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ethical and ecological value analysis
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Beacon company For some time, The
Co-operative Bank has been recognised as a leading
proponent of the sustainable development business
model. Not only are significant enhancements of
ethical and ecological performance underway, the
bank has also seen eight years of record profits in an
increasingly competitive industry. Customer satisfaction,
staff satisfaction and supplier satisfaction are all above
the industry norms. Initially, it was alleged that ethical
and environmental matters were irrelevant to the
conduct of banking and financial services. However,
over time, such criticism has diminished, and many of
the bank's competitors now partially embrace the
sustainable development business model, at least in
public pronouncements. The bank takes seriously its
responsibilities as a practitioner of sustainable
development. Not just because, like its sole
shareholder, the Co-operative Group, the bank is
convinced that enlightened self-interest is the formula
for long-term business success, but also because the
business world is short of case studies which show
that an organisation can be both socially responsible
and profitable. A key text on this subject matter is
'Accounting for the Environment'i, sponsored by the
UK's Association of Chartered Certified Accountants.
The preface to this text notes that, whilst sustainability
accounting and value analysis has come a long way in
a short time, there is an urgent need for more case
studies and more experimentation. It is against this
background that the bank offers the following revised
ethical and ecological value analysis. It is noteworthy
that the aforementioned text devotes just one paragraph
of its 350 pages to the matter of sustainability revenue
contributions. As described below, this is the area in
which the bank has revised to a significant degree its
previous methodology and transparency.
Ethical and ecological value analysis
Last year, for the first time, the bank undertook a
preliminary analysis of the estimated costs and
benefits of pursuing sustainable development. The
sustainability analysis contained two elements (see
Figure 1). No attempt was made to integrate or 'net off'
the two elements, as the second part of the analysis
included hypothetical costs (e.g., the opportunity cost
of declining corporate business as a result of the
bank's Ethical Policy) and savings (e.g., the cost
savings arising from the estimated reduction in paper
usage). The two elements are considered to present
different aspects of the costs and benefits of pursuing
sustainable development. Each has proved to be of
interest to a different audience. For example, the
Government's Small Business Service has produced a
booklet for distribution by Business Links which
highlights the costs and benefits of the bank's switch
to green electricity, whilst BBC Radio 4 has featured an
analysis of the bank's waste reduction and recycling.
At a more generic level, the Financial Times has run
three articles on the total profitability contribution made
by the bank's ethical and ecological positioning.
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Early in 2002, the bank agreed a £1 million financial package for a series of wind turbines in Cumbria. This community-owned scheme generates electricity, whilst helping to reduce carbon dioxide emissions. |
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Figure 1: sustainability analysis contained in last year's Partnership Report (2000)
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· Examples of the costs/benefits of particular
sustainability initiatives. The impact of ethical factors on
specific decisions were calculated and disclosed (e.g., the
additional costs associated with the purchase of green
electricity; the opportunity cost of foregoing certain
corporate business as a result of the bank's ethical policy),
together with any ethical overheads (e.g., the costs
associated with maintenance of the Ethical Policy Unit and
the Ecology Unit). |
· Estimate of the total profitability contribution
made by the bank's ethical and ecological
positioning. This figure was estimated, taking a steer from
MORI personal current account market research and a
1999 valuation of the bank's brand. It had initially been
envisaged that profitability could be determined via an
aggregation of the profitability contribution of each product.
However, time did not allow for this option to be pursued in
a robust fashion. |
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Determining the total profitability
contribution made by the bank's
ethical and ecological positioning
Experience has shown that 'examples of the
costs/benefits of particular sustainability initiatives' are
relatively easy to identify and account for. The
methodology employed this year, therefore, remains
much the same as for the Partnership Report 2000.
However, estimating 'the total profitability contribution
made by the bank's ethical and ecological positioning'
is much more complex. The Partnership Report 2000
reached the following tentative conclusion.
- "Whilst it is clearly not possible to identify
absolutely the exact impact of 'ethics' on the
bank's profitability, it can be related to the brand, of
which it is the major component. Technical analysis
shows that the brand generated between 15% and
18% of the bank's pre-tax profit (2000). This figure
is supported by in-house research and
independent market surveys which show, for
example, that over 20% of personal customers are
influenced to open an account with the bank for
ethical and environmental reasons and this is by far
the most frequently specified reason".
Clearly, the methodology employed to reach this
conclusion was at an early stage. For the 2001
Partnership Report, a more robust methodology has
been developed in order that a more meaningful
analysis could be presented.
Determining ethical motivation
factors For all major products, the bank has asked
its customers to specify the degree to which ethical
and ecological factors influence decision making, as
exemplified in Figure 2.
This produces a response range. For example, 53% of
personal current account customers state that 'ethics'
is one of a number of important factors, whilst 31% cite
'ethics' as the most important factor. Data is derived
via comprehensive telephone polling. Computers
randomly sort options presented to pollsters to ensure
that no bias arises from the order of presentation. For
reasons of commercial confidentiality, the bank will not
publish the ethical motivation factors of each product
as this might allow competitors an unfair advantage
when designing and marketing products. However, all
data has been viewed by the bank's social auditor, who
can provide assurance that factors have been
formulated in a balanced and robust fashion. The bank
does indicate the net profitability contribution of
Personal Banking and Corporate and Business
Banking below.
It is interesting to note that, where comparative
information is available for UK retail banks in relation to
the importance customers place on ethical and
environmental factors, the data indicates that
Co-operative Bank customers are uniquely placed to
express a preference. For example, MORI Financial
Services conducts research on a biannual basis into
the influence of various factors on the opening of
personal current accounts. This research strongly
indicates that whilst 'ethics' is a major determining
factor for customers of The Co-operative Bank (28%
cite ethics as being influential in opening an account,
and this is by far the most frequently specified reason),
it is only rarely specified by customers of other banks
(just one percent cite ethics as being influential in
opening an account).ii This is considered to be a
consequence of the fact that only customers of The
Co-operative Bank are routinely presented with
products and services in which 'ethics' are constituted
as a core component.
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Figure 2: sample questions in September 2001
Personal Current Account Customer Example:
Which of these factors are important in your decision to
open and maintain a Co-operative Bank account?'
Any number of influencing factors can be specified
- Branch near home/work
- Parents banked there
- Recommended to me
- Dissatisfied with previous bank
- Image/reputation
- Ethical/ecological reasons
- Lower charges/competitive rates
- Other
Which one of these factors is most important in your
decision to open and maintain a Co-operative Bank
account?'
Only one influencing factor can be specified
- Branch near home/work
- Parents banked there
- Recommended to me
- Dissatisfied with previous bank
- Image/reputation
- Ethical/ecological reasons
- Lower charges/competitive rates
- Other
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Profitability analysis For each product,
profitability data is available. For the purposes of this
analysis, the bank has determined the profitability of
each product on a fully costed Activity Based
Management (ABM) basis for the first half of 2001. This
means that not only are all direct costs incurred by the
product accounted for (including bad debts and all
divisional support costs), but those central sustaining
costs indirectly attributable to the product (e.g., brand
marketing) are also allocated in an appropriate
proportional amount. Analysis was undertaken on the
basis of the bank's half year profitability (i.e. Interim
Results, 2001) as many of the ethical motivation
factors were derived over this period. The profitability
of each product has then been multiplied by the
relevant ethical motivation factor, and aggregated to
produce an ethical profitability contribution range (which
ranges from those customers for whom 'ethics' is the
most important determining factor to those customers
for whom 'ethics' is one of a number of factors).
Treatment of 'examples of the
costs/benefits of particular
sustainability initiatives' Throughout this
Report, costs and benefits have been identified in
relation to particular sustainability initiatives. For
example, the additional cost of purchasing renewable
energies as opposed to fossil fuels (follow this link for details of the bank's purchasing of renewable energies); the
Report also identifies a number of savings attributable
to the bank's ethical policies - for example, savings
associated with reduced paper usage (follow this link for details of the bank's paper usage). As the
ABM profitability analysis described above already
accounts for all costs incurred by the bank, it is
considered that all such costs are already accounted
for. Savings are a hypothetical matter representing
costs that would have accrued under a different
management scenario and, as such, do not figure in
the final profitability analysis.
Findings As can be seen from Figure 3, the bank's
ethical and ecological positioning makes a sizable
contribution to the bank's profitability. 26% of profits
can be assigned to customers who cite ethics as an
important factor, and 14% to customers who cite ethics
as the most important factor. Last year, the profit
attributable to ethically-minded customers was put at
between 15 and 18% of the bank's profit before tax.
The numbers presented here are considered to be a
much more accurate assessment. The principal factor
behind the improved 'ethical' profitability contribution
is the discovery that there is a higher proportion of
ethically-motivated Corporate and Business Banking
customers than previously identified. For example, new
research shows that the bank's ethical and ecological
positioning is the number one reason cited by Business
Direct customers for opening and maintaining an
account.
Of the profitability assigned to customers
who cite ethics as the most important factor, 69% is
attributable to Personal Banking customers and 31%
to Corporate and Business Banking customers. Of the
profitability assigned to customers who cite ethics as
an important factor, 61% is attributable to Personal
Banking customers and 39% to Corporate and
Business Banking Customers.
Last year, the contribution made by the bank's ethical
positioning was received with welcome surprise.
Advocates of ethical business practice praised the
analysis as providing a useful tool to show that it is
possible for business to produce improved profitability
whilst paying due regard to matters of social
responsibility and ecological sustainability. This year's
analysis will, hopefully, stimulate the debate further.
It should be noted that the bank's sole equity
shareholder, the Co-operative Group, has not taken a
dividend from the bank over the last five years,
ensuring that the vast majority of profits are reinvested
in the business to the benefit of all Partners.
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Figure 3: ethical and ecological profitability contribution
(based on Interim Results to 28 July 2001)
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Profitability contribution made by customers who state ethics is the most important factor |
Profitability contribution made by customers who state ethics is an important factor |
| As % of Profit Before Tax (£60.2m*) |
14% |
26% |
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* Profit Before Tax as derived from Interim Results to 28 July 2001.
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- Gray, R. and Bebbington, J. (2001). Accounting for the Environment, 2nd edition - Sage Publications
- MORI Financial Services Survey, six months ending June 2001
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