BankTrack.org - pages - Transparency

BankTrack partners launched a website asking for more transparency in the banking sector: www.banksecrets.eu

what is at stake

The current financial crisis has been the worst since the Great Depression in the 1930s. The immediate cause of the current financial crisis was the bursting of the housing bubble in the United States. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favourable terms. This increased the issuance of "sub-prime mortgages" to people with poor credit histories and a greater risk of loan default. However, once interest rates began to rise and housing prices started to drop, refinancing became more difficult. In the end this led to many loan defaults and foreclosure activities.

Banks have been held widely responsible for selling sub-prime mortgages despite the risks, and for not sufficiently explaining the risks to the borrowers involved. If there is one thing the financial crisis has taught us it is that people have a right to know about the impacts and risks of business actions that may directly affect their livelihoods. This applies not only to mortgages, but to all activities of banks and businesses. Unless all stakeholders are fully apprised of an activity's environmental, social and economic benefits, and its costs, risks and potential alternatives, affected people cannot secure their legitimate interests.

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Apart from the moral obligation to operate in a transparent manner, an increasing number of companies realise that transparency is in their own interest. It is crucial for a company to be transparent not only with its shareholders, but also with other stakeholders such as employees, customers, governments, people directly affected by their activities and civil society at large. Every company has to earn its social license to operate, by showing how its activities contribute to the well-being of all stakeholders and by being responsive to their aspirations and grievances.

Being transparent creates a shared base of information on which various stakeholders can build trust and negotiate outcomes. It is often the absence of such a shared knowledge base, and the public perception that company owners and managers are attempting to hide potential impacts, that causes conflicts and opposition to company activities. Greater transparency can also reduce the risk of corruption and prevent the misuse of revenues for expenditures contrary to the public interest, such as military spending. No company can claim significant progress towards sustainability unless its transparency mechanisms and practices meet international standards.

Transparency is even more important to banks than to other companies. For a long time, banks have been viewed as trustworthy institutions with a high level of integrity. This perception was severely damaged by the current financial crisis, hampering banks' ability to operate as intermediaries between investors and borrowers of money.

As financiers, banks share a certain level of responsibility for the impacts of their clients' operations with the managers and owners of these companies. Banks therefore have to inform the public not only about their own practices, but also about their clients' activities for which they provide financing. Banks reap benefits from the activities of their debtors and hence carry responsibility for the environmental and social outcomes that result from these activities. To show they acknowledge this responsibility and take it serious, banks need to be as transparent as possible on the companies, projects and countries they finance.

Transparency can also serve the bank's interests by ensuring that public concerns regarding the activities they plan to finance are raised and resolved before they become conflicts. For this reason, multilateral development banks and many export credit agencies have adopted access to information policies that, while inadequate, still provide basic data on pending transactions. These policies prove that it is possible to overcome client confidentiality concerns, which are so often used as an excuse to not disclose information. Some financiers in the private sector have likewise developed disclosure policies.

selected standards and initiatives

We distinguish between the mechanisms a bank can adopt to ensure institutional transparency and the mechanisms by which it can ensure deal transparency. The institutional transparency mechanisms can be applied throughout the organisation and refer to all operations of the bank, while deal transparency mechanisms applied to the specific deals the bank is involved in.

Institutional transparency

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Each bank is expected to report in an open and systematic way on the steps it has taken towards sustainability. Publications on sustainability should clearly describe what goals banks have formulated concerning social and environmental issues, which goals have been chosen as a priority, which steps have been taken towards reaching them and what have been the results so far.

The G3 Reporting Framework - developed by the Global Reporting Initiative (GRI) - is a useful framework for producing annual sustainability reports, prompting banks to not only describe policies, but also to measure their implementation. The framework contains principles to define report content (materiality, stakeholder inclusiveness, sustainability context, and completeness); principles to define report quality (balance, comparability, accuracy, timeliness, reliability, and clarity); and guidance on how to structure the report.

As some sectors face unique needs that require specialised guidance in addition to the universally applicable core G3 Reporting Framework, the GRI and its partners developed Sector Supplements responding to these needs. The supplements constitute a key part of the G3 Reporting Framework. To address the financial services sector, the GRI and the UNEP Finance Initiative (UNEP FI) published various Financial Services Sector Supplements on issues such as Product Responsibility, Human Rights and Environment.

The G3 Reporting Framework and its Financial Services Sector Supplements are broadly worded and designed for the financial sector as a whole. In addition, banks can respond to GRI indicators in brief and minimal ways, which result in poor disclosure.

A significant step forward would be full disclosure of all sector, issue and country policies the bank has adopted, and the extent to which these policies apply to its operations. The value of these policies is seriously diminished when they are kept confidential, as this deprives people affected by the activities of the bank's clients with information about the standards to which the bank's clients are supposed to comply.

Additionally, banks should disclose specific instances of material non-compliance of clients with the bank's policies, standards or contract covenants, and the actions taken to rectify these cases of non-compliance, whether these actions have been successful and, if not, what further action (including the calling-in of loans) have been taken. Such compliance reporting is currently practiced by companies such as Nike, which identifies and describes how its subcontracting facilities are complying with the company's labour standards.

Deal transparency

The most convincing proof of a bank's commitment to transparency lies in the disclosure of all deals the bank is involved in. This includes corporate loans, project finance, investment banking services, asset management and other types of deals, with corporate clients and governments. Stakeholders should be able to find basic details on all deals on the website of the bank.

Where applicable, social and environmental assessment reports relating to individual deals should be available as well. Banks often hide behind the concept of "client confidentiality" as an excuse not to disclose information on deals. Social and environmental disclosure should not be avoided through the claim of client confidentiality, since most of the environmental and social information relevant for affected people and NGOs does not fall within the narrow margins of business secrets. Moreover, a client's interest in confidentiality should not be overriding unless it outweighs the public's right to know about impacts that may directly affect them.

Furthermore, the legitimate parameters of confidentiality vary with the transaction.

For syndicated loans and underwriting agreements this argument is completely irrelevant, as most banks already publish details on their involvement in advertisements in the financial press. For the bank's asset management for its own account, client confidentiality is also not an issue as no client relationship exists with the issuers of the shares and bonds invested in. Only for bilateral loans and investments in private companies could client confidentiality be an issue. Banks can deal with this issue by announcing and agreeing in advance with their clients that their names can be published, clearing the way for more transparency.

The benchmark in this field has been set by multilateral development banks, such as the World Bank, the Asian Development Bank and others. The International Finance Corporation (IFC) has a strict Policy on Disclosure of Information, which has been in constant development since 1994. IFC gives broad and comprehensive overviews of its activities on its own website, including investment guidelines and business partners. The IFC also makes limited project-specific information available online, including Summaries of Project Information (SPIs), Environmental Assessments (EAs), Environmental Action Plans (EAPs) and Environmental Review Summaries (ERSs). Meanwhile, some export credit agencies, which are subject to their respective countries' freedom of information laws, must disclose even more information upon request.

Commercial banks should work towards a greater deal transparency similar to the IFC's Policy on Disclosure of Information. A first step in achieving this would be for the bank to provide a breakdown by economic sector and geographic region of the deals it is involved in by financial product or service (e.g. bilateral loans, syndicated loans, underwriting, investments in shares and bonds, etc.). Such reporting is required in the GRI Financial Services Sector Supplements, and is meant to give stakeholders some sense of the bank's exposure to environmentally and/or socially sensitive areas or sectors.

A second step would be to provide basic details (client name, amount, purpose, maturity) on the deals which the bank has concluded on the bank's website. Apart from loans to companies, details should also be published on loans made to governments and state-owned enterprises. In countries with opaque and weak governance, transparency is critical to prevent such loans from being misappropriated. It also gives the countries' parliaments the opportunity to scrutinise these loans.

Banks should also create disclosure policies and practices that would require clients to make information about environmental and social impacts available to affected communities. This would be similar to the disclosure requirements the Equator Principles banks are supposed to apply to Category A transactions, which require clients to provide affected people and NGOs with timely and adequate information about proposed activities in an appropriate language and manner.

content of a bank policy

As this page focuses on transparency by banks themselves, the bank's policy primarily applies to the bank's own operations (institutional transparency). The elements for deal transparency can be applied to lending and investment banking and/or asset management and have been recorded as such in the scoring table.

In order to comply with the policy regarding deal transparency, a bank should obtain certain disclosures from its clients. As this is a logical consequence of the policy, this requirement has not been included as a separate element below.

essential elements

The bank will, with respect to institutional transparency:

Publish an externally verified annual sustainability report, which meets the basic requirements of the G3 Reporting Framework and its Financial Services Sector Supplements;
Publish all of its sector and issue policies.

additional elements

The bank will, with respect to institutional transparency:

report on cases of non-compliance with its policies and on actions taken to rectify these cases and to avoid non-compliance in the future;
Be responsive to stakeholder requests for specific information on the bank's policies and procedures.

The bank will, with respect to deal transparency:

Provide on its website a list with the basic details of the corporate investments (loans, underwriting, private equity, investments in shares and bonds) it is involved in;
Disclose information on pending deals and on deals rejected because they do not meet the criteria in the bank's issue and sector policies.

scores

how do we score this?

The bank has no procedures regarding transparency;
The bank has signed onto the Global Reporting Initiative (GRI), but does not use its framework for reporting;
The bank's procedures include half of the essential elements;
The bank's procedures include all of the essential elements;
The bank's procedures include the essential elements and: include the additional elements in its lending and investment banking; or include the additional elements in its asset management;
The bank's procedures include both the essential and additional elements in its lending and investment banking as well as its asset management.

Italy \| Intesa Sanpaolo	3
Netherlands \| ING Group	3
Brazil \| Banco Bradesco	3
United Kingdom \| HSBC	3
Netherlands \| ABN AMRO	2
China \| Industrial Commercial Bank of China	2
Brazil \| Itaú-Unibanco	2
Netherlands \| Rabobank	2
Italy \| UniCredit Group	2
Australia \| Westpac	2
Switzerland \| UBS	2
Spain \| Santander	2
Belgium \| Dexia	2
South Africa \| Nedbank	2
Norway \| DnB	2
China \| Bank of China	2
Brazil \| Banco do Brasil	2
Australia \| ANZ	2
Spain \| BBVA	2
United Kingdom \| Barclays	2
France \| Crédit Agricole	2
Canada \| RBC	1
Switzerland \| Credit Suisse	1
United States \| Bank of America	1
United Kingdom \| Standard Chartered	1
Germany \| WestLB	1
Germany \| Deutsche Bank	1
Japan \| Bank of Tokyo-Mitsubishi UFJ	1
Japan \| Mizuho	1
United States \| Citi	1
United States \| Goldman Sachs	1
China \| China Construction Bank	1
France \| BNP Paribas	1
Belgium \| KBC	1
United States \| JPMorgan Chase	1
Denmark \| Danske Bank	1
China \| Agricultural Bank of China	0
Germany \| DekaBank	0
Turkey \| Garantibank	0

analysis scores transparency

Not all 35 signatories of the Global Reporting Initiative are users of the GRI framework for reporting. Thirteen signatories of GRI that published sustainability report have received one point because it was not externally verified.

Four banks have received three points because they have published an externally verified CSR Report using the GRI framework and published all sector and issue policies they have developed (Banco Bradesco, HSBC, ING, Intesa Sanpaolo).

Twelve of the 16 banks that have not signed GRI did publish a sustainability report and six of these banks used external verification (BNP Paribas, China Construction, Bank of China, Bank, Crédit Agricole, Dexia and Westpac). The last four also used the GRI framework and received two points.

Total:

Sustainability reports: 45
Sustainability report using GRI: 34
External verification / limited assurance: 24
Disclosure of policies: 4
Transparancy of deals: none

A few banks put information regarding major deals on their website. Some signatories of the Equator Principles show the amount of projects financed were reviewed according the EP. The majority of the banks does not disclose any deal information.

Five banks that are not a signatory of GRI have published an externally verified CSR Report using the GRI framework (Bank of China, Crédit Agricole, Dexia, ICBC, Westpac).