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AMY YIP W H LO

HSBC SUSTAINABILITY – THE WHAT, THE WHY AND THE HOW

“We recognise that we have responsibilities not only towards our customers, employees and shareholders, but also the countries and communities in which we operate.”

- Douglas Flint, HSBC Group Chairman1

HSBC was huge: for the financial year 2014, its 266,000 employees in 6,100 offices in 73 countries served 51 million customers. 2 That year, the bank generated a net income of US$61.2 billion, a number that was higher than the GDP of 125 countries around the world.3 Its sheer size meant that it touched the lives of millions of people, and its decisions and actions impacted thousands of communities in which it operated. The bank’s responsibilities, therefore, went beyond generating profits for its shareholders. That is, it had obligations to the communities and millions of stakeholders. To HSBC, sustainable business meant not only generating profits but also fulfilling its obligations. To allow transparency into its works, and more importantly, its achievements on sustainability issues, HSBC published yearly sustainability report, which was compiled by following the Global Reporting Initiatives (“GRI”) Reporting Framework and the GRI’s financial services sector supplement. It had actively sorted to be the leading brand in the industry in terms of corporate sustainability. In the course of so doing, it had proactively and voluntarily agreed to follow and to be bounded by a number of third party code of conducts. With over six thousand offices and hundreds of thousands of employees all over the world, how did HSBC ensure that its sustainability policy was consistently implemented? What were 1 The quote was from Sustainability (n.d.) “Making a Positive Contribution”, HSBC, http://www.hsbc.com/citizenship/sustainability (accessed 8 April 2015). 2 Financial and Regulatory Reports (n.d.) “HSBC Holdings plc, Annual Report and Accounts 2014”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 19 March 2015) 3 Ibid; Wikipedia (n.d.) “List of Countries by GDP (nominal)”, http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) (accessed 8 April 2015).

To order this case, please contact Centennial College, c/o Case Research Centre, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; website: http://cases.centennialcollege.hku.hk . This case was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (UGC/IDS12/14). © 2015 by Centennial College, a member of The University of Hong Kong group. No part of this copyrighted publication may be reproduced or transmitted, in whole or part, in any form or by any means, whether electronic, mechanical, photocopying, recording, web-based or otherwise, without the prior permission of Centennial College. This case was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 15/002C Published: 2 May 2015

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its strategic priorities and how did they contribute to sustainable business of HSBC? What were the sustainability metrics against which the bank measures its performance? From a shareholder perspective, were all these efforts and investments in environmental, climate and community issues worth it from a business sustainability point of view? In recent years, the banking industry faced some “well-founded public criticism,” which stemmed from “shifts in environmental priorities and societal expectations,” and the industry was working hard to rebuild public confidence in financial institutions.4 As a highly profitable and influential industry player, what role could HSBC uniquely play in building a socially responsible banking industry? How could it leverage its expertise in sustainable finance to contribute more effectively to sustainable social and economic development in the communities in which it operated?

HSBC in Brief

In 2015, HSBC celebrated its 150th birthday. In 1865, the Hong Kong and Shanghai Banking Corporation, one of HSBC’s founding members, was established as a local bank in Hong Kong to serve the China coast traders doing local and international trades. The bank’s hundred and fifty years’ heritage was a story of rapid expansion arising from the increasing rapid trading activities and commercial opportunities between Asia, Europe and North America..5 It was also a proof of its resilience to drastic changing environments; after all, it had survived two world wars, the great depressions and many other recessions. From a small bank in Hong Kong, HSBC had grown to become one of the world’s largest banking and financial services organizations headquartered in London.6 HSBC went public in 1991 with primary listing in stock exchanges of Hong Kong and London. Since then, the bank had secondary listings in stock exchanges of Paris, Bermuda and New York. The multiple listings of the world’s fifth largest bank had facilitated 216,000 investors from 127 countries and territories to become its shareholders, as reported in its 2014 annual financial report.7 The year also saw the bank generated a profit of US$18.7 billion out of a net income of US$61.2 billion, a number that was higher than the GDP of 125 countries around the world. The bank employed 266,000 staff in over 6,100 offices located in seventy three countries and territories across five geographical regions of Europe, Asia, the Middle East and North Africa, North America and Latin America. According to the bank’s 2014 report, it had served fifty one million customers through four lines of global businesses: retail banking and wealth management, commercial banking, global banking and markets, and global private banking.

4 HSBC 2013 Sustainability Report (2014) “Group Chairman’s Introduction”, HSBC, http://www.hsbc.com/investor- relations/financial-and-regulatory-reports (accessed 8 April 2015), p.2. 5 2014 HSBC Annual Report (2015) “Group Chief Executive’s Review”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). 6 Students interested in HSBC’s history and development since 1865 might refer to: HSBC (n.d.) “The HSBC Group – Our Story”, http://www.hsbc.com/~/media/hsbc-com/about-hsbc/history/pdfs/140113-hsbc-our-story.pdf (accessed 8 April 2015). 7 The Bankers Database (n.d.) “HSBC”, http://www.thebankerdatabase.com/index.cfm/banks/2646/HSBC-Holdings (accessed 8 April 2015); 2014 HSBC Annual Report (2015) “Who we are”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015).

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HSBC Sustainability – An Introduction

HSBC stated that “sustainability means building … business for the long term by balancing social, environmental and economic considerations in the decisions (made)”… This … help(s) businesses thrive and contribute to the health and growth of communities”.8 According to its sustainability reports, HSBC had put long-term considerations as priorities and long-term cogitation was crucial to its success. This position on sustainability meant that the bank recognised that its sustainable well-being came hand-in-hand with the positive development of the communities and environments in which it operated. Because of this conscious regards that its actions and decisions bore not only economic but social and environmental consequences to the world, the bank had repeatedly taken stand that how it did business was as important as what business it did. Strategic Priorities and Sustainability It was under this conviction that HSBC embedded sustainability into its latest three-year (2014-2016) strategic priorities, which were made up of three equally important areas: grow the business and dividends, implement global standards, and streamline processes and procedures. The bank expected that delivering these priorities would create values for its shareholders and stakeholders, thus achieving long-term sustainability. For instance, streamlining processes and procedures would not only improve operation efficiencies and reduced cost of service, it would also mean reduced resources consumption. Thus, customers would find it easier to do business with the bank, the bank would be able to lower its cost structure in serving customers while more efficient consumption of scarce resources was achieved in doing business. Likewise, in order to successfully implement a set of global standards, the bank would need to strive to create a corporate culture based on the HSBC values. HSBC Values and Business Principles The approach of linking strategic priorities with sustainability would help to ensure that the same set of fundamental considerations, standards, principles and values were embedded in the bank’s many decisions. It would also ensure that its thousands of employees served its millions of customers around the globe in ways that shown its business principles and reflected the same set of HSBC values (for details of HSBC values and business principles, see Exhibit 1). The bank’s values and business principles were simple and basic on paper. “We expect our … employees to act with courageous integrity in the execution of their duties in the following ways: Be independent and do the right thing… Be open to different ideas and cultures… Be connected with our customers, communities, regulators and each other…” 9 (see

Exhibit 1 for more details). But when they were put in the context of achieving alignment among 266,000 people in 6,100 different locations of seventy three countries and territories across five geographical regions,

8 2014 HSBC Annual Report (2015) “Sustainability”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). The quote was from p.36. 9 2013 Sustainability Report (2014) “Our Purpose, Values and Business Principles”, HSBC, https://www.hsbc.com/citizenship/sustainability/reports-and-documentation (accessed 8 April 2015). The extract was from p.5.

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it would not be hard to understand the high level and matrix structure the bank had in place to deliver sustainability (see section on Sustainability Organization Structure below). Values alignment and grooming of corporate culture with sustainability as a core element commended massive training resources. From the numbers of employees that were reported to have received focused value training during the period 2012-2014, a number that was much higher than 266,000, it was likely that HSBC would arrange its employees to attend multiple focus training sessions.10 Sustainability Organization Structure HSBC’s corporate sustainability was governed by a subcommittee of its board, the conduct and values committee. The committee was formed to ensure that “in conduct of its business, HSBC treats customers fairly and openly, does business with the right clients and in the right way, is a responsible employer, acts responsibly towards the communities in which HSBC operates and treats other stakeholders fairly”.11 The setting of sustainability priorities and programs was the responsibility of the bank’s global corporate sustainability function, one of the eleven corporate functions of HSBC, and was headed by a group managing director.12 The corporate sustainability function worked through local offices to implement sustainability initiatives and to manage sustainability risk. Country operations, all global functions and global businesses were expected to work together to ensure sustainability was embedded in their operations and businesses and that implementation of sustainability programs and initiatives at local offices were properly managed and delivered. In addition, two other corporate functions of HSBC, the HSBC technology and services function and the global risk function, held specific responsibilities to deliver certain sustainability programs for the group. For instance, the technology and services function had the responsibilities to deliver “greater automation and standardization” and to optimize the bank’s operation model, works that were crucial to achieving sustainable operation of the bank.

Sustainability in Action

The bank’s works on sustainability had three focus areas: sustainable finance, sustainable operations, and sustainable communities. Sustainable Finance Within the domain of sustainable finance, HSBC reported that it had taken a proactive approach to ensure that its funding provisions to customers and businesses were not channelled to projects and usage that would have negative societal and/or environmental impacts that out-weighted the economic gains. In addition, the bank had reported that it had used its influence on sector customers, whose activities bore significant implications to the environment, to try and turn their activities in alignment with sustainable principles. These sensitive sectors included forestry, mining and metals, fresh water infrastructure, energy and chemicals. According to the bank, it had set requirements and compliance deadlines for forestry and palm oil customers to meet specific standards and third-party certification that

10 According to the bank’s 2013 sustainability report and 2014 annual report, the number of employees that had received focused value training in 2012 was 103,000, that for 2013 was 135,000 and that for 2014 was 145,000. 11 Governance (n.d.) “Board Committees”, HSBC, http://www.hsbc.com/investor-relations/governance/board-committees (accessed 8 April 2015); students might refer to the following link for a copy of the terms and reference of the conducts and values committee of the HSBC board, http://www.hsbc.com/investor-relations/governance/board-committees. 12 The eleven corporate functions of HSBC were communications, company secretaries, corporate sustainability, finance, HSBC technology and services, human resources, internal audit, legal, marketing, risk (including compliance) and strategy and planning.

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their operations met legal and sustainable standards. The bank pledged to end customer relationships with those that failed or unwilling to meet its requirements (for more details on how HSBC managed sustainable risk associated with business opportunities of sensitive sectors, see section on Managing Sustainable Risk). Besides taken a responsible approach to positively influence customers from sensitive sectors, HSBC had cultivated customers and business opportunities associated with the climate business sector, that is, “clients in the solar, wind, biomass, energy efficiency, low-carbon transport and water sector”.13. The sector was of growing importance as economies transited into low-carbon nature. The bank had not only directly offered supports to customers of the climate business sector, it had also provided back-up and support services to institutional investors to facilitate their investment decisions in financing low-carbon business opportunities that had the potential to reap long-term commercial, social and environmental benefits. Sustainable Operations For any corporation, implementing initiatives for sustainable operations provided economic and environmental incentives. The huge and geographically stretched operations of HSBC offered ample rooms for the bank to reap such benefits. To achieve so, HSBC had set a ten-point sustainable operation strategy (see Exhibit 2 for details). The strategy used 2011 as the base year and had et ambitious targets in reducing carbon footprint, energy and resources consumption of the company’s operations by 2020. For instance, the bank aimed at recycling 100% of office waste and electronic waste and increased energy consumption from renewables to 25% by 2020 from zero. To enable this, HSBC had set up an eco-efficiency fund of US$50 million a year to encourage employees’ innovations in developing new ways of operations. To ensure it could deliver the targets set out under this operation strategy, the bank formulated a sustainability leadership programme and had trained over 800 senior managers since the programme was rolled out in 2009. The ultimate aim of the programme was to ensure these executives would embed sustainability into the way they run their business or functional operations. In addition, to ensure clear accountability and responsibility, the bank appointed a business owner for each of the ten operation targets to drive for year-on-year improvements and measurable results (see Exhibit 2 for information of business owner of each operation target). Performance of progress made in delivering each operation target were tracked and reported in plain numbers each year in the company’s annual report and its sustainability report. Sustainable Communities

“Our long-term partnership with charities build trust, promote sustainable change and support their organizational development.”

- Simon Martin, Head, Global Corporate Sustainability, HSBC14

The bank’s community investment focused on two main themes, education and the environment. Projects were run through partnership with global and local non-profit organizations. In making investment choices in community projects, the bank followed four principles to ensure programmes should:

13 2014 HSBC Annual Report (2015) “Sustainability”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). The quote was from p.37. 14 HSBC 2013 Sustainability Report (2014) “Our Approach to Community Investment”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015), p.25.

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• have significant global impact while have local relevancy; • mobilize the bank’s business skills to manage partnership with charities, while the

programmes should be long-term and of proactive nature in addressing either education or environmental problems, and with clearly defined objectives;

• provide HSBC employees with opportunities to deploy their skills while HSBC could provide funding;

• provide engaging and inspiring experience for HSBC staff. Applying these principles on the one hand allowed HSBC to make donations to community projects worth supporting, and on the other hand provided enlivening volunteer work exposures to the bank’s employees. In 2013 and 2014, the bank made respectively US$117 million and US$114 million investments in community projects around the world. 15 In addition, by offering paid leaves for its staff to participate in volunteer works and by enabling local offices to organize staff volunteer work schemes, the bank donated over 250,000 and over 300,000 volunteer hours of its employees work time in 2013 and 2014 respectively.16 According to the bank’s reports, these significant monetary and manpower investments had enabled local and global non-profit organizations to provide disaster relieves, to run education programmes for under-resourced young people, to offer programmes on financial literacy, to provide scholarships and to approach water challenges with the long-term HSBC Water Programme (see Exhibit 3 for more details of the HSBC Water Programme).

Managing Sustainability Risk

Sustainability risk referred to “the risk that the environmental and social effects of providing financial services outweigh the economic benefits”.17 In its annual reports, HSBC always discussed and analysed its sustainability risk alongside with the rest of other risks that the bank was exposed to, including credit risk, liquidity and funding risk, pension risk, fiduciary risk, reputational risk, compliance risk and insurance risk. As the bank had discussed in its 2014 annual report, “sustainability risk can also lead to commercial risk for customers, credit risk for HSBC and significant reputational risk”.18 Interconnected Financial and Non-Financial Risks When HSBC provided financial services to clients with operations or with projects that might be counter to the needs of the environment or against the interest of sustainable development, the bank not only incurred sustainability risk but also committed credit risk. Overall, the world was shifting towards a tighter regulatory environment that looked to confine corporations’ actions to reduce environmental and social stress. Such clients’ ability to meet regulatory requirements was directly linked to long-term viability of their projects or operations. The risk of such clients’ actions that might result in actual damage would directly affect their ability to repay loans. As a financial service provider, it was therefore to the bank’s interest to ascertain the associated sustainability risk and credit risk before funding provisions were made to finance projects or operations of such clients.

15 Ibid; 2014 HSBC Annual Report (2015) “Sustainability”, HSBC, http://www.hsbc.com/investor-relations/financial-and- regulatory-reports (accessed 8 April 2015). 16 Ibid; for more details of how HSBC volunteers were supported by the bank in Hong Kong and in U.K., students might refer to: HongKongBank Foundation (n.d.) “HSBC Volunteers”, http://www.hongkongbankfoundation.org/1/2/foundation/volunteers (accessed 8 April 2015) and Sustainability (n.d.) “Encouraging Volunteering”, HSBC, https://www.hsbc.co.uk/1/2/ (accessed 8 April 2015). 17 2014 HSBC Annual Report (2015) “Glossary”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). 18 2014 HSBC Annual Report (2015) “Sustainability”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). The quote was from p.36.

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Brand and reputation building and maintenance was a common concern of sustainability pursuit of corporations, and HSBC should be of no exceptions. For HSBC, its reputation was at risk if it failed to meet expectations of its stakeholders “as a result of its action or inaction, either by HSBC itself, its employees or those with whom it is associated, that may cause stakeholders to form a negative view of HSBC”. 19 Not effectively mitigating the bank’s sustainability risk would also negatively affect the group’s brand and reputation. Environmental or societal damage arising from projects or companies funded or served by HSBC might tarnish the bank’s reputation. An example would be a lawsuit that HSBC was facing in the United States for handling billions of dollars for financial institutions that help funded extremist.20 The Equator Principles and HSBC Sensitive Sector Policies To help manage and contain its sustainability risk and associated risk elements, HSBC had adopted the Equator Principles and had developed policies that govern project finance and lending activities associated with sectors of customers whose activities had high implications on either the environment or the society. The Equator Principles The Equator Principles were developed in 2003 by a group of financial institutions and was a process framework in managing risks and impacts on the environment and society that arisen from funding provisions to projects or operations (for details of the Equator Principles, see Exhibit 4). The principles called for financial institutions to categorise and assess projects seeking financing in accordance to their degrees of possible environmental or social impacts. It required funding provisions be subjected to action plans to address possible risks and to imposing compliance requirements on the clients. It demanded transparency with affected communities. Financial institutions were also required to monitor and compile reports on impacts and mitigation of risks throughout the lifespan of projects funded. In 2003, HSBC adopted the principles voluntarily and deployed it “for all new project financings globally with total project capital costs of US$10 million or more, and across all industry sectors”.21 HSBC Sensitive Sector Policies In addition, to further mitigate sustainability risk in financing projects of sensitive industries the bank had developed its own set of sector policies (for a list of HSBC sector policies, see Exhibit 5). These sensitive industries were forestry, mining and metals, fresh water infrastructure, energy and chemicals. They were regarded as having high potential negative impacts on the society or the environment. The policies were developed, and reviewed periodically, in consultation with “customers, industry experts, shareholders and non-government organizations” and whenever possible, in accordance to international standards of good practices. 22 These policies were developed by the group’s central corporate

19 2014 HSBC Annual Report (2015) “Risk”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015). The quote was from p.115. 20 Barrett, P. (19 February 2015) “The Big Bet to Hold Banks Liable for Terrorism”, Bloomberg Business,

http://www.bloomberg.com/news/articles/2015-02-19/are-credit-suisse-rbs-standard-chartered-hsbc-and-barclays-terrorist- banks- (accessed 8 April 2015). In Freeman Vs HSBC, HSBC was accused of handling “hundreds of billions of dollars in

international transfers for Iranian financial institutions. The Iranian financial institutions, in turn, have moved money for the Islamic Revolutionary Guard Corps (IRGC), an elite Iranian paramilitary organization, and for Hezbollah, the militant Shia movement based in Lebanon and backed by Iran. The Revolutionary Guard and Hezbollah have trained and armed Shia groups in Iraq that have kidnapped, shot, and blown up Americans, including Vincent and Freeman.” 21 Equator Principles (n.d.) “HSBC’s Application of the Equator Principles Reporting Guidance 2013”, HSBC, http://www.hsbc.com/citizenship/sustainability/sustainability-risk/equator-principles (accessed 8 April 2015). 22 Sustainability Risk (n.d.) “Introduction to HSBC’s Sustainability Risk Policies”, HSBC, http://www.hsbc.com/citizenship/sustainability/sustainability-risk (accessed 8 April 2015).

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sustainability team and were approved by HSBC’s risk management meetings of the group management board. Implementation While the bank relied on its relationship managers to check whether customers had met requirements of applicable policies, it had around 50 sustainability risk managers to provide them with guidance. It also engaged external experts to confirm customers had met its policies. For the implementation of the Equator Principles, the bank used independent consultants and resorted to credible independent certification schemes wherever available. As transparency in reporting was also required, the bank commissioned an independent assurer every year to review the Principles application and reporting. To ensure the involved personnel were equipped with the knowledge and skills to help mitigate the bank’s sustainability risk, trainings and capacity building programmes were provided. In addition, the bank used system-based processes to institute control points to help responsible managers to consistently apply relevant policies. The system-based infrastructure not only helped to capture management information that reduced the cost of reviews by the managers, it also enabled reporting and measuring of the bank’s impact of financing activities on the society the environment.

Sustainability Reporting

HSBC published annually a financial report and a sustainability report. The latter was not absolutely required from a regulatory perspective (see Exhibit 6 on legal requirement of corporate social responsibility reporting in the United Kingdom), therefore, HSBC had published it yearly more for the purpose of complementing its annual financial report than for regulatory compliance purpose. On the one hand, the group’s financial report had a full section on sustainability where it discussed and reported sustainability activities that contributed most to the bank’s strategy delivery and the company’s achievements in the reporting year. It also contained a good discussion and analysis of the group’s sustainability risk alongside other risk elements that the group was facing. On the other hand, the sustainability report gave a full picture of the detail progress of initiatives and projects within the domain of HSBC sustainability. Wherever possible, the group provided benchmark figures and trackable numbers with past two years’ performances. It was apparent that the group had a clear intent to target global stakeholders who had professional interests in the matters reported as the major audience group for the sustainability report. Evolvement Before 2007, the sustainability report was called corporate responsibility report. The change in name of the report from 2007 represented the group’s acknowledgement of the interconnectedness between the bank’s commercial activities and their social and environmental implications on the bank’s long-term sustainability. It was reported that the change “also reflected an internal shift as responsibility for direct environmental footprint, sustainability risk and business opportunities, and community investment activities were brought together into a department called corporate sustainability”.23 Changes in HSBC’s sustainability reports over the years also reflected evolution of the company’s sustainability focus and efforts. In answer to changes in social and stakeholders’ expectations, there was a year-on-year shift of more focus and resources by the bank onto 23 Bhimani, A. and Soonawalla, K. (2010) “Sustainability and Organizational Connectivity at HSBC”, in Hopwood, A., Unerman, J. and Fries, J. (eds.) Accounting for Sustainability Practical Insights, p.187.

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addressing environmental issues. For instance, community investments of the bank had evolved from the earlier years’ ad hoc nature to focus on two themes, education and the environment. For another instance, there was gradual increase in data provided on environmental impacts of the bank’s operation. In addition, the bank had, over the years, expanded the number of long-term reduction targets on its operations’ environmental impacts and had given full reports in progress achieved. Reporting Frameworks The bank’s sustainability reporting started to follow the Global Reporting Initiative guidelines in 2004 (see Exhibit 7 for an overview of Global Reporting Initiative). The same year also saw the bank’s efforts to ensure transparency in reporting its applications of the Equator Principles. Global Reporting Initiative emphasized the use of “metrics and methods for measuring and reporting sustainability-related impacts and performance”. 24 The reporting requirement of the Equator Principles called for unambiguous year-on-year display of number of transactions approved and values of loans associated with three different levels of risks. In 2007, the bank also adopted the connected reporting framework. This framework advocated that “reported information should identify and explain the connection between the organization’s strategic objectives, the industry, market and social context within which the business operated, the associated risks and opportunities it faced, the key resources and relationships on which it depended… it should explain the connection between delivery of the business’s strategy and its financial and non-financial performance”.25 Assurance HSBC had always engaged independent third party to audit and to offer assurance on data related to the application of Equator Principles and the company’s carbon emissions. These two areas were selected for assurance likely because they were not only of interest but also of use to two groups of specific stakeholders, the sustainable and responsible investment community and globally influential NGOs. These two groups of stakeholders followed clear processes in tracking and benchmarking sustainability performances of international corporations of scale, such as HSBC. Third party audited data provided assurance that rigor was in place in the process of managing commercial activities with environmental implications as well as in reports compilation.

24 Global Reporting Initiative (n.d.) “What is GRI?”, https://www.globalreporting.org/information/about-gri/what-is-GRI/Pages/default.aspx (accessed 8 April 2015). 25 Connected Reporting (n.d.) “Introduction to Connected Reporting”, http://www.connectedreporting.accountingforsustainability.org/introduction-to-connected-reporting.html (accessed 8 April 2015).

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Looking Forward

We must keep in perspective the enormous benefits of a properly focused and functioning financial system. These range from: • the efficient allocation of financial resources that enhances economic growth; • to the financial innovation that allows those investing in new and complex areas

to manage the related project risks; • and on to the creation of the products and services that allow individuals and

companies to realize their ambitions and contemplate their future with confidence.

- Douglas Flint, HSBC Group Chairman26

With the banking industry facing the challenges of shifting expectations from social, regulatory and public policy perspectives, true sustainability of the industry and its players depended upon the latters’ recognition and execution of the transformations required by “a properly focused and functioning financial system.27 As one of the largest banks in the world, HSBC had a critical role to play in fostering such systemic transformation, which was pivotal to sustainable social and economic development. As an influential, highly profitable industry player, what unique role should it take with respect to sustainability? Looking ahead, the bank planned to focus its future investments on new products designed for better risk management, on deployment of technologies to increase the accessibility of financial services, and on enabling the world’s aging population to deal with retirement.28 Within these focused investment domains, should the bank introduce a focus on “sustainable communities” – in addition to education and the environment – to leverage its financial expertise directly to contribute even more effectively to the communities in which it operated?

26 Annual General Meeting (24 April 2015) “2015 AGM statement - Douglas Flint”, HSBC, http://www.hsbc.com/investor-relations/investing-in-hsbc/annual-general-meeting (accessed 6 July 2015), p.5. 27 Ibid. 28 Ibid.

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EXHIBIT 1A: HSBC VALUES In HSBC’s 2013 sustainability report, HSBC used the following to describe its values:

Source: Sustainability Report 2013 (2014) “Our Values”, HSBC Holdings plc, https://www.hsbc.com/citizenship/sustainability/reports-and-documentation (accessed 8 April 2015). The extract was from p.5.

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EXHIBIT 1B: HSBC BUSINESS PRINCIPLES In HSBC’s 2013 sustainability report, HSBC used the following to describe its business principles:

Source: Sustainability Report 2013 (2014) “Our Business Principles”, HSBC Holdings plc, https://www.hsbc.com/citizenship/sustainability/reports-and-documentation (accessed 8 April 2015). The extract was from p.6.

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EXHIBIT 2: HSBC SUSTAINABLE OPERATION STRATEGY AND BUSINESS OWNERS HSBC Ten-point Sustainable Operation Strategy29 Business Owner30

1. Sustainable engagement: encourage employees to deliver improved efficiency by 2020

Sustainability Engagement Head, HSBC Technology and Services

2. Supply chain collaboration: sustainable savings through efficiency and innovation

Chief Procurement Officer

3. HSBC Eco-efficiency fund: US$50 million annually to develop new ways of working, based on employee innovations

Group Chief Operating Officer

4. Energy: reduce annual energy consumption per employee by 1MWh by 2020, compared to 6.2MWh in 2011

Global Head of Corporate Real Estate

5. Waste: use less, and recycle 100% of office waste and electronic waste

Global Head of Corporate Real Estate

6. Renewables: aim to increase energy consumption from renewables to 25% by 2020 from zero

Global Head of Corporate Real Estate

7. Green buildings: design, build and run energy efficient, sustainable buildings to the highest international standards

Global Head of Corporate Real Estate

8. Data centres: achieve an energy efficiency (power usage effectiveness rating of 1.5 by 2020)

Global Head of IT Operation

9. Travel: reduce travel emissions per employee Chief Procurement Officer 10. Paper: paperless banking available for all retail and

commercial customers and 100% sustainably sourced paper by 2020

Global Head of Service Delivery

Source: 2014 HSBC Annual Report (2015) “Sustainability”, HSBC, http://www.hsbc.com/investor-relations/financial-and-regulatory-reports (accessed 8 April 2015); the business owners of the ten-point sustainable operation strategy was according to information provided in p. 17-20 of the HSBC 2013 Sustainability Report, https://www.hsbc.com/citizenship/sustainability/reports-and-documentation (accessed 8 April 2015).

29 The ten point sustainable operations strategy was from p.38 of 2014 HSBC Annual Report. 30 The business owners of the ten-point sustainable operation strategy was according to information provided in p. 17-20 of the HSBC 2013 Sustainability Report.

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EXHIBIT 3: HSBC WATER PROGRAMME The following was an extract from the source below on the HSBC Water Programme. Only two types of adaptations were made: changes from first person to third person narration and changes from present to past tense. Launched in 2012, HSBC's Water Programme would support safe water projects in countries such as Cambodia… Together with three leading NGOs – Earthwatch, WaterAid and WWF – this five-year programme (the HSBC Water Programme) would deliver the following goals: WaterAid would help provide safe water to 1.1 million people and sanitation for 1.9

million people in South Asia and West Africa WWF would protect freshwater ecosystems and resources in the Yangtze, Ganges,

Mekong, Pantanal and African Rift Valley; they would also help thousands of small businesses tackle water risks and (would) support 115,000 fishermen and farmers to reduce fishing or farming impacts on water, whilst potentially improving livelihoods

Together with Earthwatch, 100,000 HSBC employees across four continents would participate online in freshwater research and learning, and the bank would engage HSBC employees from all regions through one-day citizen science programmes.

By the end of 2013, the Water Programme partners had: Provided more than 400,000 people with safe water and more than 500,000 with

sanitation. Organised hygiene education sessions in more than 1,500 schools. Supported the introduction of 15 new fish conservation zones in Thailand. Completed river flow studies to improve the management of the Ganges and Mekong

river basins. Set up urban freshwater research projects in 24 cities. Source: HSBC Water Programme (n.d.) http://www.hsbc.com/citizenship/sustainability/hsbc-water-programme (accessed 8 April 2015); Water Programme Update (2 September 2014) http://www.hsbc.com/news-and-insight/2014/water-programme-update (accessed 8 April 2015).

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EXHIBIT 4: THE EQUATOR PRINCIPLES 1. Categorize finance projects based on the magnitude of potential impacts and risks in

accordance with the environmental and social screening criteria of the International Finance Corporation.

2. Conduct an assessment of the relevant social and environmental impacts and risks of the proposed project and propose mitigation and management measures relevant and appropriate to the nature and scale of the proposed project.

3. Establish the project’s overall compliance with, or justified deviation from, the applicable International Finance Corporation Performance Standards and relevant industry-specific guidelines.

4. Prepare an action plan that address the relevant findings and draw on the conclusions of the assessment.

5. Consult with project-affected communities in a structured and culturally appropriate manner.

6. Ensure that consultation, disclosure and community engagement continues throughout construction and operation of the project, and that a grievance mechanism is established as part of the management system.

7. Ensure that review of the assessment, action plan and consultation process documentation is conducted by an independent social or environmental expert not directly associated with the borrower.

8. Ensure specific elements are covenanted in financing documentation. 9. Ensure ongoing monitoring and reporting over the life of the loan. 10. Commit to reporting publicly at least annually about its Equator Principles application

processes and experience, taking into account appropriate confidentiality considerations. Source: Principles 1-9 were from Bhimani, A. and Soonawalla, K. (2010) “Sustainability and Organizational Connectivity at HSBC”, in Hopwood, A., Unerman, J. and Fries, J. (eds.) Accounting for Sustainability Practical Insights, p.176-177; Principle 10 was from The Equator Principles 2013, equatorprinciples.com, http://equator-principles.com/resources/equator_principles_III.pdf (accessed 8 April 2015).

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EXHIBIT 5: HSBC SECTOR POLICIES HSBC had developed and was implementing the following sustainability risk policies Agricultural Commodities Policy Chemicals Industry Policy Defence Equipment Sector Policy Energy Sector Policy Freshwater Infrastructure Policy Forestry Policy Mining and Metals Sector Policy World Heritage Sites and Ramsar Wetlands Policy Source: Sustainability Risk (n.d.) “Sector Policies”, HSBC, http://www.hsbc.com/citizenship/sustainability/sustainability-risk (accessed 8 April 2015).

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EXHIBIT 6: LEGAL REQUIREMENT OF CORPORATE SOCIAL RESPONSIBILITY REPORTING IN THE UNITED KINGDOM

The following was an extract from the source below. Adaptations to report in past tense were made. The UK Government viewed corporate social responsibility as the voluntary actions that businesses could take, over and above compliance with minimum legal requirements, to address both their own competitive interests and the interests of wider society. The relevant body of law and regulation in the UK set out certain reporting obligations which applied to quoted companies and premium listed companies. Although no part of the UK Corporate Governance Code specifically addressed corporate social responsibility, the Corporate Governance Code touched on the need for the board to “set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met”. Furthermore, the Turnbull Guidance annexed to the Corporate Governance Code made clear that enterprise risk assessment should extend to “health, safety and environmental, reputation, and business probity issues”. UK corporate legislation touched on corporate social responsibility in other ways as well. The Companies Act 2006 required all directors to consider the impact of the company's operations on the community and the environment when fulfilling their duty to promote the success of the company. The Companies Act 2006 also required that quoted companies produce a business review as part of their directors’ report that included information about environmental matters, employees and social and community issues, including information about any policies of the company regarding those matters and the effectiveness of those policies. Furthermore the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came into force on October 1, 2013, introduced an obligation for the directors of a company to prepare a standalone strategic report for each financial year. This report had to include a fair review of the company's business and to the extent necessary for an understanding of the development, performance or position of the company's business, an analysis using key performance indicators including information relating to environmental and employee matters. Quoted companies also had to make certain disclosures regarding greenhouse gas emissions in the directors’ report – but only to the extent that it was practical for the company to obtain the requisite information. Additionally, a significant number of investor representative groups had updated their guidelines to make specific and detailed reference to corporate social responsibility matters. Source: Dunn, G. (19 April 2014) “European Parliament Adopts Broad New Compliance and Sustainability Reporting Requirements”, Gibson Dunn, http://www.gibsondunn.com/publications/pages/European-Parliament-Adopts-Broad-New-Compliance-and-Sustainability-Reporting-Requirements.aspx (accessed 8 April 2015).

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EXHIBIT 7: AN OVERVIEW OF GLOBAL REPORTING INITIATIVE The following was an extract from the source below. Adaptations to report in past tense were made. GRI had pioneered and developed a comprehensive Sustainability Reporting Framework that was widely used around the world. A sustainability report was a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report also presented the organization's values and governance model, and demonstrated the link between its strategy and its commitment to a sustainable global economy. GRI's mission was to make sustainability reporting standard practice for all companies and organizations. Its Framework was a reporting system that provided metrics and methods for measuring and reporting sustainability-related impacts and performance. The Framework – which included the Reporting Guidelines, Sector Guidance and other resources – enabled greater organizational transparency and accountability. This could build stakeholders’ trust in organizations, and led to many other benefits. Thousands of organizations, of all sizes and sectors, used GRI’s Framework to understand and communicate their sustainability performance. GRI was an international not-for-profit organization, with a network-based structure. Its activity involved thousands of professionals and organizations from many sectors, constituencies and regions. The Framework was developed collaboratively with their expert input: international working groups, stakeholder engagement, and due process – including Public Comment Periods – helped made the Framework suitable and credible for all organizations. GRI's Secretariat was located in Amsterdam, The Netherlands, and there were GRI Focal Points – regional offices – in Australia, Brazil, China, India, South Africa, and the USA. More than 600 Organizational Stakeholders – core supporters – played a vital part in endorsing GRI's mission. GRI also enjoyed strategic partnerships with the United Nations Environment Programme, the UN Global Compact, the Organisation for Economic Co-operation and Development, the International Organization for Standardization, and others.

Source: Global Reporting Initiative (n.d.) “What is GRI?”, https://www.globalreporting.org/information/about-gri/what-is-GRI/Pages/default.aspx (accessed 8 April 2015).

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AMY YIP LO W H

HSBC SUSTAINABILITY – THE WHAT, THE WHY AND THE HOW

Teaching Note

Synopsis

HSBC is a huge financial institution: for the financial year 2014, its 266,000 employees, in 6,100 offices in 73 countries, served 51 million customers. That year, the bank generated a net income of US$61.2 billion, a number higher than the GDP of 125 nations. Its sheer size means that it touches the lives of millions, and its decisions and actions impacts the thousands of communities in which it operates. The bank’s responsibilities, therefore, go beyond generating profits for its shareholders. It has obligations to those communities and millions of stakeholders. To HSBC, sustainable business means both generating profits and fulfilling those obligations. To allow transparency into its workings, and, more importantly, to its achievements on sustainability issues, HSBC provides a timely update on its website of its undertaking in relation to sustainability. HSBC also takes a voluntary move to engage its auditor PricewaterhouseCoopers to provide assurance services on related information. It actively seeks to be the industry’s leading organization in terms of corporate sustainability, and makes reference to the Global Reporting Initiatives (“GRI”) Reporting Framework and the GRI’s financial services sector supplement. With over six thousand offices and hundreds of thousands of employees all over the world, how does HSBC ensure that its sustainability policy is implemented consistently? What are its strategic priorities and how do they contribute to HSBC’s business sustainability? What are the metrics against which the bank measures its sustainability performance? From a shareholder and business-sustainability perspective, are all these efforts and investments in environmental, climate and community issues worth it?

To order this teaching note, please contact Centennial College, c/o Case Research Centre, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; website: http://cases.centennialcollege.hku.hk . This teaching note was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (UGC/IDS12/14). © 2015 by Centennial College, a member of The University of Hong Kong group. No part of this copyrighted publication may be reproduced or transmitted, in whole or part, in any form or by any means, whether electronic, mechanical, photocopying, recording, web-based or otherwise, without the prior permission of Centennial College. This teaching note was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 15/002TN Published: 2 May 2015

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Recent years see the bank facing an increasingly hostile institutional environment and a number of allegations of ethically problematic practices. What are these issues? How do they impact the bank? What are its responses to these issues from a sustainability perspective?

Conceptual Foundation and Teaching Objectives

There are increasing emphasis and public and government expectations regarding commercial organizations’ fulfillment of their corporate social responsibilities (“CSR”). Yet CSR’s commercial justification has been widely debated. In fact, there is a lack of consistent findings from empirical studies on the positive relationship between CSR investment and corporate financial performance. By observing HSBC’s commitment to and investment in sustainability, students are expected to examine the theoretical arguments for and against companies practicing CSR and the practical considerations involved in formulating CSR strategies and policies. They will also be made familiar with common frameworks and standards in CSR reporting. The case has the following teaching objectives: 1. To introduce the concept of CSR and the pros and the cons of its practice.

2. To understand the drivers of CSR practices in global corporations. 3. To discuss the importance of CSR reporting and how such reporting should be done.

Suggested Student Assignments

1. What is CSR? 2. What are the arguments for and against CSR practices?

3. Why and how should a company report its CSR practices?

Analysis

1. What is CSR?

Defining CSR—What the Literature Reveals Definitions of CSR vary. Those listed below have been chosen to illustrate not only the divergence of definition, but also to show how the construct has evolved and developed over the years. . How Academics Define CSR In 1953, Bowen published the seminal work Social Responsibilities of the Businessman and argued that organization had an obligation “to pursue those policies, to make those decisions, or to follow those lines of actions which are desirable in terms of the objectives and values of society.”1 Davis (1960) argued that “social responsibility of businessmen needs to be commensurate with their social power,” and “the avoidance of social responsibility leads to gradual erosion

1 Bowen, H. R. (1953) Social Responsibilities of the Businessman, New York: Harper and Row, the quote is from p.6; Bowen’s work is described by Carroll as seminal; Carroll, A. B. (1999) “Corporate Social Responsibility: Evolution of a Definitional Construct”, Business & Society, 38 (3), pp. 268–295.

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of social power.”2 Davis (1973) called this the “Iron Law of Responsibilities.”3 He defined CSR as: … [a] firm’s consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm. It is the firm’s obligation to evaluate in its decision-making process the effects of its decisions on the external social system in a manner that will accomplish social benefits along with the traditional economic gains which the firm seeks. It means that social responsibility begins where the law ends. A firm is not being socially responsible if it merely complies with the minimum requirements of the law, because this is what any good citizen would do.4 Davis’s view that CSR “begins where the law ends” points to the voluntary nature of CSR practices. Though academics generally agree on this voluntary nature, they vary on the scope and approach to implementation of CSR in corporations. For instance, Eilbert and Parket (1973) advocate an “active role [of business organizations] in the solution of broad social problems, such as racial discrimination, pollution, transportation, or urban decay.”5 In another instance, Carroll (1979) holds that “social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organisations at a given point in time.”6 Carroll (1991) later depicts these four kinds of responsibilities as a pyramid, with economic obligations as the “foundation upon which all others rest.” He then puts legal, ethical and philanthropic responsibilities in the upper layers, though this does not mean each of these should be fulfilled in sequence.7 Jones (1980) puts forth the stakeholder argument by pointing out that “corporations have an obligation to constituent groups in society other than stockholders … extending beyond the traditional duty to shareholders to other societal groups such as customers, employees, suppliers and neighbouring communities.” 8 This CSR stakeholder duty is crystalized in Freeman’s seminal 1984 work, Strategic Management: A Stakeholder Approach, discussed in the next section.9 It is worth noting that academics generally agree that profitability precedes CSR. Carroll (1983) points out that “profitability and obedience to the law are foremost conditions to discussing the firm’s ethics and the extent to which it supports the society in which it exists with contributions of money, time and talent.” 10 Drunker (1984) asserts that “the proper ‘social responsibility’ of business is to tame the dragon, that is, to turn a social problem into economic opportunity and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth.”11 However, not everyone believes that CSR can be embedded in corporations. Friedman is the most prominent disbeliever. 2 Davis, K. (1960) “Can Business Afford to Ignore Social Responsibilities?”, California Management Review, 2 (3), pp. 70–76. The first quote is from p.70 and the second from p.73. 3 Davis, K. (1973) “The Case For and Against Business Assumption of Social Responsibilities”, Academy of Management Journal, 16, pp. 312–322; the term “Iron Law of Responsibility” appears on p. 314. 4 Davis, K. (1973) “The Case For and Against Business Assumption of Social Responsibilities”, Academy of Management Journal, 16, pp. 312–322; the definition can be found in p.312-313. 5 Eillbert, H. and Parket, I. R. (1973) “The Current Status of Corporate Social Responsibility”, Business Horizons, 16 (4), p. 7. 6 Carroll, A. B. (1979) “A Three-Dimensional Conceptual Model of Corporate Social Performance”, Academy of Management Review, 4, p. 500. 7 Carroll, A. B. (1991) “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organisational Stakeholders”, Business Horizons, 34 (4), pp. 39–48. The quote is extracted from Figure 3 on p. 42. 8 Jones, T. M. (1980) “Corporate Social Responsibility Revisited, Redefined”, California Management Review, 3, pp. 59–60. 9 Freeman, R. E. (1984) Strategic Management: A Stakeholder Approach, Pitman: Boston. 10 Carroll, A. B. (1983) “Corporate Social Responsibility: Will Industry Respond to Cutbacks in Social Program Funding?” Vital Speeches of the Day, 49, pp. 604–608. 11 Drunker, P. (1984) “The New Meaning of Corporate Social Responsibility”, California Management Review, 26 (2), pp. 53–63.

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Theoretical Approaches to CSR Friedman’s objection to CSR has its root in neo-classical economic and agency theory.12 In one chapter of his book Capitalism and Freedom, he disputes the “social responsibilities of business” other than profit maximization. 13 He also questions whether a manager or shareholder agent should spend a firm’s money for “general social interest,” which, according to Friedman, is in essence an illegal tax levied on corporations.14 Jensen and Meckling (1976) agree with Friedman and anticipate a negative correlation between CSR and corporate financial performance (“CFP”). They posit that corporate agents will, in the name of CSR, pursue their own interests.15 Brummer (1991) and Jensen (2001) also agree with Friedman’s objections to CSR. They see that corporations’ CSR practices are made to respond to social expectations. In other words, these expectations are social constraints. They therefore believe that CSR practices, which respond to social constraints, hinder value maximization.16 The few negative voices on CSR are out-matched by a huge group of supportive academics. Donaldson (1983) believes firms bear a contractual liability, albeit an implicit one, to society. He advocates that, as a consideration in using society’s resources for profit-seeking, companies have social obligations. These include explicit legal, contractual or union obligations, and society’s unwritten rules, customs, and moral and ethical standards. Failing to observe these obligations will jeopardize a firm in the long run.17 Perhaps the most compelling theoretical framework affirming CSR is stakeholder theory. It is Freeman’s (1964) seminal work Strategic Management: A Stakeholder Approach that draws attention to the rights and claims that different vested-interest groups, or stakeholders, have on corporations. 18 Freeman highlights the fact that shareholders are but one of an organization’s multiple stakeholders. Freeman posits that corporate managers need to respond to external shifts and environmental changes. This implies firms should factor not only shareholders’ but also stakeholders’ views into their decision-making processes.19 In other words, corporate agents are accountable to both shareholders and stakeholders. Because the differing vested interests of stakeholders sometimes conflict, it becomes part of agents’ core duties and management functions to manage these competing interests.20

12 Friedman, M. ([1962], 2000) Capitalism and Freedom, netLibrary: Boulder, CO; Friedman, M. (13 September 1970) “The Social Responsibility of Business Is to Increase Its Profits”, New York Times Magazine, http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html (accessed 30 April 2015). 13 Friedman, M. ([1962], 2000) Capitalism and Freedom, netLibrary: Boulder, CO. 14 Friedman, M. (13 September 1970) “The Social Responsibility of Business Is to Increase Its Profits”, N ew York Times Magazine, http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html (accessed 30 April 2015). In this article, Friedman writes, “Insofar as his actions in accord with his ‘social responsibility’ reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.” 15 Jensen, M. C. and Meckling, W H. (1976) “Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure”, Journal of Financial Economics, 3, pp. 305–360. 16 Brummer, J. J. (1991) Corporate Responsibility and Legitimacy: An Interdisciplinary Analysis, Greenwood Press: New York; Jensen, M. C. (2001) “Value Maximization, Stakeholder Theory and the Corporate Objection Function”, Journal of Applied Corporate Finance, 14 (3), pp. 8–21. 17 Donaldson, T. (1983) “Constructing a Social Contract for Business”, in T. Donaldson and P. Werhane (eds) Ethical Issues in Business, Prentice-Hall: Englewood Cliffs, NJ, pp. 153–165; McWilliams, A. and Siegel, D. (2001) “Corporate Social Responsibility: A Theory of the Firm Perspective”, Academy of Management Review, 26 (1), p. 118. 18 Freeman, R. E. (1984) Strategic Management: A Stakeholder Approach, Pitman: Boston; Carroll, A. B. (1999) “Corporate Social Responsibility: Evolution of a Definitional Construct”, Business & Society, 38 (3), pp. 268–295. According to Carroll, it is Freeman who has popularized the stakeholder concept in the context of CSR (see p. 290). 19 Freeman, R. E. (1984) Strategic Management: A Stakeholder Approach, Pitman: Boston. 20 Ansoff, H. I. (1984) Implanting Strategic Management, Prentice-Hall: Englewood Cliffs, NJ.

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According to a study by Berman et al. (1999), corporate agents’ concern for stakeholders, or their practice of CSR, may on the one hand help resolve challenges in stakeholder management and, on the other hand, help improve their firms’ financial performance.21 Despite increasing buy-in on the strategic importance of CSR, there is still no congruence on the foundation or scope of CSR, or even on the term’s definition. According to Balabanis et al. (1998), “Different aspects of a firm’s operations can be seen to come under its sway – depending on the stance one adopts.” 22

Defining CSR: What Leading Organizations Say

The World Business Council for Sustainable Development (“WBCSD”)23 WBCSD represents 200 companies from “all business sectors, all continents and combined revenue of over $US 7 trillion - to share best practices on sustainable development issues and to develop innovative tools that change the status quo.”24 It defines CSR as “the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large.”25 With 200 companies around the world in a wide array of sectors, these practitioners’ view on CSR ought to be a good representation of the commercial world’s views on the subject. The European Commission (“EC”) The EC’s CSR definition is simple: “the responsibility of enterprises for their impacts on society.”26 In the same document, EC weighs in on enterprises’ CSR execution as follows: “…enterprises should…have a process in place to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close cooperation with their stakeholders.” The aim is to “create returns on investment for…shareholders” and ensure “benefits for the company's other stakeholders,”, while being able to “identify, prevent and mitigate possible adverse impacts which enterprises may have on society.” The United Nations (“UN”) The UN’s CSR definition takes a very practical approach, spelling out the lowest possible standards under which corporations could be said to have practiced CSR: “A minimum standard for CSR might be that businesses fulfil their legal obligations or, if laws or enforcement are lacking, that they ‘do no harm.’ A median approach goes beyond compliance, calling for businesses to do their best, where a ‘business case’ can be made, to contribute positively to sustainable development by addressing their social and environmental impacts, and potentially also through social or community investments. A maximum standard points toward the active alignment of internal business goals with externally set societal goals (those that support sustainable development).”27

21 Berman, S., Wicks, A., Kotha, S. and Jones, T. (1999) “Does Stakeholder Orientation Matter? The Relationship Between Stakeholder Management Models and Firm Financial Performance”, Academy of Management Journal, 42 (3), pp. 488–506. 22 Balabanis, G., Phillips, H. C. and Lyall, J. (1998) “Corporate Social Responsibility and Economic Performance in the Top British Companies: Are They Linked?”, European Business Review, 98 (1), p. 27. The quote is the conclusion of Balabanis et al.’sCSR literature review. 23 WBCSD it is “a CEO-led organisation of forward-thinking companies that galvanizes the global business community to create a sustainable future for business, society and the environment.” There are “200 member companies - who represent all business sectors, all continents and combined revenue of over $US 7 trillion - to share best practices on sustainable development issues and to develop innovative tools that change the status quo.” World Business Council of Sustainable Development (n.d.) “About”, http://www.wbcsd.org/about.aspx (accessed 3 May 2015). 24 World Business Council of Sustainable Development (n.d.) “Corporate Social Responsibility (CSR)”, http://www.wbcsd.org/work-program/business-role/previous-work/corporate-social-responsibility.aspx (accessed 3 May 2015). 25 Ibid. 26 Press Release Database (25 October 2011) “Corporate Social Responsibility: a New Definition, a New Agenda for Action”, European Commission, http://europa.eu/rapid/press-release_MEMO-11-730_en.htm (accessed 3 May 2015). 27 United Nations (February 2007) “What CSR is… and is Not”, Sustainable Development Innovation Briefs, 1, http://www.un.org/esa/sustdev/publications/innovationbriefs/no1.pdf (accessed 3 May 2015).

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The UN acknowledges that there are difficulties in defining CSR due to two factors: 1. “the extent to which importance is placed on the centrality of the ‘financial business case’ for responsible business behaviour in defining the scope of CSR practices — i.e. the extent to which tangible benefits to companies must be demonstrable” 2. “the extent to which government is seen to have a role in framing the agenda — and how.”28

Discussion • Like the academic world, representative organizations such as the ones listed above

differ in their definitions of CSR. While the WBCSD reflects corporate views on the nature of CSR, the EC demonstrates how governments and societies expect organizations to practice it. The UN definition is all-embracing and reflects the harsh reality that even influential organization such as the UN find it difficult to come up with a single universally agreed-upon definition.

• While academics point out that profitability and legal obligations are both CSR pre-

requisites, WBCSD leaves both untouched, while the EC and UN highlight the fulfilment of legal obligations as the minimum standard.

• Both the academic and business worlds acknowledge the importance of stakeholders.

The CEO-lead WBCSD sees the workforce and its families as the essence of organization’s stakeholder responsibility, while the EC defines it more vaguely and widely.

• The WBCSD sees CSR as an instrument that brings business benefits, while the EC holds that CSR is one of the factors that corporations must manage at both the operational and strategic levels.

1. What are the arguments for and against CSR practices?

Argument for CSR Practices Davis puts forward a list of “arguments for social responsibility.”29 1. Long-run self-interest: “The firm which is most sensitive to its community needs will as a

result have a better community in which to conduct its business.”30 2. Public image. 3. Business viability: “the institution of business exists only because it performs valuable

services for society.”31 4. Avoidance of government regulation: socially responsible corporate practices render new

restrictions unnecessary. 5. Sociocultural norms: “profits are sought and achieved within a particular set of social

norms” and the corporate “manager has a utility function in which he desires more than economic satisfaction.”32

28 Ibid. 29 Davis, K. (1973) “The Case For and Against Business Assumption of Social Responsibilities”, Academy of Management Journal, 16, pp. 312–322. The quote and arguments are from pp. 313–317. 30 Ibid. (p.313) 31 Ibid. 32 Davis, K. (1973) “The Case For and Against Business Assumption of Social Responsibilities”, Academy of Management Journal, 16, p. 315.

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6. Stockholder interests: Henry C. Wallich’s (1970) analysis is reported to demonstrate that “types of responsive behaviour which bring returns to the corporate sector as a whole actually operate to the benefit of the holder of a diversified portfolio.”33

7. Let business try. 8. Business has the resources. 9. Problems can become profits. 10. Prevention is better than cure.

Non-Supportive Arguments

Studies also indicate conflicting results in the correlation of CSR practices and financial performance. Scholtens (2008) reports, “There are different opinions about the interaction between financial and social performance and the empirical research has not arrived at a consensus.… Margolis and Walsh (2001)…find that corporate social performance is treated as an independent variable in most studies. This variable is used to predict or precede financial performance. Approximately 50% of the studies found a positive relationship between the two, 25% found no relationship, 20% had mixed results and 5% had a negative relationship.”34 The inconsistent correlation between CSR and financial performance is illustrated by Lee et al (2012).: “Scholars have found a positive, a negative, a curvilinear, and even a zero effect of CSR on CFP (Aupperle et al., 1985; Barnett and Salomon, 2006; Bhattacharya and Sen, 2004; Hillman and Keim, 2001; McWilliams and Siegel, 2000; Preston and O’Bannon, 1997; Wu, 2006).”35 1. Why and how should a company report its CSR practices?

Why CSR Reporting? Vurro and Perrini (2011) report: Theoretical and empirical investigations have converged on identifying multiple underlying drivers of the impact of CSR disclosure on corporate social performance.… First of all, superior performers are expected to have an incentive to disclose their commitments and attainments in fields other than the relationships with shareholders (Verrecchia, 1983)… Disclosure through ad hoc reports acts as a signalling exercise aimed at differentiating the company in the eye of interested stakeholders, thus avoiding potential adverse selection risks and the exposure to future social costs (Dye, 1985)… [D]isclosure and reporting function as legitimacy devices realigning stakeholder perceptions and expectations about actual changes in corporate behaviour, highlighting accomplishments in critical areas, justifying intentions, acts and omissions (Patten, 2002)… [T]he practices of CSR disclosure mirror certain adaptive managerial styles to dealing with an increasingly dynamic environment (Bowman and Haire, 1975).36

33 Davis, K. (1973) “The Case For and Against Business Assumption of Social Responsibilities”, Academy of Management Journal, 16, p. 316. 34 Scholtens, B. (2008) “A Note on the Interaction Between Corporate Social Responsibility and Financial Performance”, Ecological Economics, 68, pp. 46–47. 35 Lee, S., Singal, M. and Kang, K. H. (2012) “The Corporate Social Responsibility–Financial Performance Link in the U.S. Restaurant Industry: Do Economic Conditions Matter?” International Journal of Hospitality Management, doi: 10.1016/j.ijhm.2012.03.007. 36 Vurro, C. and Perrini, F. (2011) “Making the Most of Corporate Social Responsibility Reporting: Disclosure Structure and Its Impact on Performance”, Corporate Governance, 11 (4), p. 461.

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The Global Reporting Initiative (“GRI”) listed the benefits for organizations in reporting CSR as follows:37 “Internal benefits for companies and organizations can include: • Increased understanding of risks and opportunities • Emphasizing the link between financial and non-financial performance • Influencing long term management strategy and policy, and business plans • Streamlining processes, reducing costs and improving efficiency • Benchmarking and assessing sustainability performance with respect to laws, norms,

codes, performance standards, and voluntary initiatives • Avoiding being implicated in publicized environmental, social and governance failures • Comparing performance internally, and between organizations and sectors • External benefits of sustainability reporting can include: • Mitigating – or reversing – negative environmental, social and governance impacts • Improving reputation and brand loyalty • Enabling external stakeholders to understand the organization’s true value, and tangible

and intangible assets • Demonstrating how the organization influences, and is influenced by, expectations about

sustainable development • Many GRI publications examine organizations' experiences with sustainability reporting,

including the benefits they have experienced.” 38 Besides voluntary reporting, more and more countries have instituted mandatory and statutory CSR reporting requirements. Harvard University provides a tracking of the developments of CSR reporting requirements by the governments and stock exchanges of 42 nations.39

CSR Reporting—What and How According to KPMG, the most popular guidelines for disclosure initiatives in 2013 were the Global Reporting Initiative (“GRI”) G3 (2006) or G4 (2013) guidelines, which 78 percent of reporting companies utilized. The GRI’s Sustainability Reporting Framework provides guidance for organizations to voluntarily report on their environmental, social, and governance (ESG) performance. In support of those preparing corporate sustainability reports, the GRI offers Reporting Principles, Standard Disclosures and an Implementation Manual. Their guidelines are developed through a dialogue with stakeholders from around the world, including representatives from business, civil society, financial markets, labour, and government.40 The following section introduces the G4 guidelines published by the GRI in 2013. Unless otherwise stated, the information below is extracted from that source.41

37 The Global Reporting Initiative “promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development.”. Global Reporting Initiative (n.d.) “About GRI”, https://www.globalreporting.org/Information/about-gri/Pages/default.aspx (accessed 3 May 2015). 38 Global Reporting Initiative (n.d.) “About Sustainability Reporting”, https://www.globalreporting.org/information/sustainability-reporting/Pages/default.aspx (accessed 3 May 2015). 39 Initiative for Responsible Investment at Harvard University (n.d.) “Corporate Social Responsibility Disclosure Efforts By National Governments and Stock Exchanges”, http://hausercenter.org/iri/wp-content/uploads/2015/04/CSR-3-27-15.pdf (accessed 3 May 2015). 40 Ibid. 41 Global Reporting Initiative (2013) “G4 Sustainability Reporting Guidelines”, https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf (accessed 3 May 2015).

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Reporting Principles The GRI lists the following principles with respect to the content and quality of sustainability reporting: A. Stakeholder Inclusiveness: The organization should identify its stakeholders, and explain

how it has responded to their reasonable expectations and interests. B. Sustainability Context: The report should present the organization’s performance in the

wider context of sustainability. C. Materiality: The report should cover aspects of CSR that:

• Reflect the organization’s significant economic, environmental and social impacts; or

• Substantively influence the assessments and decisions of stakeholders D. Completeness: The report should include coverage of material aspects and their

boundaries, sufficient to reflect significant economic, environmental and social impacts, and to enable stakeholders to assess the organization’s performance in the reporting period.

E. Balance: The report should reflect positive and negative aspects of the organization’s performance to enable a reasoned assessment of overall performance.

F. Comparability: The organization should select, compile and report information consistently. The reported information should be presented in a manner that enables stakeholders to analyse changes in the organization’s performance over time, and that could support analysis relative to other organizations.

G. Accuracy: The reported information should be sufficiently accurate and detailed for stakeholders to assess the organization’s performance.

H. Timeliness: The organization should report on a regular schedule, so that information is available in time for stakeholders to make informed decisions.

I. Clarity: The organization should make information available in a manner that is understandable and accessible to stakeholders using the report.

J. Reliability: The organization should gather, record, compile, analyse and disclose information and processes used in the preparation of a report in a way that they can be subject to examination and that establishes the quality and materiality of the information.

Standard Disclosures GRI lists two different types of Standard Disclosure: General Standard Disclosures and Specific Standard Disclosures. General Standard Disclosures should cover: • Strategy and Analysis • Organizational Profile • Identified Material Aspects and Boundaries • Stakeholder Engagement • Report Profile • Governance • Ethics and Integrity Specific Standard Disclosures include: • Disclosures on Management Approach • Economic, Environmental and Social Indicators The GRI also details a proposed report structure. Teachers who wish to show students the entire G4 standard on CSR reporting should consult the original guidelines for details. Teachers may choose to use the HSBC sustainability report to show how corporations, in practice, follow and expand sustainability reporting based on G4 standards.

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Synthesis

The case depicts how HSBC incorporates sustainability as an integral part of its business. Through the case, students can appreciate the rationale behind HSBC’s sustainability policy, and its implementation in its operations around the world. The case also introduces students to a comprehensive framework on sustainability reporting.

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