The FINANCIAL — Corporate social responsibility is gaining a momentum in Georgia. It was in June 2014 when the seed was planted for this business model and a policy tool to enter the private and public discussions in the country.
The EU – Georgia Association Agreement (AA) was signed and the Georgian Government made a commitment to promote labour and human rights, as well as, the corporate social responsibility in accordance with the internationally recognized principles and guidelines. Thus, it is expected that responsible ways of doing business in Georgia are protected by the Government while respected and practiced by the enterprises. Recently, some initiatives were put in place that will further endorse the CSR engagements among the private sector representatives in Georgia. CSR Club, UN Global Compact Local Network in Georgia, along with UN Women Georgia Office’s current project to train over 80 business representatives from up to 45 companies in Georgia in CSR are among the few to be named. Yet, CSR still is a new concept and lacks solid examples from the Georgian business sector, including the financial institutions.
What is CSR?
Before venturing on the arguments to why financial institutions in Georgia shall work with CSR, let’s see how EU has defined a term ‘CSR’. Midst the lavishness in the definitions of the term CSR or the phenomenon what it stands for, European commission has decided to define it as ‘…the responsibility of enterprises for their impact on society’ (EU Commission, 2011). It also added, that while CSR is to be company led, public authorities can play a vital role in supporting corporations efforts through policy measures, some voluntary and some compulsory. Enterprises can be socially responsible by obeying the legislation and by integrating social, environmental, ethical, human rights, and consumer rights concerns in their business operations and strategy.
Why to Tango With CSR?
The reason companies choose to work with CSR are various – some feel obliged due to the regulations and law requirements, some are full-heartedly committed to make positive social and environmental impact, while others wish to be branded as sustainable and innovative, and some respond to the demands of their business partners, customers, or other key stakeholders. Thus, while some see working with CSR a calculated and strategic move from the side of the companies to build a brand of a socially conscious and sustainability oriented company, some also see the increased interest from the consumers and business partners (so called ‘enlightened stakeholders) to matter when companies decide to work with CSR on a strategy level and to open their boardrooms to the topics previously seen as the matter of HR departments or CSR & External Communication Offices. In general, there are two types of benefits when working with CSR regardless of the speculations behind company’s CSR commitments: they rip the benefits of reputational and non-compliance (legal) risk management, on one hand and on the other hand, it leads to an opportunity creation for talent attraction, building a strong brand, attracting a responsible capital, becoming innovative and improving a customer and employer loyalty, when establishing or improving their business operations, forming business contacts, developing and providing products and services in a way that reduced their potential negative social, environmental, and human rights impact on communities and end-users.
For financial institutions working with environmental, social and good governance principles have number of global frameworks to join in and adhere to in their CSR work. Few can be mentioned. One of the largely referred standard by private sector representatives is the UN Global Compact created in 2000 is the global framework that supports enterprises efforts to be socially and environmentally responsible while acting ethically and in compliance with human rights principles. Currently around 9000 companies from 166 countries have committed to this standard, including 63 signatories from Georgia out of which around 9 companies represent financial sector.
Another type of a sector-regulatory framework aimed for banks that finance large projects (above 10 000 ml USD) is initiative called Equator Principles (EP). Equator Principles was initiated by large private banks willing to ensure social, environmental, human rights, and ethical governance principles were considered and negative risks mitigated in the projects where they invested money. Being built on the IFC Guidelines on Performance Standards it has around 84 financial institutions from 32 countries (predominantly from North America and Europe) as signatories who adhere the principles in their operations.
And finally, the third international initiative to ensure ethical behaviour of financial institutions is UN Principles of Responsible Investment. It is a global framework elaborated in partnership with UNEP Finance Initiative and the UN Global Compact. This initiative aims to ‘understand the investment implications of environmental, social and governance issues and to support signatories in integrating these issues into investment and ownership decisions’. Currently nearly 1500 signatories (including asset owners, investment managers and service providers) have joined in across 50 states representing US $60 trillion. PRI works with its international network of signatories and produces an annual Assessment Report in order to provide feedback to the signatories in their efforts towards integrating social and environmental concerns into their investment decisions.
When we talk about a need of working with CSR and considering the vast capacity that financial institutions have to ensure that they bring positive social, economic and environmental impact through their operations, it is worth mentioning three events that will shape the future corporate social responsibility agenda in relation with financial institutions globally.
Three Events that Matter:
It is vital to bear in mind that in the coming years three events will pave the road for the financial institutions to work and act upon existing corporate social responsibility frameworks and tools or strategies. One is the financial meltdown of 2008 where a public outrage made it clear and financial institutions had to be better regulated and scrutinized, while the institutions had to exercise corporate social responsibility norms. Secondly, it is the global commitment to combat a glaring problem and increased risk of future environmental disasters due to the climate change. Thus, the results of the Paris COP21 agreement among multiple stakeholders to do their outmost to reduce emissions and the temperature with 2 Celsius degrees by 2030 is to drive mobilization of capital and future investment initiatives. And lastly, it is the global set of 17 Sustainability Development Goals (SDGs) that by 2030 have to deliver results with the support and coordination from the UN. Those SDGs will provide the frame for the already emerging Green Funds across the countries, policy initiatives and public-private partnerships, as well as, for the capital venturing into the impact investment initiatives in the years to come.
Current Trends:
That said, one cannot wish a better moment to talk about CSR in the context of financial institutions both globally and in Georgia particularly. As said, there are first steps made in Georgia for capacity building and creating a critical mass, which grasps the need and ways of working with CSR across sectors. Meanwhile though, there are interesting trends emerging in financial sector worldwide that can be grouped as trends that either tap on opportunities that socially and environmentally conscious players tap on or the risk management tools that also financial sector players opt for. Those trends range from financial technology (fintech) to crowdfunding as a democratic banking to impact investment and ethic banking. Those trends are not making the notion of CSR or working ethically in financial sector obsolete but just opposite – they strengthen the core of working with CSR for financial sector that is to: manage risks and to create opportunities.
For instance, financial technology and platforms that gather funds for various initiatives or business ventures create opportunities and increase access to invest, contribute or to participate into financial transactions to individuals on a much broader level. Thus, those trends help increasing availability and accessibility of financial resources among various groups of individuals. This is not directly part of corporate social responsibility norms or frameworks known today and adhered by financial institutions, but it is neither in contradiction of it. On a positive side though, ‘democratic banking’ and improved technology that allows individuals with particular needs and limited ability to be part of economic activities through crowdfunding or fintech do in fact contribute to social and human rights issues entailed in CSR frameworks.
While traditional banking, payments, wealth management and other type of financial services are being disrupted by fintech players, some financial institutions choose to view them as collaborators and/or acquisition targets (for instance, BBVA acquiring Holvi and Simple in 2014), while others invest massively in developing fintech on their own (for instance, Santander InnoVenture). Consequently, the global investments in fintech ventures has tripled in the past years from $ 4,05 bn in 2013 to $12.20 bn in 2014. As a rebellion against traditional banking and the availability of the funds that small companies or donation activities needed gave a way to crownfunding platforms. The Massolutions in 2015 estimated that the industry is exploding in terms of attracting capital. The estimated market value of the crowdfunding (for funding models in rewards, donations, equity or debt/lending) 2015 is $ 34 bn which is massive compared to its value in 2010 that was $ 880 mln.
Impact investment and use of socially responsible investment strategies is also emerging as a growing trend in financial sector. Global Impact Investing Network (GIIN) defines impact investment as an ’investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.’ The trend has gained even more support from multiple stakeholders including governments that aim to tap on the private capital willing to help eradicating global social and environmental problems by providing necessary regulatory frame and infrastructure. As estimated by the leading European association for the promotion and advancement of sustainable and responsible investment across Europe – Eurosif in 2014, the European impact investing market has grown massively over past years reaching estimated 20 bn euro market. Environmental, Social and good governance (ESG) principles and selective criteria are increasingly included in the financial decisions of the banks, investment funds, wealth managers or asset owners. Some estimate that for the sake of achieving Sustainability Development Goals (SDGs) of 2015 that are to improve the livelihoods of all in global South and North and to address climate change problems, gender issues to poverty and lack of healthcare and education, need massive help from the private sector. Some 2.5 trillion USD is estimated to be needed per annum in private financing worldwide to supplement local tax and free revenues to official development assistance funds to achieve the SDGs. Thus, financial institutions, NGOs and governments along with the multiple types of stakeholders try to mobilize capital and private funding for environmental, social and human rights issues that plague countries in South and North. What differentiates impact investment from a conventional investment is that it is aimed to solve a particular problem and achieve a clear social impact (through achieving a set target) along with delivering financial results. In a nutshell, impact investment is definitely an opportunity and financial institutions globally are incorporating it into their portfolios.
And lastly, when it comes to managing CSR risks the trend of ethical banking is to be mentioned. Ethical banking has emerged as a new trend among the financial institutions that integrate social, environmental and human rights principles along with good governance norms in their business models. Ethical banks are transparent, have policies on CSR issues and engaged with their stakeholders actively. They have clear social and environmental vision and targets. In their lending or investment decisions they use strict strategies of excluding companies that fall short on protecting biodiversity and environment, manage chemicals or waste in a responsible manner, that does not use energy efficiently or does not aim to reduce emissions or its waste, that does not respect human and labour rights or allows its colleagues to get away with poor conduct and unethical behaviour. In ethical banking some institutions have also a strategy to exclude projects or companies based on ethical principles or norms. For instance, some refrain to invest in companies from the sector of pornography and alcohol sector, weapon transportation or tobacco production. In general primary concern of the financial institutions have been to bring return on investment to its shareholders by managing risks and investing in profitable projects/ companies. Over time, financial sector representatives started to view corporate social responsibility as one of the forms of a risk management. It shall be said, that when engaging with CSR by a bank in order to manage risks does not make it necessarily a bank that practices ethical banking as the latter requires certain level of transparency, commitment to various international standards and commitment assurance which is provided by the third party audits who check weather bank really walks its talk on its commitments and achievements on CSR indicators.
Few promising examples from the financial sector:
Danske Bank
Recently published ratings of the global 100 most sustainable companies in 2016 by Canada-based company (that has its own research division dedicated to the social ranking of world’s largest public firms as the most sustainable companies annually based on their leadership in industry best practices and transparency.) Corporate Knights ranked a Danish bank ‘Danske Bank’ as one of the top ten companies among the Global 100 world’s largest public enterprises that are pioneers in being sustainable and transparent in their relevant sector. (Danske Bank was also among the top 10 companies in 2015 ranking). Danske Bank was established in 1871 with a head office in Copenhagen and it is the largest bank in Denmark and a retail bank in Northern Europe serving in total 3,5 mln individual clients, large and small companies, as well as, institutional clients. Danske Bank operates in 15 countries, while its primary market is the Scandinavian countries.
Danske Bank has worked over the years to integrate Responsibility Policy into its daily business while acting as a sustainable, responsible and transparent business partner. The priority areas of Danske Banks Responsibility Policy range from environmental footprint to responsible supplier relations, to responsible employers, responsible customer relations to contributing to society. For the companies working with CSR to be able to ‘walk the talk’ and not only claim what they stand for, but to have a clear strategy, endorsement from the management and also a reporting and monitoring mechanisms, it is vital that CSR gets out of the HR or Communication Departments only and makes its way to the Board of Directors. This is what the Danske Bank did when it established its CSR governance. Updates on the bank’s CSR activities and achievements are made to the Board of Directors by Executive Board. The latter has the responsibility to develop and implement company’s CSR strategy. To do so, Executive Board established a Business Integrity Board (BIB) chaired by the CEO and comprising managers of various divisions where those managers are responsible to inform all on the CSR principles and focus areas and to ensure their implementation in their relevant departments.
Danske Bank has also clear targets on its priority areas of the Responsibility Policy in the Sustainability strategy, thus, tracking them and reporting them is done annually in its annual sustainability report that is public and available to all interested parties. Moreover, to ensure impartiality and correctness of the annual reports, the Bank is using assurance from a third party. In 2015 the company updated its Corporate Responsibility Policy and reviewed its Corporate Responsibility Strategy (2015-2018) and has made very concrete targets and listed actions to be undertaken to achieve those targets by 2018. Meanwhile, Danske Bank endorses number of international standards and frameworks of corporate responsibility and responsible banking that are, The UN Global Compact, The OECD Guidelines for Multinational Enterprises, The UN Guiding Principles, The Principles for Responsible Investments (PRI), UN Environmental Program Finance Initiative (UNEPFI).
Triodos Bank
Neatherlands-based private bank Triodos Bank was established in 1980 and is known as one of the pioneers in ethical banking in Europe. The bank provides services to institutions and individual customers including lending, investments, payments and saving accounts. The bank prides itself to be transparent and ethical in its operations and lending/investment decisions. It uses ‘positive screening’ strategy where companies or organizations Triodos Bank chooses to invest need to be not only financially viable, but also socially and environmentally beneficial. Thus, fair trade initiatives, social enterprises, ecological farming projects get to star among the lending or investment lists of the bank. Triodos bank also deselects enterprises or initiatives for investment and lending using ‘negative screening’ if they may bear negative social and environmental impact and if they belong to such sectors as hazardous chemical production, weapons distribution or production and the like. And lastly, Triodos Bank chooses to be fully transparent on how and where it uses the money to all its stakeholders. Triodos Bank uses Global Reporting Initiative since 2001 and thrives to focus on the most material issues for the company to report on as a result of the intensive stakeholder discussions and meetings.
While in general financial institutions focus on risk, return and exit the Triodos Bank choses to focus on impact, risk and return. Triodos Bank is a signatory of the UN PRIs since 2009 and has in 2016 received a positive feedback on its investment management efforts by UN PRI annual assessment report giving A and A+ to Triodos IMs. The bank has also established a network ‘Global Alliance for Banking on Values’ (GABV) that across all continents comprises of 36 financial institutions and strategic partners collectively serving 24 mln customers, managing 110 bn USD assets. The network brings together value-based banks that aim to build sustainable financial future and create positive social and economic impact. Moreover, the full subsidiary of the bank – Triodos Investment Management that focuses on socially and economically lasting changes in the way it approaches money, is also in the Investors’ Council of the large impact investors network Global Impact Investing Network. Currently the Bank manages 18 sustainable investment funds (amounting to EUR 3.1 bln) both in Europe and in emerging markets. The sectors where investment are being made are broad and range from renewable energy, organic food and agriculture, sustainable real estate and microfinance and also invests in listed companies that have above average en environmental, social, and governance (ESG) performance.
A Way Ahead:
Through my observations and discussions in Georgia on CSR made it clear to me that on one hand, there is confusion about the social responsibility activities of corporations with their philanthropic initiatives, which shall not be the case. Philanthropy is not a strategic CSR. On the other hand, since CSR is a new notion for the business sector in Georgia there is a need for pioneers to start working with it on a strategic level. As a result, peers will get inspired and companies in Georgia will have best practice to measure up to. Thus, there are three things that might help the financial institutions in Georgia not only to tango with CSR but also to master this dance very well in a close future: firstly, corporate social responsibility is not to be confused with philanthropy. Giving away is not a CSR, it is a philanthropy. CSR is not to replace it, nor is it to transform it. Both have their own place in the activities of corporations. However, CSR is and shall be an integral part of a company’s strategy and its business model: thus, part of what it does (i.e. its products and services) and how it does it (i.e. processes it uses in its operations) through its business contacts that also practice responsible business. Secondly, working with CSR takes strategic planning and intensive self-assessment, stakeholder analysis and engagement. In this realm, the size of a company is non-important. Any size of a company, being SME or a large corporation, can and shall work with causes that they feel strong about and that are relevant to their company’s sector and product/services. In this manner they can mitigate risks of possible negative social and environmental impact their work might bring, and they can go beyond risk management and choose to seek opportunities in their CSR efforts. Thirdly, CSR engagement takes strategic decision-making on the level of executives and company’s boards. This is therefore; no CSR commitment or engagement is worth of anything if it is packed in the communication and HR department only and is not endorsed at the CEO level. CSR has to enter a room of Board of Directors, and I mean it literally so. There has to be a executive level group that works with the social, environmental and good governance initiatives, bears responsibility for implementing CSR policies, and achieving set targets – otherwise, talk will remain a mere talk and no results will be achieved.
Nina Dadalauri, Ph.D. is an expert in the field of Corporate Social Responsibility. Her current engagements as a Managing Partner at Peruse Company range from CSR policy and strategy development, KPIs and sustainability reporting, CSR risk assessment (HRIA and SIA included), to designing and facilitating workshops within the real on CSR.
Through her consultancy work and a lectureship at the Copenhagen Business School (CBS) Nina Dadalauri is on forefront of the current corporate sustainability trends and academic debates. She can be contacted at the follwing e-mail address: nd@perusecompany.com .
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