Principles for responsible banking has been saved
Perspectives
Principles for responsible banking
A look at corporate social responsibility in the banking sector
As a business built around connections to people from all walks of life, respecting human rights is essential to the mission, purpose, and success of banking. Taking a more proactive stance when it comes to ESG in banking delivers measurable financial benefits, including managing risks better, creating new sources of value, and increasing brand value. Dive into three principles for responsible banking to help banks develop a human rights strategy and act upon it.
Responsible banking: The upside to being upstanding
When people think of banks, they think about money. Can I get a loan? Can I get more credit? Is my money safe? But banks are much more than a trusted place to store and borrow cash. They are the gatekeepers of the financial system and have enormous influence on society. Banks can strengthen or hobble individual businesses and whole communities alike by supporting or limiting their access to funding. And they can accelerate or slow the economy based on the sum of the lending decisions they make.
Banks’ role in society positions them as a front-line guardian of basic human rights. As “duty-bearers” on human rights, banks have a disproportionate responsibility in society. For instance, laws require banks to treat customers fairly and promote financial health and access. Banks need to evaluate the beneficiaries of their business as worthy recipients, lest their access to funding be used for illicit purposes. And they have a moral obligation to keep out of the market financial instruments and service offerings that can perpetuate social inequities.
By being more proactive, banks can accrue measurable financial benefits, from managing risks better to creating new sources of value to protecting reputations and increasing brand value.
The upside to being upstanding | The human rights imperative for banks
Human rights risks related to banking
In addition to human rights risks faced by all organizations, banks face their own unique set of risks they need to manage across four major groups of rights holders who are impacted by them: employees, suppliers, customers, and communities.
Since the Universal Declaration of Human Rights (UDHR) was published more than seven decades ago, regulators around the world have enacted a broad sweep of regulations designed to protect human rights in select geographies and sectors. Today, banks and other financial services firms are governed by rules seeking to guarantee equal access to credit and consideration when buying a home or applying for other loans, protect consumers’ privacy, and provide basic banking services in low- and moderate-income communities, among other objectives.
But perhaps the biggest prod for change is coming from the market itself. Institutional shareholders and customers are homing in on companies’ environmental, social, and governance (ESG) activities, paying increasing attention to what companies are doing under the “S” pillar. As part of this appraisal, banks are coming under heavy scrutiny given their gatekeeping role in society.
From concept to action
Addressing human rights within financial services requires turning abstract concepts into measurable observations and related actions. Three concepts come into play when developing a human rights strategy and acting on it: salience, leverage, and remediation. Each concept is tied to a definite step that banks can consider as they develop a human rights strategy and operationalize it.
To date, some banks have made progress when it comes to assessing the materiality of human rights risks, disclosing key issues as soon as they arise. But salience is about being more proactive, focusing on the prevention and management of key issues while prioritizing those at risk of the most severe negative impacts to key stakeholders through a company’s footprint, operations, geographies, products and services, and relationships.
Some banks often conduct a saliency assessment when first developing their human rights strategy. These assessments examine the scope of human rights risks the organization faces and prioritize those with the most grave, widespread, and difficult-to-remedy impacts. They then assess the organization’s current state in managing each risk and make recommendations for closing key gaps between the current state and what’s required (for instance, by the UNGPs).
Due to their role in society, banks have the power to influence industry and markets based on what they require or expect as part of the banking relationship. Banks have a moral responsibility to seek to prevent or mitigate the impact of a client that is adversely affecting a community, and they may even be legally liable if they lack the proper controls to identify such activities and behaviors.
Of course, not all transactions allow the same level of visibility into potential adverse human rights impacts. Providing financing at a corporate level, for instance, can diminish a bank’s ability to influence how that money is deployed. That means banks need to work to better understand where they have leverage to effect change. Banks can work to improve their clients’ awareness and business practices when they suspect the potential of human rights abuses. They can also commit, as some banks already have, to reevaluate and possibly terminate relationships with clients that have a track record or relative commitment to improvement that doesn’t meet their standards.
Companies can help ensure that victims of human rights abuses have access to effective remedies. In the human rights arena, remediation can take many forms, but there are five internationally recognized elements: restitution, compensation, rehabilitation, satisfaction, and guarantee.
Consider the example of a bank that wrongfully foreclosed on a customer. The bank might seek restitution by returning the house to the customer if the bank was shown to have violated consumer protection laws during the foreclosure process. It might provide compensation to cover attorney fees if the customer brought a related lawsuit. It might go a step further by providing financial planning and financial education at no cost in a bid to rehabilitate the borrower. To ensure the customer is satisfied, the bank could issue a public apology. And the bank could detail the steps it’s taking to improve transparency and increase oversight of its foreclosure processes, as part of a guarantee to limit or eliminate future violations.
Advancing ESG in banking
As banks reevaluate their performance in respecting and protecting human rights, they have an opportunity to use human rights as a lens through which to advance their business agendas. The end goal isn’t simply staying on the right side of the law and minimizing related penalties. It’s much more expansive than that: Here is a chance to fundamentally change the relationship between banks and their employees, customers, shareholders, and other partners in the community and build and sustain their trust.
Banks that get this right will not only be recognized for it—they will attract new customers, new employees, and new business partners as well through the process. The stakes couldn’t be any higher—and not just for the banks.
As a longtime trusted adviser of the banking industry, Deloitte can help your organization develop and execute such a plan and start connecting the dots between your social and financial performance.
Get in touch
| Ricardo Martinez Advisory principal Deloitte & Touche LLP rimartinez@deloitte.com +1 646 373 7084 |
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Courtney Davis Advisory principal Deloitte & Touche LLP coudavis@deloitte.com +1 516 918 7322 |
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Michele Crish Advisory managing director Deloitte & Touche LLP mcrish@deloitte.com +1 516 918 7313 |
| Jim Eckenrode Managing director, Deloitte Center for Financial Services Deloitte Services LP jeckenrode@deloitte.com +1 617 585 4877 |
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Keri McKenzie Advisory managing director Deloitte Financial Advisory Services LLP kemckenzie@deloitte.com +1 469 417 3296 |
Sarah Haley Advisory senior manager Deloitte & Touche LLP shaley@deloitte.com +1 980 376 4115 |
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