| Social Responsibility |
| National and International Society |
Since the launch of the Ethical Policy in 1992 the Bank has gone from strength to strength - proving that principles and profitability can go hand in hand. Developed in close consultation with our customers, the Policy clearly sets out who we will and will not do business with.
Social attitudes are not set in stone; so it's essential that we regularly consult with our customers to ensure that the issues contained in our Ethical Policy remain an accurate reflection of their changing concerns. (To take just one example, opposition to factory farming among our customers has been growing.) This section of the report looks at how we have gone about this process of developing our Ethical Policy in line with our customers' wishes. It also contains an independent assessment, by ethics etc..., of our performance in implementing our Ethical Policy. As you'll see, this is no easy matter. Business customers approach the Bank in all kinds of ways, ranging from a phone call to a local branch through to a visit to Head Office. The products and services they need are equally varied, from a simple overdraft facility to asset, trade or project finance.
It follows that there has to be a degree of flexibility in the way we assess potential customers against our ethical criteria - while, at the same time, doing our best to demonstrate consistency and fairness in all our dealings.
2a) Developing the Ethical Policy - ensuring that our customers have a say in where their money is and is not invested
[ Existing commitment ]
Our Ethical Policy, launched in 1992, states that we will regularly re-appraise customers' views on ethical issues and develop our ethical stance accordingly. The Ethical Policy was developed following research conducted in 1990 which showed that more than 8 in 10 of our customers thought that it would be a good idea for the Bank to have a clear policy on ethical matters. Research conducted last year, just prior to the launch of our Partnership Approach, indicates that the level of support is now in excess of 9 in 10 customers.
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The origin of our Ethical Policy
Research undertaken in 1990 showed that our customers would, if given the option, like to see their money invested ethically. In fact a sizeable proportion of our customers, aware of the reputation of the Co-operative Movement for social responsibility, assumed that this was already the case. As a result, in 1991 we approached 30,000 customers (both Corporate and Personal) with a draft Ethical Policy and ascertained opinion on both the Policy and a number of specific statements. We took the decision early on that the Policy should reflect the concerns of customers' and not management as it was customers money that was being invested. The majority (84%) of customers who responded believed that it was a good idea for The Co-operative Bank to have a clear ethical policy; only 5% felt that ethical issues had nothing to do with banking. The policy statement as a whole was endorsed by 78% of customers; only 2% felt it was not a good idea and 20% expressed no particular opinion. The individual issues which were included in the final policy statement were all supported by more than 60% of customers (the subject matter with the lowest level of support was 'tobacco product manufacture'). No statement receiving less than 60% of support was included in the Ethical Policy as to do so would mean that we no longer had the support of the majority of customers - which would undermine the very heart of the initiative. In 1994, we repeated the consultation exercise, only this time with all of our Personal customers, some five hundred thousand people. Support for the Ethical Policy as a whole rose substantially, to 91%, with no individual issue polling less than 80%. Now whilst the Ethical Policy has undoubtedly been an outstanding success on a number of fronts - raising the issue of corporate responsibility in the UK, attracting new customers to the Bank, giving staff a renewed sense of pride, providing ethically minded suppliers with new profit opportunities - it has also attracted criticism from a number of quarters. In 1992, just after the launch of the policy, The Cosmetics Association and Chemical Industries Association both reported the Bank's ethical advertising campaigns to the Advertising Standards Authority alleging that our position was misleading and denigratory. After much deliberation, the ASA ruled in the Bank's favour and reported that the allegations were without foundation. There have been a number of other complaints since 1992, and at present we are embroiled in a deeply technical complaint with the British Plastics Federation as a result of our 99.99% PVC-free Greenpeace Affinity Card. We expect that such challenges will continue in the future, however, whilst we retain the support of our customers and other Partners we are confident that our Ethical Policy will remain intact.
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[ Performance ]
To date, we have undertaken two customer consultation exercises on the Ethical Policy, one in 1991 and another in 1994. Each time customers were presented with a list of ethical issues for their approval and subsequent inclusion in the Ethical Policy. The list presented in 1994 was longer by five issues than that of 1991; incorporating new statements relating largely to issues raised by customers in the ballot of 1991. In addition, in 1994 the clause covering 'the Environment' was altered in order to strengthen our commitment.
The percentage of customers agreeing with each statement is presented below.
[ Comment ]
More support than ever. As the variation in response over the two consultation exercises shows, our customers' concern for particular ethical issues is not fixed and changes over relatively short periods of time. However changes are predominently restricted to the expression of increasing support for each of the various statements. In particular there was a large increase in support for the environmental statement (up by 23%), one of the statements that was strengthened in the 1994 ballot. This finding rather challenges the view that 'green issues' had their day in the late 1980's. The demand from our customers that we should pursue a path of ecological excellence has never been stronger, especially amongst our younger customers. Which is one of the reasons we went on to develop an Ecological Mission Statement in 1996.
Support for new issues. In the three years between the two customer consultations a number of new issues emerged as areas of concern for the Bank and its customers. Principal amongst these were 'fairtrade' and 'ethical suppliers'. The issue of fairtrade has gained prominence in recent years, particularly as consumers have become more aware of the working conditions suffered by many in the developing world. Therefore, in 1995 we made a commitment, with the support of our customers, to seek out and assist organisations supporting the principles of fairtrade, i.e. trade which regards the welfare and interest of local communities all over the world. We also announced a commitment, again with our customers' support, to seek out suppliers whose activities are compatible with the Bank's ethical policies. We consider that this sits neatly alongside our undertakings to invest customers monies in an ethical fashion, a subject we explore in detail in the section on "Suppliers".
[ Future objective ] The Bank will undertake another Ethical Policy ballot in 1998 and publish the results in subsequent Partnership Reports.
SIMON WILLIAMS Head of Corporate Affairs
2b) Implementing the Ethical Policy - ensuring that our customers' money is invested ethically
[ Existing commitment ]
Last year, just prior to the launch of our Partnership Approach, we undertook research with 1,000 customers to find out whether they wished to see the implementation of our Ethical Policy, and other aspects of the Partnership Approach, externally assessed. Despite the fact that 88% of our customers said they were confident that the Ethical Policy was already being fully implemented, and only 3% expressed any concern, 85% believed it was nonetheless a good idea to have implementation of the policy externally assessed. Therefore we invited the Auditors, ethics etc..., to visit the Bank and review our Ethical Policy implementation processes.
[ Performance ]
As can be seen from the statement overleaf, the auditor confirms that the Bank implements its Ethical Policy fully, although there are grounds for some process improvement. It would be possible to leave the matter of Ethical Policy implementation at that, however, we believe that there are many who would like to understand the process more fully. We have also described in detail the various levels of our ethical screening processes, which, unfortunately, can get somewhat technical at times. We have also provided an analysis of all those cases in 1996 and 1997 where the activities of a potential corporate client was so complex as to require referral to our Ethical Policy Unit, and a number of case studies which exemplify that ethical and ecological matters are not straightforward issues.
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Ethical Policy implementation process
In general, to secure the Ethical Policy, implementation processes are built into the Bank's overall credit risk assessment procedures for lending facilities. Initial implementation requirements are instigated through evaluation and acceptance at the discretion of the Bank's Relationship Management. However, the majority of the lending is referred into the Bank's Head Office Corporate Advances Department for additional credit and ethical consideration. In order to facilitate Ethical Policy development and implementation, in 1992 the Bank established an Ethical Policy Unit. In 1995 an Ecology Unit was also established. The two units work closely with the Corporate Advances Department, arranging briefing sessions on issues such as the Landfill Tax and the Packaging Producer Responsibility Act, in order that Corporate Advances are equipped with the latest thinking on key issues. Within Corporate Advances Department there can be two separate evaluations of a company's ethics prior to a transaction being authorised. All transactions over a certain defined level must ultimately be sanctioned by the Board. This means that in addition to a potential referral to the Ethical Policy Unit, transactions may have been subjected to five individual ethical evaluations. These transactions may also be subject to a further separate review by the Bank's Internal Audit Department on a sample basis, who will review transactions to give general assurance that the procedures laid down for ethical compliance have been adhered to. To ensure continued Ethical Policy compliance all lending facilities are subjected to a full annual review. In addition to the corporate lending described above, there is a portfolio of some £30 million controlled by our Business Customer Services (BCS) centre which covers a large number of low level facilities. This portfolio has arisen recently as a result of the centralisation of small value assets from the network. Staff at BCS are fully instructed in Ethical Policy implementation. An important recent development is that ethical screening increasingly commences prior to customer contact. Public knowledge of our Ethical Policy means that some businesses now choose not to approach the Bank for financial services as they recognise that their activities are in conflict with our policies. Sales driven Relationship Managers will avoid suspect companies. Furthermore, the development of low cost, centralised products such as Business Direct mean that more and more approaches are instigated by the Bank to the customer. Prior to such direct marketing campaigns, we can screen out sectors involved in an activity that is in conflict with our policies.
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Ethical Policy Unit Referrals
During 1997, 149 cases of corporate business were referred for more expert investigation and a decision to the Ethical Policy Unit. This is equivalent to 2.5% of all new corporate current accounts opened over that period. Most of these were potential new business, although some existing accounts were referred where there was concern as to a change in corporate activities. Of the cases referred for consideration, 20% were found to be in conflict with the Ethical Policy and subsequently rejected as actual or potential customers. The basis for the rejections and closures can be classified as follows:  Note: The Co-operative Bank is unable, for legal reasons, to identify by name any organisation or individual that it declines to do business with.
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The Co-operative Bank's Ethical Policy and its Implementation The audit consisted of the following elements: • checking that the Policy was consistent with customer expectations. • reviewing the systems in place for implementing the Policy, including the screening and referral of account opening and loan applications; the referral procedures including the use of external advisers and expertise; and internal auditing of processes and decisions. • reviewing a random sample of cases from 1997 new-to-bank business. Overall, I can confirm that customer confidence in the Bank's procedures for implementing the Ethical Policy is justified by the systems in place and their performance. (An independent survey of 975 Corporate and Personal customers in 1996 found 27% said the Ethical Policy was one of the reasons or the main reason for banking with The Co-operative Bank and of these 37% were very confident and 51% quite confident in the Bank's implementation of the Ethical Policy.) The current Ethical Policy statement is based on 6,000 customer responses to a survey in 1992 and 23,000 to a follow up survey in 1994. I reviewed the procedures for self-certification (Business Direct account opening applications) and for account opening and loan approval by bank staff for other forms of business account, including asset finance and treasury contracts. The Bank has several layers of approval for escalating facility values all of which included checking the ethical compatibility of the business concerned. Relevant managers have been trained in the Ethical Policy and all staff receive training on induction. Managers can refer to on-line documentation which interprets the policy statements and gives specific examples of what is and is not acceptable. I visited the offices of EIRIS, the Ethical Investment Research Service, which provides ethical searches on public companies and detailed analysis of specific industries, products and cases. EIRIS dealt with 132 referrals from the Bank in 1997 (referrals for 1996 numbered 128 and in 1995 numbered 50). I am satisfied that the independent advice provided by EIRIS, and other external referees, is followed b y the Bank in making ethical decisions. I also reviewed the Bank's internal audit procedure for checking that individual managers have ascertained compliance with the Ethical Policy. Procedures for Head Office generated applications are very rigorous. A higher risk of procedural breakdown may occur with lower value accounts dealt with by the Bank's business centres and local branch managers. 128 of these applications from 7 centres were checked. In 9% of these the Bank's internal auditors had noted that the manager needed to update the ethical compliance of the customer. None of these cases were large accounts or suspected of non-compliance. Business Direct accounts are certified for ethical compliance by the account holder. All applications are checked on receipt by the Bank but are not currently covered by internal audit. I would recommend that the Bank sets up a system for recording all new corporate applications for loans or facilities, the subsequent Ethical Policy vetting, and the outcome - whether the application was accepted or declined.This will facilitate better monitoring of referrals and internal auditing of ethical compliance, including Business Direct accounts. I am satisfied, from reviewing a random sample of cases referred by the screening process to the Ethical Policy Unit, that the Ethical Policy in all cases overrides any consideration of economic advantage to the Bank.
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RICHARD EVANS, ethics etc..., 27 FEBRUARY 1998
[ Comment ]
As can be seen, the majority of business declines related to environmental issues and animal welfare matters. A high volume of refusals on environmental matters might be expected, as the vast majority of businesses have a significant environmental impact and UK environmental legislation is considerably less stringent than that of the USA and a number of our European neighbours. On the other hand, the high rate of declines related to unsatisfactory animal welfare practices is perhaps less expected, especially as the UK has a reputation as having some of the best animal protection legislation in the world. However, we have found that whilst there are few UK businesses that now test cosmetics products or their ingredients on animals directly in the UK, a number of UK companies have parents who do so abroad. The Bank declines to do business with such companies or their subsidiaries.
The issue of refusing to finance a business or corporate activity is a serious matter, not only does it represent a loss of income to the Bank, but it also puts the jobs of those employed in that company at risk. Therefore, the Bank will only refuse finance on ethical grounds following exhaustive research and deep consideration.
Information Sources. In order to implement the Ethical Policy in an effective manner, the Bank has had to source a wide range of expertise, and develop relationships with a number of expert organisations. For example as part of a recent piece of work on ostrich farming, we consulted with, amongst others, the Royal Society for the Prevention of Cruelty to Animals, Compassion in World Farming, Humane Slaughter Association, Ministries for Agriculture, Fisheries and Farming and the British Domesticated Ostrich Association. However, in the main we regularly use the services of two dedicated ethical research organisations, EIRIS and ECRA for most of our research needs. EIRIS (Ethical Investment Research Service) provides the Bank with detailed information on 1,200 quoted UK companies, 550 non-UK companies and many other organisations. On the other hand, ECRA (Ethical Consumer Research Association) provide information on a much wider range of organisations, some 40,000 companies, but on a less detailed basis.
Difficult Decisions. A large number of decisions to be made on ethical matters are quite straightforward. For example, an organisation employing battery egg production facilities is in conflict with our stance on the basis that they are engaged in intensive factory farming. However, implementation of the Policy can also be a much more complex affair. Consider the following cases, all of which arose recently:
• Oppressive Regimes: Do you deny finance to companies based in oppressive regimes if these companies are providing real benefits on the ground, such as farming co-operatives?
• Armaments: How do you define an armament manufacturer when manufacturing is typically shared by a whole host of companies, many of which make seemingly innocuous parts?
• Environment: Do you refuse to provide asset finance for a piece of pollution control equipment on the basis that the recipient of the technology has a poor record on pollution?
No quick and easy answers. The answer to all these questions is that each case much be researched thoroughly and judged on its own merits. There are no quick and easy answers. In the instances raised the following factors were brought to bear.
• Oppressive Regimes: Our policy on oppressive regimes covers the abusers of power only (government departments, armed services, security forces, state owned organisations, etc.) not the geographical region as a whole. Therefore, it would be legitimate for us to fund a farming co-operative. To ascertain up to date information on the human rights record of a particular part of the world at a particular time we consult regularly with Amnesty International and other human rights agencies. Some 93 countries around the world are currently classified as 'oppressive' by Freedom House based on a wide range of political rights and civil liberties. These include such rights as protection from political terror, exile or torture, the existence of free and fair elections and free trade unions.
• Armaments: Our policy on armaments refers specifically to the manufacture and sale of weapons to oppressive regimes. Our definition of 'weapon' is quite broad, and goes much further than just guns, tanks and landmines; it includes the manufacture of systems that kill, maim or destroy, and equipment or services that have battlefield application. Therefore, under this definition we will include items such as radar, armour, military bases and the training of military personnel. As with most large scale manufacturing industries a high percentage of weapon manufacturers sub-contract a substantial amount of their production. Therefore, our position on 'armaments' necessitates a thorough review of component producers as well as the assemblers of the final product. For the assembly of a military aircraft this can involve over 50 separate component manufacturers. Therefore, within this definition we differentiate between companies producing bespoke products for military application and those whose products are standard and are utilised widely within society.
• Environment: Pollution control equipment will, by definition, be required by a company that has a pollution problem. Therefore, where the Bank is assured that finance is ring-fenced to a given technology or process, which is possible via asset finance, we will usually take the decision to go ahead with such a deal, even if the company has a track record of pollution. In order to assess the ecological impact of a given product or service on nature, we have adopted The Natural Step methodology, which, as laid out in our Ecological Mission Statement, expresses in unambiguous terms what is and is not ecologically sustainable. A number of staff have now received training in the methodology and our Ecology Unit is charged with arranging seminars and briefings for the Corporate and Commercial Division of the Bank on a wide range of environmental issues.
[ Future objectives ]
The Co-operative Bank, through the vigilance of all its staff, will continue to screen new business against the Ethical Policy. In addition we will:
i) review the manner in which ethical and ecological issues affect business in the UK and the repercussions this has for Ethical Policy implementation, particularly as far as sectorial referrals are considered.
ii) develop further training for all appropriate staff on ethical and ecological matters, particularly our new Business Customer Service centre staff.
CHRIS SMITH Group Public Affairs Manager
| When we introduced our Partnership Approach last year, we recognised that long term commercial success was reliant on delivering value to all our partners. | |
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| Our Ecological Mission Statement commits us to develop our business taking into account the impact our activities have on the environment and society at large. | |
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