CSR – What you do when no one is watching

Author

Kayleigh Gregor

Associate

Corporate Social Responsibility (CSR) is not a new concept. The Financial Times define it as “a broad concept that differs in approach” and cites its main purpose as aiming to “drive change towards sustainability” [1]. In its most basic form, CSR can be said to be an ethical way of carrying out business whilst keeping in mind the company’s social, economic and environmental impact

Published: 22 June 2017
CSR

Carroll’s Four-part Pyramid (1983) [2] aims to simplify the hierarchy of company contributions that are expected or desired by stakeholders, ranging between economic and philanthropic factors. This concept can be dated back to the financial crisis of the early 80’s, however in more modern times it has developed somewhat to a more long-term vision of sustainability and shared values, with institutions choosing to embed CSR into their corporate governance structure. The Concentric Circle model portrays the main objectives of major corporations as being profit, but also highlights the obligation to work toward social betterment [3]. In recent years, CSR reporting has progressed from voluntary to “comply or explain” and is moving towards mandatory reporting in all OECD countries [4] through government regulation and peer pressure [5].

So, why are financial institutions choosing to report on this, ahead of mandate and why is it so important for them to invest in CSR in the current climate?

Confidence in the financial sector plays a vital role in the wellbeing of our economy, and this was never more evident following the financial crash of 2007/08. In the wake of the crisis, the finance industry was seen as one of the biggest villains after bonuses correlating to bank profits were paid out, incentivising both risk-taking and greed. It emerged that large pools of bad debt were masked as Triple A investments in order to profitably sell them on, whilst some institutions had used tax payers’ money to cover risky investments, resulting in public outcry and severe reputational damage across leading financial institutions.

The Memorizing Resonance Reputation Index (MMRI) is a formula that uses the media to gauge the reputation of the Dow Jones Top 30 Banks [6]. The factors included in the MMRI formula are the number of media contributions and their relative positive or negative sway.

Functional/Social reputation trends and Share Price of Dow Jones Banks between 2002 and 2011.

It shows a clear correlation between public reputation (DJTBAK), how profitable banks are (Functional MMRI) and also the perception of banks as a “community player” (Social MMRI). The trends highlight that Social MMRI is the most volatile, however as it increases, so does profitability. There are clear declines in Social MMRI in both 2002, when the highly media reported Enron scandal hit and the Dotcom bubble burst, and also in 2007 when news of the financial crisis broke to the public.

But how are banks using such indicators to their advantage?

The financial crisis was seen as a “stress test for good intentions” [7] by many as some firms decreased their investments due to lower levels of generated wealth. However, a survey by Globescan in 2015 on global public opinion of the CSR performance of financial institutions indicated that, despite less profit, most sectors have increased their CSR investment since 2007 [8].  

KPMG (2015) conducted a global survey in order to establish what percentage of the financial and banking sectors had chosen to invest in CSR reporting. The results highlight a significant increase from 4% in 2008, during the initial stages of the recession, to 56% in 2015 [9]. This increase can be attributed to differing factors – a survey by Ernst & Young (2013) of motivating factors found the main reason for this increase being due to the need for an increased culture of transparency between the financial sector and its stakeholders [10]. It can also be said to be as a result of an increase in the number of instruments allowing companies to measure their social impact. Between 2013 and 2016, this increased from 180 identified in 44 countries to 383 in 64 countries [5]. Financial regulators and stock exchanges are at the forefront of creating sustainability reporting frameworks, making up 29% of all CSR reporting instruments in 2016 according to a Carrot and Sticks report [5]. 

What motivates organisations to report?

Source: Boston College Center for Corporate Citizenship and EY 2013 survey [11]

Banks and other financial institutions appear to be adopting CSR guidance and reporting in order to retain or improve upon their reputation both in the market place and in the eyes of the public. Increasingly, leaders are embedding CSR values from the top down, a good example of which being the case of Vikram Pandit, Citigroup’s CEO at the time of the crisis, who took a monumental pay-cut after the crash, stating that it would stay that way “with no bonus until we return to profitability” [11].

 

Although the financial sector isare faced with much skepticism around their investment in CSR, it can also be seen to provide many other advantages besides improved reputation. It may lead to an increased consumer base, for example in the case of Santander who has used its resources to help more than 1,300 SMEs create jobs and drive growth allowing an increase in their customer base and an increase in its share of the UK SME market to more than 5%.

 

A CSR conscious institution may be preferred amongst potential employees and investors alike, which can be seen to be aiding banks to find and keep highly skilled workers as well as attracting increased investment. Deloitte conducted a survey in 2011 which found that 70% of millennials feel that a company’s commitment to the community influences their decision to work there [12]. Investment in on-the-job training and work experience programmes may benefit a company with a happier, highly skilled work force whilst the community and economy also benefit through lower levels of unemployment.

There are many definitions of CSR, however following the 2007 financial crash the focus has needed to change to a more ethical and sustainable way of profit making for financial institutions. Now that social responsibility has made a shift from being desirable to simply expected by consumers, leaders must imbed CSR as a core competence and make it integral to their governance and company culture.

 

This has been a great building block for financial institutions in terms of undoing the reputational damage following the financial crisis and particularly now, in the uncertain political environment we have found ourselves in in 2017 and in the infamous generation of the millennial with social media playing such a key role in branding and reputation, maintaining a socially responsible organisation has never been more important. Can financial Institutions afford not to invest in CSR? After all, you have to spend money to make money.

[1] http://lexicon.ft.com/Term?term=corporate-social-responsibility--(CSR)

[2] http://research-methodology.net/carrolls-csr-pyramid-and-its-applications-to-small-and-medium-sized-businesses/

 

[3] http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8594.2008.00311.x/full

[4] http://www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm

[5] http://www.sseinitiative.org/wp-content/uploads/2016/05/Carrots-Sticks-2016.pdf

[6] https://www.foeg.uzh.ch/dam/jcr:00000000-13a2-35bc-0000-000073b2a305/Eisenegger_Ku_BB_011.pdf

 

[7] http://arno.uva.nl/cgi/arno/show.cgi?fid=154786\

 

[8] http://www.globescan.com/news-and-analysis/blog/entry/seven-years-on-from-the-financial-crisis-optimism-in-africa-but-csr-ratings-deficit-elsewhere.html

 

[9] https://assets.kpmg.com/content/dam/kpmg/pdf/2016/02/kpmg-international-survey-of-corporate-responsibility-reporting-2015.pdf

 

[10] http://www.ey.com/Publication/vwLUAssets/EY_-_Value_of_sustainability_reporting/$FILE/EY-Value-of-Sustainability-Reporting.pdf

 

[11] https://www.forbes.com/sites/brendancoffey/2011/05/16/ceos-who-make-one-dollar-or-less-a-year/#58430cf33ad9

 

[12] http://business.time.com/2012/05/28/why-companies-can-no-longer-afford-to-ignore-their-social-responsibilities/

Kayleigh Gregor

Kayleigh joined FinTrU through our second Financial Services Academy in 2015 after graduating from Queen’s University Belfast with a BSc (Hons) in Business Economics. She joined FinTrU in order to expand her knowledge in the financial services sector.

Since joining FinTrU, Kayleigh has worked as a pre-settlement analyst for a Tier I investment bank, gaining a diverse professional experience through client engagements. Kayleigh is responsible for dealing with fixed income/equity settlements of trades, allegement reporting, trade discrepancies and procedures to ensure settlement for internal and external clients. She has gained experience in conducting complex data analysis and liaises with clients and senior team members in London, Hong Kong and New York.

 

Kayleigh continues to work with the team in London to create and improve procedures for daily tasks, pre-funding analysis and central bank trade investigation.

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