater awareness of ‘green issues’ and a growing agenda insisting that commercial and financial activity—as well as national and local politics93—have greater ‘respect for the environment’. Banks, as ever with important social trends, are not unaffected by this. It has become increasingly apparent in the twenty-first century that there has been what some commentators call a ‘greening’ of international financial institutions94 as they have responded to pressure to have greater regard to environmental issues affecting projects financed by them. Pring and Noe observe that:

Having financed environmental disasters, been subjected to wide-spread criticism (even violent mass demonstrations), and concerned about their own potential liability, IFOs95—including multilateral development banks … bilateral development assistance agencies … national export-import promotion bodies … and other public- and private-sector finance, insurance and trade entities—are increasingly conditioning their loans and other involvements with environmental requirements and expanded public participation.96

11.37  The integration of environmental and social issues into decision-making processes, as well as quality corporate governance, is reflected in the banking industry’s efforts to enhance business models, keeping up with the pace of the evolution of the sustainable finance field. Sustainable finance ‘should not just be about the relationship between financial institutions and the environment and society (important though that is) it should also be, in the post-Crisis era, about the running of the institutions themselves in a sustainable manner and their acceptance of responsibility for a sustainable financial system: systemic responsibility’.97 The working definition of a sustainable financial system from the UNEP Inquiry into the Design of a Sustainable Financial System is: ‘Sustainable development requires changes in the deployment and relative value of financial assets and their relationship to the creation, stewardship and productivity of real wealth. A sustainable financial system is, therefore, one that creates, values, and transacts financial assets, in ways that shape real wealth to serve the long-term needs of an inclusive, (p. 222) environmentally sustainable economy’.98 Financial institutions have been exploring ways of integrating sustainable goals into their business in an attempt to convey a positive image and formalize corporate values and practices designed to guide business behaviour, by adopting multi-stakeholder initiatives.99 There are various forms of voluntary codes and sets of principles, such as the Equator Principles, UN Global Compact, OECD Guidelines for Multinational Enterprises, UNEP Finance Initiative, and UN Principles for Responsible Investment, to name a few. These voluntary commitments to sustainability hold the potential to bring a new meaning to environmental and social responsibility for business.

11.38  The Equator Principles (EP) are a set of voluntary standards relating to project finance transactions that have been adopted by private sector lenders over a period of years from 2003. They are closely related to the relevant environment policies and guidelines of IFC, who were present at the first meeting (on October 2002) that ultimately led to the formulation of the principles.100 The principles were launched in June 2003 in Washington DC when they were initially adopted by ten banks: ABN AMRO Bank, Barclays, Citigroup, Credit Lyonnais (Calyon), Credit Suisse, HypoVereinsbank (Unicredit), Rabobank, Royal Bank of Scotland, West LB, and Westpac.101 The principles were updated and revised twice—in 2006 (commonly referred to as ‘EPII’) and in 2013 (commonly referred to as ‘EPIII’). The ‘EPII’ version places greater emphasis on social issues than the first version and reflects the changes in the IFC’s Performance Standards, which deliver the environmental and social criteria for the EPs. The current version, the ‘EPIII’, reflects the expansion of the scope of the Equator Principles to include project-related corporate loans, and more robust and consistent reporting requirements. The ‘EPIII’ enhances the banks’ commitments to climate change, transparency and human rights. Moreover, the EP’s revisions are also driven by changes to address consistency and support implementation.102 As the UN Guiding Principles on Business and Human Rights noted, it may be the first corporate code to recognize the ‘responsibility to respect human rights by undertaking due diligence’.

(p. 223) 11.39  Since 2003, many more banks, and institutions, such as export credit agencies, have ‘signed up’ to the principles. The official list of institutions103 adopting the principles can be found on the Equator Principles website.104 Adopting institutions—Equator Principles Financial Institutions or EPFIs, commit themselves not to finance projects105 where the principles will not be observed. They are required to commit and to implement internal policies, procedures, and standards that are consistent with the principles, and that they will report publicly on their implementation experience. Wendt106 observes that ‘The EP are still the most effective and internationally accepted voluntary framework for managing environmental and social risk in project lending and the basis on which most instruments for management of nontechnical risks have been created in international lending’.

11.40  The Equator Principles provide a framework for each institution to develop its own individual policies, practices and procedures to ensure that projects identify the environmental and social risks and impacts, are assessed per specific environmental and social standards, and are carried out in a socially and environmentally responsible manner. At the core of the Equator Principles are financial risk assessment and financial sustainability. The principles themselves are set out on the EP website. They cover matters such as:

  • •  review and categorization of projects according to magnitude of their potential environmental and social risks and impacts (Principle 1);

  • •  requirements (to the client) to conduct an environmental and social assessment (addressing risks and impacts) and produce the assessment documentation (proposing measures to minimize, mitigate and offset adverse impacts) (Principle 2);

  • •  where appropriate,107 cross-referencing to relevant IFC Performance standards and the applicable industry-specific EHS guidelines (Principle 3);

  • •  the development of an Environmental and Social Management System (ESMS) and an Environmental and Social Management Plan (ESMP) (both by the client/borrower), and an Equator Principles Action plan (AP) to outline gaps and commitments to meet EPFI requirements in line with the applicable standards (Principle 4);

  • (p. 224) •  consultation with affected communities in an appropriate manner and a grievance mechanism for such communities (Principles 5 and 6);

    • •  independent review of the steps taken in implementation of the above and independent monitoring and reporting over the life of the loan (Principles 7, 9 and 10);

    • •  incorporation of covenants linked to compliance (by the client) with all relevant host country environment and social laws, regulations and permits in all material respects (Principle 8).

11.41  Mindful, no doubt, of the legal risks associated with committing to the principles, the draftsmen of the Equator Principles (‘EPIII’) included the following disclaimer:

The Equator Principles is a baseline and framework for developing individual, internal environmental and social policies, procedures and practices. The Equator Principles do not create any rights in, or liability to, any person, public or private. Financial institutions adopt and implement the Equator Principles voluntarily and independently, without reliance on or recourse to the IFC, the World Bank Group, the Equator Principles Association, or other EPFIs. In a situation where there would be a clear conflict between applicable laws and regulations and requirements set out in the Equator Principles, the local laws and regulations prevail.

11.42  As indicated above, litigation is not uncommon in connection with major new capital projects and much of it is related to environmental and climate change issues. In April 2010, a significant judgment was delivered by the International Court of Justice108 on a dispute between two neighbouring countries, Argentina and Uruguay, about a pulp mill project being financed by IFC and other lenders on the Uruguay bank of the Uruguay River, which forms the boundary between the two countries. The Court ruled that Uruguay had broken obligations it had under a treaty with Argentina to notify it about the project before proceeding with construction. However, it did not make any award affecting the continuing operation of the project. The judgment was of interest because of the observations of the court on the practice of conducting environmental impact assessments. This was described as ‘a practice, which in recent years has gained so much acceptance among states that it may now be considered a requirement under general international law to undertake an environmental impact assessment where there is a risk that the proposed industrial activity may have a significant adverse impact in a trans-boundary context, in particular, on a shared resource’. Although this statement is of application in a limited (trans-boundary, etc) context, it demonstrates how quickly a practice, or set of practices—such as those established by the Equator Principles—can become regarded as part of customary international law and thus have binding effect. Further, the reference to the trans-boundary (p. 225) context is by no means as limiting as it might at first sight appear. It would obviously catch sensitive projects located near a state’s border, or located anywhere that might result in, say, harmful emissions across its border. But also many pipeline projects and offshore oil and gas projects have trans-boundary aspects, as do certain kinds of transport projects.

11.43  The pulp mills project attracted, and continues to attract, a great deal of attention from NGOs, who have complained about IFC’s involvement (amongst other things) but their complaints have largely been unsuccessful. They are a constant source of potential bad publicity, and possibly litigation, for project financing banks. The general tone of their position can be seen from the website of one of the more prominent, BankTrack. This states that their mission is ‘to promote fundamental changes in the operations of banks so that, while conducting their business in a fully transparent and accountable manner, they contribute to the ecological wellbeing of the planet and to offering a decent life free of poverty for all people’.109 The ‘vision’ of the organization is said to be elaborated further in the ‘Collevecchio Declaration’.110 This document proclaims that ‘financial institutions (FIs) can and must play a positive role in advancing environmental and social sustainability’ and calls on FIs to adopt six commitments which ‘reflect civil society’s expectations of the role and responsibilities of the financial services sector in fostering sustainability’. The six principles are: (i) a commitment to sustainability; (ii) a commitment to ‘do no harm’; (iii) a commitment to responsibility; (iv) a commitment to accountability; (v) a commitment to transparency and (vi) a commitment to sustainable markets and governance. These commitments are described more fully in the document. For example, the first commitment is:

FIs must expand their missions from ones that prioritize profit maximization to a vision of social and environmental sustainability. A commitment to sustainability would require FIs to fully integrate the consideration of ecological limits, social equity and economic justice into corporate strategies and core business areas (including credit, investing, underwriting, advising), to put sustainability objectives on an equal footing to shareholder maximization and client satisfaction and to actively strive to finance transactions that promote sustainability.

11.44  The ‘immediate steps’ that FIs are encouraged to take in furtherance of the above commitment include using their influence ‘to ensure that companies and projects in which they invest or support act in line with best practice’. They are also urged to ‘set clear timetables for improving their clients’ sustainability performance, (p. 226) and if necessary, withdraw their support of non-performing clients’. Like many NGOs, BankTrack tends to hold banks responsible for the actions of their customers. For instance, the financing of coal power plants, which are significant contributors to climate change, has been subject to campaigning against banks.111 If a bank is not thought to meet generally accepted standards in relation to sustainability, this may affect how it attracts investment112 (and deposits) as well as the nature of the lending business it is able to transact (in effect, the mandates that it wins in highly competitive markets). This may not be unreasonable where the customer is, in effect, a major project that would not exist without bank financing but in the context of corporate loans it may be a heavy, even impractical, burden to bear. Again, however, one sees society’s image of the bank as a kind of ‘policeman’ coming to the fore.

11.45  Notwithstanding the disclaimer set out in paragraph 11.41 above, the assumption of a degree of responsibility by banks that is implicit in adopting the Equator Principles may, depending on a combination of facts and relevant jurisdiction, lead to some ‘lender liability’ for banks and affect the organizational legitimacy of financial institutions,113 at least if they do not live up to the commitments that they have agreed to take on. Their exposure to lender liability may of course be radically increased if, upon enforcing security or otherwise, they become involved in the operation of a project or can be said to ‘occupy’ the project site.114 The preamble language of the EPIII suggests that there is a risk that the EP might be legally enforceable by third parties (eg affected communities) for project-affected communities.115 Moreover, disclaimers of liability generally may prove to be of only superficial protection in this area. As Watchman, Delfino, and Addison point out:

… we must recognise that risks, whether financial, legal, regulatory, political, environmental or social have become tied together in a Gordian knot. Projects such as Sakhalin II, the Chad-Cameroon pipelines, the TXu coal plants and the Frey Bentos paper and pulp mills116 show that these risks cannot easily be separated. Over-ambitious legal agreements which seek to protect projects (p. 227) from the rule of law or deny state sovereignty for substantial periods of time may help reduce legal risk but also focus and increase political, regulatory, and other risks.117

11.46  The various heads of risk referred to by these authors are a reflection of the high profile that major development projects have achieved in the public consciousness. The banks find themselves at the centre of an international phenomenon which is sometimes described as a requirement for ‘public participation’118 in major economic development projects, commented on by Pring and Noe in 2002:

Long viewed as central only to western-style democracies, public participation in decision-making is being accelerated by a concatenation of at least seven factors:

  1. (1)  the democratization trends and pressures of the 1990s in the former Soviet Bloc countries, Africa, Asia, and Latin America;

  2. (2)  adoption of the new international legal paradigm of ‘sustainable development’ of which public participation is a central tenet;

  3. (3)  the international environmental movement, currently the major ‘proving ground’ for public participation;

  4. (4)  incorporation of public participation in lending requirements by major international financial organizations … such as the World Bank;

  5. (5)  human rights law regimes designating public participation as a political ‘right’;

  6. (6)  increasing recognition of rights of indigenous peoples and local communities; and

  7. (7)  the Internet, which has so greatly increased the public’s ability to obtain, analyse and disseminate information and views and thereby break down existing barriers to public participation on public issues.119

11.47  The seven factors referred to above are an inescapable reality for internationally active banks and their advisers. They have a direct effect on how transactions are structured and negotiated and also present a series of risk management questions. Although there are potential liabilities associated with adopting the Equator Principles, their existence, from a risk management perspective alone, should be regarded as a positive development. The Equator Principles provide an opportunity for financial institutions to manage risk and reputational hazards and to create a new organizational learning and voluntary cooperation, including increasing awareness of sustainability issues within these institutions. They have transformed the risk culture in project finance and this may extend to general commercial lending (or underwriting)—currently beyond the scope of Equator Principles. They demonstrate where ‘good practice’ stands from time to time, providing a yardstick that otherwise would be hard to find at levels (that may (p. 228) be above the requirements of local law) where the ‘appropriate standard’ may otherwise be very difficult to determine, given the many possible options that, internationally, might apply.

11.48  The EPFI may have adopted the Equator Principles for a variety of reasons, the main motivation perhaps being based on a ‘business case approach rather than on a sustainability case approach’.120 Research suggests that the EPFI are driven by economic and reputational benefits or risk management processes,121 which can lead to limited effectiveness for the financial sector in achieving sustainable goals. Furthermore, critics reason that without fundamental implementation efforts on disclosure requirements at the project level and enforcement of the enhanced community engagement criteria, the EPs will not contribute to any change with respect to the effects of projects on sustainable development. Notwithstanding all reservations, the overall result should be regarded as a step forward in the context of ‘sustainable’ project finance.

11.49  In the context of project finance, stakeholders who are affected by projects have a legitimate interest in the activities of project financiers.122 The banking industry (as well as mining industry) is more vulnerable to the pressure of communities’ demands on ‘socially responsible behaviour’ than others. Banks can find themselves as a target of global demonstrations and activist campaigns in opposition to their ‘activities’ (and particular behaviours) more often123 to the extent such actions can undermine their legitimacy and, ultimately, damage profitability and reputation. It is sometimes said that the Social Licence to Operate (of a lending bank) is adversely affected if it ignores these pressures.

11.50  The term ‘Social Licence to Operate’ (SLO) was deployed by the United Nations Guiding Principles on Business and Human Rights and the UN ‘Protect, Respect and Remedy’ Framework, which apply a SLO associated with business-related human rights abuse. The concept is based on the idea that companies also need a ‘social permission’ to conduct their business besides the ‘regulatory permission’. According to Thomson and Boutilier, an SLO is ‘a community’s perceptions of the acceptability of a company and its local operations’.124 It implies social involvement that is granted and renewed and, can never be self-awarded. An SLO does not refer to a formal agreement and its process (in itself) has no legal standing. However, it refers to a trust-based model that actively (p. 229) involves the stakeholders (comprehensively mapped) and aims to achieve the credibility, reliability, and the acceptance of projects, companies, or industries, building the argument for responsible business conduct125 and understanding (and anticipating) stakeholders’ expectations. ‘What is envisaged by calling for a social licence, therefore, is nothing less than a fundamental reposition of finance. It forces the sector to engage in meaningful and sustained dialogue with its stakeholders about the risks, benefits and impacts of its collective decisions’.126

11.51  Mark Carney, the Governor of the Bank of England, argues that it is only through the negotiation of a new ‘social licence to operate’ that financial markets can restore lost legitimacy, credibility, and trust, and simultaneously serve genuine public goods:

Markets need to retain the consent of society—a social licence—to be allowed to operate, innovate and grow. Repeated episodes of misconduct (such as the Libor and FX scandals) have called that social licence into question. To restore it, we need to rebuild fair and effective markets. Not markets that collapse when there is a shock from abroad. Not markets where transactions occur in chat rooms. Not markets where no one appears accountable for anything. Real markets are professional and open, not informal and clubby. Their participants compete on merit rather than collude online. Real markets are resilient, fair and effective. They maintain their social licence.127

If any sector needs to accept that pleasing shareholders and increasing shareholder value is not sufficient as a management objective it is surely the financial sector, where the costs of failure to society were so graphically demonstrated by the Financial Crisis.128 And in this context failure may mean failure to control not just the normal risks traditionally associated with banking. It also includes an expanding range of operational risks, at the centre of which lies, in the post-Financial Crisis era, conduct risk (the management of which is described by Peter Kurer as the ‘new frontier’).129 Carney also believes that it is ‘vital that we—public authorities and private market participants—work together to reverse the tide of ethical drift. This cannot be a one-off exercise; we need continuous engagement so that market infrastructure keeps pace with market innovation. In so doing it (p. 230) is possible to build the real markets the UK deserves. Markets that merit social licence and reinforce social capital’.130

11.52  However, the goal of the restoration of public trust (and being deserving of it) remains somewhat distant. If, for example, one accepted that the conduct cost data regularly published by the CCP Research Foundation’s Conduct Costs Project131 provide, at the very least, an indication of whether or not standards of behaviour are improving, the latest data set132 (showing a conduct cost bill for twenty major banks for the five years ending 2016 of around £264 bn) suggests that, at best, banks are, or may be, only just beginning to turn the corner and that we have not yet seen the end of the Conduct Crisis.133

11.53  What other initiatives might be helpful? We would suggest that although the establishment of ‘standards boards’, such as the Banking Standards Board and the FICC Market Standards Board134 should prove to be a positive step, as their work develops, more will be needed if the current enthusiasm for improving conduct is not to dissipate over time. We would, for example, advocate, in the context of giving life to the idea of a social licence for the financial sector, the following practical steps for consideration:

  1. (1)  Better analysis of the hallmarks of a profession and professional behaviour in the twenty-first century and what exactly we mean when we call for ‘professional’ behaviour. This is not as straightforward as it may sound. Many professions (for example, law) have much more of a ‘business culture’ than was the case, say, thirty years ago (before reforms designed to increase competition). When commentators lament the lack of a professional ethos in banking one senses that many of them are thinking of how professions like law and accountancy used to operate rather than how they operate now. We need to move from generalities to specifics when we talk about the professionalization process and root it to the overarching question of purpose.

  2. (2)  Recognition that a common professional hallmark, which could be transferred to banking with beneficial results, is the willingness to discuss difficult ethical and moral questions on a cross-industry basis in an open and transparent way, with fora established to facilitate this, fully authorized to move from discussion to decision.

  3. (3)  The development of a case study approach to the identification of difficult issues and accepted solutions to them. These need to be widely canvassed and put together in a manner that reflects real areas of difficulty in moral decision-making within fast-moving complex trading environments. It is, to put it (p. 231) mildly, sub-optimal for such matters to be looked at only on a bank by bank basis (or worse still, on a silo by silo basis within banks).

  4. (4)  The facilitation of discussion and resolution of grey area issues in a manner that leads to the adoption of standards not only within banks but across the sector. These grey areas are by no means merely questions for academic discussion in an era of rapidly changing public expectations of how businesses should behave. Even banks that seek to ‘do the right thing’ (over and above mere compliance with the law) may easily trip up over the standards they adopt in relation to, for example: (a) how to treat customers in default; (b) the sale of loans in default (and ‘cleaning up their balance sheet’); (c) the methodology for valuation of customer assets (especially when relevant to financial ratios); (d) sales (and mis-sales) of financial products to SMEs; (e) advice on, and implementation of, tax planning or tax avoidance devices; (f) the appointment of professional third-party firms to carry out and produce supposedly independent reviews, reports, valuations etc without acknowledging potential conflicts of interest; and (g) all manner of financial ‘tricks’ and short cuts sometimes known as ‘creative compliance’.135 (‘Repo 105s’ and other devices for masking the true scale of indebtedness of a bank or corporate body (or even a country) spring to mind). The difficulty in understanding where the ‘standard’ now is (as opposed to where it was ten years ago) is considerable and the sector needs a joined-up approach if it is to improve on its, so far, lamentable performance.

  5. (5)  The acceptance by banks, and their regulators that the involvement of ‘outsiders’ in these processes is essential if the message that ‘we are now trustworthy’ is to have a hope of being sold to the public that, essentially, comprises outsiders.

  6. (6)  A more partnered approach in leveraging the benefits of conduct risk management practice and through the multilateral exchange of relevant data between market participants, regulators and other interested parties, appropriately structured to balance proprietary and social interests.

  7. (7)  The embracing of objective indicators of the success or otherwise of banks’ efforts to achieve, and maintain, improved ethical behavior.

  8. (8)  The acceptance of the need for much improved reporting of the costs of misconduct and reporting of both such costs and the efforts to make improvements in a manner that enables the public to make bank by bank comparison (an objective that may prove to be significant in improving competition in retail banking in the same way that better comparative information on the terms of current accounts would.)

(p. 232) Taken together these steps suggest that evaluation cannot be conducted only by the banks or entities which are beholden to them. In any case, banks (and, perhaps, even regulators) tend to be reluctant to be ‘first mover’ even when the need for change has become apparent. It is not so much that they do not wish to reform themselves, more that they would rather someone else did it first (especially if the needed reform involves major cultural change, possibly at the expense of short-term profits). As at the time of writing, that first mover has not yet been identified.

Footnotes:

1  The authors gratefully acknowledge the assistance of Tânia Duarte in the preparation of this chapter.

2  ‘Sustainability’, <http://www.about.hsbc.co.uk>.

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).

8  See para 11.11 and Ch 10.

9  See para 11.51 et seq.

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).

17  According to data in 2017 Edelman’s Trust Barometer—Financial Services results (<http://www.edelman.com/post/accelerating-trust-in-financial-services/>), the financial services were the least trusted industries (in comparison to other industries such as energy, consumer packaged goods, food and beverage, and technology).

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.

53  TCFD’s mission at <https://www.fsb-tcfd.org>.

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.

59  See para 12.12.

60  See Section E of this chapter.

61  According to the KPMG Survey of Corporate Responsibility Reporting 2015 <https://assets.kpmg.com/content/dam/kpmg/pdf/2016/02/kpmg-international-survey-of-corporate-responsibility-reporting-2015.pdf>, around three quarters (73 per cent) of N100 companies now report on Corporate Responsibility (CR) and the current rate of CR reporting among the G250 is over 90 per cent.

62  Corporate responsibility reporting in the Banking sector, Key findings from the KPMG survey of Corporate Responsibility Reporting 2015, July 2016 <https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/08/corporate-responsibility-banking-sector.pdf>.

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.

69  Integrated Reporting, ‘Towards Integrated Reporting—Communicating Value in the 21st Century’ (2011) <http://integratedreporting.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf>.

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.

72  See paragraph 11.31.

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’.

82  See n 64.

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).

88  See Coal India—company profile at Bank Track <https://www.banktrack.org/show/companyprofile/coal_india/pdf>.

89  The 2016 DJSI score was 84 out of 100 with the industry average at 61 out of 100.

90  See Kirsty Britz, director of Sustainability comment on ‘Sustainable Banking at RBS’ <http://www.rbs.com/sustainability/sustainable-banking-at-rbs.html> accessed 14 May 2017.

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.

96  See n 94.

97  McCormick, ‘Towards a More Sustainable Financial System; The Regulators, the Banks and Civil Society’ LFMR Vol. 5 No. 2 at 129.

98  UNEP, Inquiry into the Design of a Sustainable Financial System, ‘The Financial System We Need—Aligning the Financial System with Sustainable Development’ (2015), 13 <http://unepinquiry.org/wp-content/uploads/2015/11/The_Financial_System_We_Need_EN.pdf>.

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.

102  UNEP Inquiry into a Design of a Sustainable Financial System, ‘The Equator Principles—Do They Make Banks More Sustainable? (2016) <http://unepinquiry.org/wp-content/uploads/2016/02/The_Equator_Principles_Do_They_Make_Banks_More_Sustainable.pdf> (hereafter UNEP Inquiry, ‘Equator Principles’).

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.

104  Equator Principles, <http://www.equator-principles.com>.

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.

108  Pulp mills on the River Uruguay (Argentina v Uruguay) (20 April 2010) <http://www.icj-cij.org/docket/files/135/15877.pdf>.

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.

111  ‘Banks: Quit Coal!’ campaign <www.coalbanks.org>.

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.

119  See n 94.

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.

125  See Ch 10.

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).

130  Carney, see n 127.

131  See Ch 10.

132  As at June 2017.

133  Available at <www.ccpresesearchfoundation.com>.

134  See Ch 12.

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.