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December 29, 2004
Report Finds Bank Sector Assessment of Impact on Disadvantaged Communities Lacking
    by William Baue

AccountAbility and Business for Social Responsibility to apply their new assessment methodology to the pharmaceutical, agricultural, and extractive sectors next.

If "you can't judge a book by its cover," as the old saying goes, then an apt corollary might be, "you can't judge a report by its title." Take, for example, Business & Economic Development: Financial Sector Report, a recent report from AccountAbility and Business for Social Responsibility (BSR).

To unpack its contents a bit, the report's topic is how banks strategize, assess, and disclose their economic impact on disadvantaged communities. The report's findings are significant, making its white bread title seem coy. As the report points out, the Equator Principles broke new ground for signatory banks to voluntarily assess the social and environmental impacts of project financing, but disclosure of the findings from such assessments has not been forthcoming. The report advocates for extending assessment beyond project financing, which typically involves substantial funding to companies, to cover bank activities more broadly, including direct interactions with individuals and indirect impacts on communities. The report also promotes transparent reporting.

This is the first of four sector reports to use a new BSR/AccountAbility methodology for assessing corporate economic impact on disadvantaged communities. The Business & Economic Development project researched 68 companies in all, and will release sector reports on the pharmaceutical, agricultural, and extractive industries in the near future. The finance sector report, which examines the five largest US and UK banks, the ten largest European banks, and the ten largest banks in the rest of the world, thus sets the precedent for the series.

"What is clear from this research, is that there is little consistency or coherence in whether and how banks manage their economic impact," state report authors Helen Campbell and Williams Johnson, AccountAbility senior researcher and researcher, respectively. "We found that only 13 of 37 banks specifically reported on their broader economic impact (not just [their] financial [impact])."

Unfortunately, the report does not make it readily apparent which banks are which. Likewise, the report enumerates how many banks participate in socially responsible investment (SRI) indexes such at the Dow Jones Sustainability Indexes (DJSI) and FTSE4Good (21 in each), but it does not name names. Identifying the precious few banks participating in social and environmental initiatives such as the UN Global Compact (9) or the Equator Principles (4) instead of just tabulating them would have accentuated the poor commitment to sustainability.

Interestingly, the report elsewhere deemphasizes quantification when it comes to assessing the sustainability performance of banks.

"[I]t is the quality, not just the quantity of capital flows, including bank lending, to developing economies that may determine whether banks contribute to improved sustainability," the report authors state. "Enhanced accountability for economic impact is one way for banks to examine these issues--to begin to manage the quality of their contribution to economic development and sustainability."

The report, which was funded by the Ford Foundation and the US Agency for International Development (USAID), follows the example of the Global Reporting Initiative (GRI) in distinguishing between direct and indirect economic impacts. Direct economic impacts are those created by company operations, such as employment and tax payment, while indirect (also known as "induced" or "multiplier effect") economic impacts are more remote, such as employment along supply chains.

The report suggests that the finance sector footprint tends to lean toward indirect economic impacts.

"[I]t is arguable that the most significant and positive impacts of the sector are indirect impacts created by investment, increased productivity, and second round employment and income effects, generated by bank products and services," the report states. "Intuitively, the indirect and induced economic impacts of consumption of credit are a significant product-related economic impact for the banking sector, which can have a direct impact on the capacity of individuals, communities and countries to engage in economic activity."

The report's recommendations call for enhanced assessment of economic impacts and enhanced disclosure of such assessment, as well as expanding assessment methodology to cover an additional business function: government relations.

"This would enable companies to include in their economic impact assessment corporate policies and practices relating to lobbying, political donations, corruption and transparency and a rationale for these decisions," the report authors state. "Corporate responses to these issues are critical across all sectors, but particularly important in the banking sector where the relationships between companies and government are multi-faceted."

"Strategies might include more widespread adoption and implementation of internal Codes of Conduct on bribery and transparency," they conclude.


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