Are European Finance Sector CSR Initiatives Adequate?

Are the European finance sector’s corporate social responsibility (CSR) initiatives effective at addressing climate change, poverty and economic exclusion, corruption, and human rights abuses, or do they in fact exacerbate these problems? Earlier this month, the UK Presidency of the European Union (EU) convened a conference on corporate social responsibility (CSR) and the finance sector in Europe. Two reports resulting from this conference provide different answers to the above question.

The official conference background paper, while acknowledging the negative social and environmental impacts created by the European finance sector, ultimately advances a rosy view of the effectiveness of voluntary CSR initiatives, such as the UN Global Compact.

“Critics argue that the finance sector itself is a major cause of these global problems–that many of its actions encourage unsustainable behavior and short-term thinking, or that it has no interest in the social and environmental impacts of its lending or investment practices,” states the conference paper. “Others argue that existing governance and regulatory structures are inadequate and encourage a narrow focus on maximizing short-term returns.”

“But, importantly, there are voices within the finance sector recognizing the need to address global challenges,” the paper continues. “As a number of key financial institutions have argued in [the Global Compact report] Who Cares Wins–‘Ultimately, successful investment depends on a vibrant economy, which depends on a healthy civil society, which is ultimately dependent on a sustainable planet [so] investment markets have a clear self-interest in contributing to better management of environmental and social impacts in a way that contributes to the sustainable development of global society.'”

A report from the Corporate Responsibility (CORE) Coalition of UK charities–including Amnesty International, Friends of the Earth (FoE), and WWF–advances the critics’ arguments outlined above, namely that voluntary initiatives and current regulation are insufficient. The report, entitled A Big Deal?, quotes a 2004 report from accounting consultancy KPMG in the UK and asset manager F&C to support its case.

“The financial services sector is not regulated on a global basis and no overarching framework exists to manage key human rights issues,” states the KPMG/F&C report. “Codes of conduct have been established that, because of either their reach or influence, have become proxies for industry standards . . . such initiatives may be criticized for ‘lacking teeth’ if no accountability mechanisms exist to assess how well they are being implemented in day-to-day business practices.”

“Ultimately, binding regulation may be more likely to ensure that industry leaders are not competitively disadvantaged, and that all companies operate to a set of agreed minimum standards,” it continues.

The CORE report presents seven case studies exemplifying shortcomings of self-regulation as well as instances where companies circumvented regulation. The sixth and seventh case studies focus on human rights and environmental impacts of the Baku-Tbilisi-Ceyhan (BTC), Chad-Cameroon, and Trans Thai-Malaysia (TTM) pipeline projects.

The TTM project’s lead financer (to the tune of $257 million, or half the total loan) is Barclays (ticker: BARC.L), which spearheaded the Equator Principles (EPs), a voluntary set of sustainability guidelines for project finance based on International Finance Corporation (IFC) rules.

“A key requirement of the Equator Principles is that an Environmental Impact Assessment (EIA) involving mandatory public consultation is carried out on all projects to inform the final decision on project finance,” states the CORE report. “The EIA carried out on the Trans-Thai Malaysian pipeline was heavily criticized for omitting many environmental and social impacts and is the subject of an administrative lawsuit.”

“The Barclays involvement in the Trans Thai-Malaysia pipeline demonstrates that participation in voluntary finance-sector CSR initiatives, such as the Equator Principles, does not guarantee real improvements in the protection of human rights and the environment,” it continues.

Each case study ends with a set of recommendations for bolstering corporate accountability and regulation. The report ends with overarching recommendations, including that the EU and its member states adopt a rules-based approach (complete with monitoring and enforcement) to upholding sustainable development in the finance sector.

More importantly, the report recommends fortifying Company Law to require companies to be legally responsible for their social and environmental impacts globally. Specifically, the report recommends mandatory corporate sustainability reporting and expanding directors’ legal duties to encompass care for communities and the environment.

The EU conference paper, which focuses on promoting responsible investment and addressing climate change and poverty, asks whether the approaches outlined in each section “strike the right balance between market-led and voluntary approaches, and regulatory-led approaches?” Seeing as the paper was issued before the conference, it suggests “potential outcomes” but could not foretell what determinations would be arrived at in the conference. A summary report on the conference will be available in the near future.