Sustainability reporting: Why it is essential for banks, FIs

Sustainability reporting is a method of reporting as regards economic, environmental and social performance of an organisation. Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development. It helps the organisation to set goals, measure progress and manage sustainability within the organisation. A clear idea of its impact on the internal and external stakeholders, increase in the efficiency and improving the performance also come through this method. It enables the organisation to move forward into successful sustainable future. An organisation's commitment to sustainable development is also improved.
As per definition of Global Reporting Initiative (GRI), "A sustainability report enables companies and organisations to report sustainability information in a way that is similar to financial reporting. Systematic sustainability reporting gives comparable date, with agreed disclosure and metrics."
The value of a company is influenced by the quality of its relationship with the internal and external stakeholders. Stakeholders are interested in understanding the performance of companies in managing the sustainability impacts of their activities. This has elevated the importance of sustainability reporting. In response to demands from stakeholders, many organisations are incorporating environmental and social information into their public reports for more information so that they may make better informed decisions about a company's performance in this area.
Organisations of all sizes including commercial companies, NGOs, schools and small and medium enterprises are choosing to report on their sustainability strategies for several reasons. Reporting demonstrates how the company influences and is influenced by expectations about sustainable development. Stakeholders can compare performance within a company and between different companies over time. In addition, some regulatory bodies issued guidelines and encouraged organisations to issue sustainability reports. An effective sustainability-report cycle benefits all reporting organisations.
Awareness of banking sector on environment which leads to sustainability reporting: Banks usually provide services for profits but it is believed that profit should not be earned at the cost of environment. Therefore, banking sector is conscious about environment, which leads them to prepare sustainability reporting.  The role of banks toward sustainable development is potentially enormous because of their intermediary role in an economy. Banks transform money in terms of duration, scale, spatial location and risk and have an important impact on the economic development of nations. This influence is of not only quantitative, but also of a qualitative nature, because banks can influence the pace and direction of economic growth.
However, the banking sector has responded slowly compared to other sectors to the new challenges of sustainability. Bankers generally consider themselves to be in a relatively environment-friendly industry in terms of emissions and pollution. But they have been surprisingly slow to examine the environmental performance of their clients. A stated reason for this is still that such an examination would 'require interference' with a client's activities.
CERCLA reference: Empirical research from 1990 concluded that banks were not interested in their own environmental situation or that of their clients. This situation is now changing. There is growing awareness in the financial sector that environment brings risks (such as a customer's soil degradation) and opportunities (such as environmental investment funds). On the risk side, there has been an enormous rise of concern in the United States since the late 1980s as per Comprehensive Environmental Responses, Compensation, and Liability Act (CERCLA). The CERCLA is commonly known as Superfund which was enacted by Congress on December 11, 1980. CERCLA established prohibitions and requirements concerning closed and abandoned hazardous waste sites; provided for liability of persons responsible for releases of hazardous waste at these sites and established a trust fund to provide for cleanup when no responsible party could be identified.
A Potentially Responsible Party (PRP) is a possible polluter who may eventually be held liable under CERCLA for the contamination or misuse of a particular property of resource. Under this Act, four classes of PRPs may be liable for contamination i.e. (i) The current owner or operator of the site, (ii) The owner or operator of a site at the time that disposal of a hazardous substance, pollutant or contaminant occurred, (iii) A person who arranged for the disposal of a hazardous substance, pollutant or contaminant at a site, (iv) A person who transported a hazardous substance, pollutant or contaminant to a site, who also has selected that site for the disposal of the hazardous substance, pollutants or contaminants.
Under CERCLA, banks could be held directly responsible for the environmental pollution by clients and obliged to pay remediation costs. Some banks even went bankrupt under this scheme. Due to these developments, American banks became first to consider their environmental policies, particularly with regard to credit risks. European banks were not exposed to these liabilities and only began to develop policies toward environmental issues during the mid-1990s. The focus here was less on risk assessment and more on internal environmental care and later the development of new products such as environmentally friendly investment funds.
In different countries, including Bangladesh, risks and opportunities are now becoming established elements in banking policies towards the environment. Empirical research from 1995 on the environmental activities of the signatories of the 'UNEP statement by Financial Institution (FI) on the Environment and Sustainable Development' (launched in Rio) showed that 80% of the respondents made some kind of assessment of environmental risks. An investigation amongst the signatories concluded that many banks had set up environmental departments and were developing environment-friendly products. In Asia, South America and Eastern Europe, change is also underway, mostly through the influence of environmental standards from multilateral development banks. As for example, sustainability reporting has now become mainstream of reporting activities every year with financial reporting.
GRI promotes preparing sustainability report, FSS reference: The Global Reporting Initiative (GRI), founded in 1997, is a non-profit organisation that helps businesses, governments and other organisations to understand and communicate their impacts on issues such as climate change, human rights and corruption. GRI produces one of the world's most widely used standards for sustainability reporting. Sustainability reports based on the GRI Reporting Framework disclose outcomes and results that occurred within the reporting period in the context of the organisation's commitments, strategy, and management.
The financial Services Sector Disclosures document is based on the 'GRI (Global Reporting Initiatives) Financial Services Sector Supplement (FSS)'. This sector supplement was issued in 2008 and developed based on G3 Guidelines (2006). After the launch of G4 Guidelines in May 2003, the complete Sector Supplement content was modified and reorganized in a new format to facilitate its use in combination and to fit with the G4 Guidelines' content, structure and requirements.
The financial sector was segmented into four categories for the purpose of developing these Sector Disclosures, i.e. retail banking, commercial and corporate banking, asset management and insurance. The working definitions used for these categories in developing the Sector Disclosures are as follows:
* Retail Banking: This category refers to everyday high street banking including the provision of private and commercial banking services to individuals. It also includes banking for more affluent clients, including wealth management and portfolio management services. It may also include everyday transaction management, payroll management, small loans, foreign exchange, derivatives, etc. for individuals in their business activity.
* Commercial and corporate banking: This category includes all transactions with organisations/business counterparts of all sizes, including commercial and corporate banking projects and structured finance, transaction with small and medium enterprise (SMEs) and the provision of financial services to government departments. It also includes corporate advisory services, mergers and acquisitions, equity/debt capital markets, and leveraged finance.
* Asset Management: This category refers to the management of pools of capital on behalf of third parties. The capital is invested in a wide range of asset classes, including equities, bonds, cash, property, international equities, international bonds, alternative assets. The definition also encompasses elements of investment banking including the trading in shares and share derivatives, as well as fixed income- trading bonds, debt instruments, trading loans and loan portfolio and credit derivatives.  
n Insurance: This category refers to both pension and life insurance services provided directly or through independent financial advisors to the general public and employees of companies. It also covers the insurance of products or services for businesses and individuals and re-insurance services.
Sustainability reporting in banking sector, green banking etc. in Bangladesh perspective: Banks hold a unique position in an economic system that can affect production, services, business and other activities through their financing activities and thus may contribute to removing polluted environment. Environmental impact of banks is not physically related to their banking activities but with the activities of the customers. Banking sector is one of the major sources of investment for commercial projects, which is one of the most important economic activities for economic growth and encouraging environmentally responsible investments and prudent lending.
The banks should go green and play a pro-active role to take environmental and ecological aspects as part of their lending and investment principle, which would direct industries to go for mandated investment for environmental management, use of appropriate technologies and management systems.
Bangladesh Bank issued a circular on 27th February 2011 (BRPD Circular No.2) on Policy Guideline for Green Banking, stating: "To adopt a comprehensive Green Banking Policy in a formal and structured manner in line with the global norms so as to protect environment degradation and ensure sustainable banking practices." As stated, "Green Banking" generally refers to banking practices that foster environmentally responsible financing practices and environmentally sustainable internal processes minimizing GHG (Green House Gas) emissions.
Green Banking means eco-friendly or environment-friendly banking to stop environmental degradation to make this planet more habitable. Green Banking is regarded as sustainable banking, which has a role to safeguard the planet from environmental degradation, with the aim of ensuring economic growth which is sustainable. Green Banking is also a multi-stakeholder endeavour where banks have to work closely with government, NGOs, International Financial Institutes (IFIs)/International Government Organisations (IGOs), central bank, consumers and business communities to reach the goal.  
This mode of banking involves two-pronged approaches: firstly, it focuses on the green transformation of internal operations of all banks/FIs. It means all the Banks/FIs should adopt appropriate ways of utilizing renewable energy, automation and other measures to minimize carbon footprint from banking activities. Secondly, all banks should adopt environmentally responsible financing; weighing up environmental risk of projects before making financing decisions and in particular supporting and fostering growth of upcoming green initiatives and projects. As per Bangladesh Bank's circular there are three phases of green-banking activities and the banks have to prepare sustainability report in standard format with external verification under GRI method.
First sustainability report in banking sector of Bangladesh under GRI G4: Prime Bank Limited, a leading private commercial bank in Bangladesh, has shown leadership in publicity declaring a commitment to sustainability by publishing the first G4 sustainability report in banking sector in Bangladesh in March 2015. The bank has also completed the 'Materiality Disclosure Service' and has got permission to use 'Materiality Disclosure Service Icon' from GRI, the Netherlands, and first time in Bangladesh. Some other banks are also working on this issue.
According to Peter Druker, a writer, professor and management consultant, "What you can't measure, you can't manage. What you can't manage, you can't change". Therefore, sustainability reporting is a vital step for managing change towards a sustainable global economy that combines long-term profitability measuring social justice and environmental care. And a dedicated sustainability report is a reflection of the company's commitment to the issue of sustainability, which helps companies and their stakeholders to identify a comprehensive reference point for reporting, thereby aligning many of their CSR initiatives with goals that can be measured and monitored.
Failure to manage environmental and social effects properly may give rise to reputational and/or financial risks in the banking sector. For this reason, firstly it is important to give consideration to environmental-and social-impact issues just as one does to financial, technical and economic matters in credit-assessment process and secondly to make them subject to executive level decisions. Environmental and social risk management involves defining the environmental and social risks that arise in the conduct of banking sector's core business activities, analyzing them during assessment process, identifying the dimensions of potential effects and risk, determining the obligations and practices needed to minimize risk, and taking these last into account in the decision-making process.
Sustainability Reporting Guidelines for the banking sector suggests ways in which banks may internalize the environmental-and social-risk assessment process by incorporating it into their lending policies. Banks may also identify sectors and/or activities that they will not finance and an exclusion list may be appended to their lending policy. They should take initiative to set absolute Greenhouse Gas emission-reduction targets from operations, energy use and business travel.  Although banks have started their green journey lately, the hope is that a cooperative effort of banks and other stakeholders will contribute to coping with the climate challenges and ensuring sustainability in coming days.

Md. Touhidul Alam Khan is Deputy Managing Director & Chief Business Officer of Prime Bank Limited, Bangladesh. He is the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh and Associate Member of Institute of Cost & Management Accountants of Bangladesh (ICMAB). He can be reached at: [email protected]