Financial services

Banks, insurance companies and other financial institutions have enormous potential to influence social and environmental development, most notably through how they provide businesses with access to finance.

Key challenges and opportunities

Investment and lending decisions

Banks and insurance companies make their most significant social and environmental impacts indirectly – through their decisions on whether to lend to businesses or otherwise invest in them.

The most responsible financial institutions systematically examine the social and environmental aspects of their investments in businesses, and make their decisions accordingly.

This is particularly important when it comes major infrastructure projects, where a financial institution could be committing itself to providing millions of dollars of funding over periods as long as 20 years or more. Many banks and other institutions have signed up to the Equator Principles, a widely accepted set of social and environmental criteria to be used when deciding whether to invest in major projects.

On a smaller scale, many of the more responsible banks provide funding and other support for microfinance schemes, particularly in developing countries. Microfinance is the provision of small loans to the working poor. It supports entrepreneurialism and can help impoverished communities develop economically and reduce their dependence on aid.

Meanwhile, some of those in the sector at the forefront of sustainable business use their influence as major institutional shareholders to push for change in the companies in which they invest. They often do this by using their shareholder votes to encourage companies to implement more sustainable practices and to challenge behaviour that does not meet certain ethical criteria. They are then transparent about how they have wielded this influence, for instance by publishing their voting record at company AGMs.

Treating customers fairly

Over recent years, the financial services industry has come in for criticism for mis-selling, particularly relating to pension and mortgage products, and for having fostered a culture of indebtedness that has left many in financial difficulty.  Excessive banking charges and lack of transparency over terms and conditions have also surfaced as major concerns.

Responsible financial institutions put in place rigorous management processes to make sure personal customers are treated fairly. That means making it as easy as possible for customers to understand the products and services they offer, and then marketing and selling them responsibly, according to customers’ needs and circumstances. This is particularly important when dealing with vulnerable customers and those on low incomes.

Financial inclusion

In some more developed economies, there has been significant consolidation in the provision of financial services, particularly as web-based services have come to the fore. This has led, for example, to closures of bank branches. These closures have occurred more frequently in poorer communities, potentially increasing a local pattern of economic decline and leading to financial exclusion.

Leading banks have well-developed programmes to ensure the financial inclusion of all members of the community, particularly the poorest. They do this in many ways, including by providing individuals on low incomes with basic bank accounts. These accounts enable account holders to receive money, pay bills and make cash withdrawals, but do not require would-be customers to produce all of the usual forms of identification such as utility bills and information from employers, and do not allow customers to go overdrawn. Many banks also fund independent money-advice charities that help people in debt or on low incomes.

Insurance provision

Insurers are increasingly coming under fire for excluding – either overtly or through exorbitant pricing – those who present the greatest risk even though they are often those most in need of insurance services. This applies, for example, to those seeking home insurance but who live in deprived areas or areas at risk of natural disasters brought about by climate change. This practice runs contrary to the basic principle of spreading risk across the community for the good of all. More responsible insurers are committed to fair pricing and to ensuring insurance is easily and widely accessible.

Islamic banking

Islam prohibits followers from earning interest on invested funds or paying interest on funds they have borrowed. This feature is built into so-called ‘Islamic banking’ services, which also accommodate other aspects of Islamic law, such as prohibiting transactions, including investments, involving gambling, alcohol, pork products and pornography.

Credentials

• We have provided independent assurance of The Co-operative Group sustainability report for three years running and of the Co-operative Financial Services’ report for three years before that. In our assurance of the latest report for 2008-09, we provided detailed assurance of The Co-operative’s reporting of its ethical approach to providing financial services.
• From 2002 to 2004, we provided assurance of the corporate responsibility report produced by RSA, one of the world’s leading insurance groups.
• We helped Nationwide Building Society develop its first web-based sustainability report, and to produce subsequent reports.
• We have assessed and benchmarked the accountability performance of Royal Bank of Scotland and of AXA and made recommendations for improvements.
• In 2000, we were asked to analyse and comment on environmental and social impact assessments produced in relation to the proposed development of the Baku-Tbilisi-Ceyhan oil pipeline across central Asia. We acted as an independent reviewer of these assessments, highlighting potential conflicts with investors’ social and environmental criteria and the requirements of international bodies including the International Finance Corporation.