Assessing CSR Risks in Finance, Banking and Insurance

December 5, 2017 EcoVadis ‏‏‎

When we talk sustainability, the discussion often centres around apparel, electronics, food and consumer packaged goods. The reasoning: These industries manufacture products and have a physical supply chain with clear links to potential worker safety, labour rights and other ethical issues.  

But the sustainability conversation doesn’t stop there. Financial service and insurance organizations, despite lacking physical supply chains, also face urgent Corporate Social Responsibility (CSR) risks, including:

  • Lender liability: The financial risk banks assume when giving out loans are amplified when the borrowing company isn’t sustainable. A borrower’s financial position could be compromised if CSR risks – such as a worker safety issue that destroys its reputation and sales demand — are realized.
  • Outsourced processes: Following the financial crisis, the Consumer Financial Protection Bureau, along with other regulators, implemented strict controls that hold financial institutions responsible for the behaviour of their suppliers. Given the amount the industry outsources — Information Technology (IT), billing, and data processing, to name a few – procurement professionals need to pay attention. The farther away these partners are, the harder it is for the buying organization to oversee performance and ensure they aren’t suspect to unethical practices, which could have a trickle-up impact due to guilt-by-association regulations.
  • Human capital management: Employment and professional services are often the biggest spending categories for financial organizations, which means these teams need to go the extra mile to make sure they are implementing compliant and ethical labour practices. At stake: record-setting fines, damage to the brand, and potentially, a negative impact on earnings and valuation.

 

Business is about choices.

For financial service organizations with no physical supply chain, sustainability improvements stem from how and where they choose to spend money, and the partners they select to act on their behalf.
For example, banks spend substantial funds on IT equipment and technologies. While banks have no control over the manufacturing of these goods, by choosing socially-responsible vendors, as evidenced by an in-depth audit of the prospective partner’s business practices, banks can ensure their own CSR adherence and mitigate the risk of fines and brand damage due to vendor misbehaviour.
Other methods of CSR encouragement include factoring environmental criteria into lending and investment strategies, offering financial products that provide sustainability and environmental businesses with easier access to capital, and providing grants to help other companies and individuals reach sustainable development goals.
The need for sustainable development is urgent. Businesses are increasingly responsible, both legally and practically for the actions of their suppliers, and their suppliers’ suppliers. This means that in the eyes of the law if your supplier is not compliant with a regulation or labour practice, you’re guilty by association. And practically speaking, where there’s a risk of operational disruption due to an unsustainable practice, as the buying organization, you also reap the negative consequences, which could include a data breach, disruption of service, financial loss, or a tarnished reputation due to other sustainability scandals.

Despite the challenging landscape, there is good news: together, the finance industry has made a lot of progress over the past few years. EcoVadis’ recent index rankings rated the financial, legal, consulting and advertising sector as the highest performing “large” industry due to low risks in human and labour rights, and fair business ethics. This is a terrific testament to the power organizations in this sector can have within the global community. On average, a financial organization works with thirty to fifty thousand suppliers. By carefully examining business practices and making sustainability-driven decisions with each partner, these companies can cause a trickle-down effect of positive CSR outcomes throughout the global supply chain, while reducing their own risk and improving financial and procurement performance.

 

Continue Reading:

Know Your Vendor: Supplier Risk Takes Center Stage for Banks, Financial Institutions.

Human Rights Rising On The Corporate Risk Agenda: The Intertwining Of Corruption And Human Rights

About the Author

EcoVadis ‏‏‎

EcoVadis is the world’s most trusted provider of business sustainability ratings, intelligence and collaborative performance improvement tools for global supply chains. Backed by a powerful technology platform and a global team of domain experts, EcoVadis’ easy-to-use and actionable sustainability scorecards provide detailed insight into environmental, social and ethical risks across 198 purchasing categories and 155 countries.

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