Financial services

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

Key challenges and opportunities

Investment and lending decisions

Financial institutions make their most significant social and environmental impacts indirectly – through their decisions on whether to lend to businesses or invest in them.

The most responsible financial institutions systematically examine the social and environmental aspects of their investments in businesses through a robust environmental, social and governance (ESG) assessment and make their decisions accordingly.

This is particularly important when it comes to major infrastructure projects and project finance, where a financial institution could be committing itself to providing funding over periods as long as 20 years or more. Many financial 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 been criticised for a range of failings, for example rigging Libor rates, mis-selling payment protection insurance (PPI) and 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 retail 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.

Credentials

• We have provided independent assurance of The Co-operative’s influential and highly regarded sustainability report for seven straight years. Our assurance work involves extensive analysis of the reliability of data and claims in the report and of how well the organisation understands its material issues and is responding to the issues that matter most to stakeholders. The Co-operative is a major financial services provider with strong ethical commitments, and we also provide ‘high level’ assurance of the data and claims in the ethical finance section of its report.
• We were engaged to provide assurance of State Street’s CR report. State Street is one of the world’s leading providers of financial services to institutional investors. Our assurance scope has grown, following the geographical extension of the report. Through materiality workshops we have assessed the significance and relevance of information reported, assisting State Street to focus its efforts and manage reputational risk. Moreover, our assurance provides valuable observations that enable State Street to continuously improve.
• 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.