Integrative Case 2

HSBC: Banking on CSR?

Founded in 1865, the HSBC Group is one of the world’s largest banking and financial services

organisations. Serving 100 million customers through personal financial services and

commercial banking, the group employs more than 300,000 people and has an asset base of US

$2.5 trillion. 1 With a network spanning more than 80 countries and territories, and listings on the

London, Hong Kong, New York, Paris and Bermuda stock exchanges, little wonder it proclaims

to be “the world’s local bank”.

CSR at HSBC

With the recent global meltdown, and protests such as the Occupy movement heavily targeting

the failings of the financial sector, the issue of “responsible banking” is high on the public

agenda. As a result, the financial services industry has increasingly found itself trying to manage

renewed regulatory pressures and regain a sense of credibility with customers, politicians and the

general public. Under the glare of constant media attention, the need for banks to be (or be seen

to be) more responsible and enhance their positive contribution to society has gained

unprecedented importance since the onset of the crisis in 2008. And with banks being critical to

the flow of global finance, many pressing concerns are related to the very core of their business

practices. As HSBC said in its 2011 Annual Report2:

society at large. The fundamental role that banks play in intermediating between savings and

lending is essential to economic growth. Throughout the world, access to financial services helps

businesses to flourish and economies to develop. Those services help individuals provide for

their families; put a roof over their heads; and live a comfortable retirement. We also help

companies to grow and prosper by enabling them to access debt and equity, as well as providing

them with a wide range of products that facilitate trade. In this way, we connect our customers to

the opportunities that will help them realise their ambitions.”

As one of the largest global financial institutions, HSBC is heavily exposed to the challenge of

developing a responsible approach to banking, and it faces a range of potential social

responsibility issues across its span of operations. These range from questions of where it invests

its money, all the way up to how it manages its environmental footprint, and what it is doing to

promote financial inclusion.

At the group level HSBC frames its CSR practices in the context of “sustainability”. This is in

contrast to some of its competitors, such as Citibank which talks primarily about “responsible

finance”, Barclays which focuses on “citizenship”, and Deutsche Bank which uses the heading of

“corporate social responsibility”. But regardless of the terminology, the issues faced by the

global banking industry are broadly similar. “Sustainability” at HSBC is presented in terms of

“managing our business across the world for the long term” and involves the main business

stakeholders: “that means achieving sustainable profits for our shareholders, building long-

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lasting relationships with customers, valuing our highly committed employees, respecting

environmental limits and investing in communities.”3

Responsible lending and investment practices

Probably the main area where banks like HSBC impact on society is through their lending and

investment practices. A company such as HSBC lends billions of dollars every year to

individuals, companies and projects, which can have huge social and environmental

consequences, both positive and negative. For example, HSBC was one of the big players in the

US subprime mortgage market in the US that ultimately led to the financial crisis of the late

2000s. The bank bet heavily on mortgage loans to high risk (or “subprime”) borrowers but when

the housing bubble burst, many of those borrowers defaulted leaving the company with huge

amounts of bad debt. HSBC lost billions of dollars in the crisis, subsequently labelling its

subprime business a “catastrophic investment”.4 It closed down its subprime lending arm, and

continued to suffer losses of some US$2bn annually in its US business right into the 2010s as it

gradually wound down its operations5. Even so, by dint of its size and asset base, HSBC

remained one of the more secure international banks during the crisis.6

Beyond the social and ethical risks posed by individual lending, HSBC like all major banks, also

lends to businesses and makes huge capital investments in major projects, which of course, also

may pose significant social and environmental risks. HSBC uses two main frameworks for

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evaluating these risks, which it captures under the banner of “sustainable finance”, namely the

Equator Principles and the bank’s own sector policies.

Equator Principles. The Equator Principles are “a credit risk management framework used for

determining, assessing and managing environmental and social risk in project finance

transactions”7. They are intended to be a minimum standard under which project financing is

provided – that is, borrowers who are unable or unwilling to comply with the standards set out

under the Principles are not able to secure financing from Equator Principles signatories.

The Principles were launched in 2003 by several of HSBC’s global competitors under a

collaborative project with the International Finance Corporation (IFC), a part of the World Bank

Group. HSBC signed up to the principles a few months after the launch and has remained a

member since 2003. Altogether there are currently 77 adopting financial institutions, including

most of the world’s biggest banks.

The Principles provide HSBC with an internationally agreed way of ensuring that the projects

they finance are developed in a socially responsible manner and reflect sound environmental

management practices. Under the principles, any potential funding projects with capital costs

exceeding $10m are rated depending on their degree of potential social and environmental risks.

In high or medium risk projects action plans are devised to address the potential risks; if these

plans are deemed adequate, an agreement to lend money may be made, on the condition that the

action plan is followed. Independent monitoring is then implemented to ensure compliance with

the standards over the period of the loan. In 2010, transactions worth US $6.7 billion were
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approved by HSBC using the Equator Principles framework. Of this, almost one quarter of the

total amount (US $1.6) was accounted for high risk category A projects, whilst about 60% of

transaction value was accounted for by category B, medium risk projects. 8

Sector policies. While the Equator Principles represent an internally agreed and rigorous

framework for assessing and managing the social and environmental risks of bank lending, they

only apply to large projects. However, HSBC’s sector policies are both more specific (in that

they only apply to HSBC, not any other financial institutions) and more encompassing (since

they are applicable to all projects, regardless of size). 9 These policies currently cover eight broad

sectors ranging from defence to forestry, and chemicals to mining. The policies specify what

areas the bank will or will not provide financial services in. For example, the chemicals sector

policy specifies that HSBC will not provide any forms of financial assistance to companies

involved in chemical weapons, or those participating in the manufacture, storage or

transportation of persistent organic pollutants (POPs)10. Meanwhile the mining sector policy

states both the activities that the bank will not provide financial services for (such as artisanal

mining or the mining of diamonds not certified as conflict-free) as well as those it has a

“restricted appetite” for (such as mines that have “no credible closure plan”). 11

Financial inclusion

In recent years, the extension of access to financial services to people otherwise unable to

participate in the formal banking sector has become a major area of growth in financial services.

Microfinance, where small sums are loaned to those excluded from conventional loans using
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innovative community-based borrowing systems, is probably the best known form of such

financial inclusion. HSBC entered the microfinance business with pilot projects in the mid 2000s

and currently operates commercial microfinance business in several emerging economies, most

notably India, Mexico, and Russia. Some of the bank’s global diversity as the world’s local bank

is played out in these businesses, featuring as they do some innovative variations such as an

Islamic microfinance project in Pakistan, and an employee volunteer programme with Bankers

without Borders to support microfinance institutions in the Middle East. 12 The bank was also the

first foreign bank to establish a banking business, HSBC Rural Bank, in China’s rural areas,

offering services specifically tailored to the needs of people and farmers in the many remote

rural regions of the country.

HSBC and environmental protection

As with other banks, HSBC has two main areas of environmental impact – its own business

operations and that of its customers. Over the past decade, climate change has become a central

theme of HSBC’s environmental programme as the bank has sought to take a leadership position

on climate in the sector. In 2005, it was the first bank to be recognized as carbon neutral in its

own operations, whilst in terms of its clients’ business, the bank has sought to position itself to

capitalize on potential opportunities emerging from the drive to meet climate goals. In 2007,

HSBC established the Climate Change Centre of Excellence as a central source of climate

knowledge. The centre aims to translate a wide range of expert inputs - from academic studies,

think tanks and government regulations - into business opportunities for the bank and its
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clients.13 As a result, the bank claims to have identified four main areas of opportunity in its

emerging “climate business”: low carbon energy production (such as renewables), energy

efficiency measures, climate adaption (especially in agriculture, infrastructure and water), and

providing climate finance, including environmental markets, debt and equity investment and

insurance14. These are all areas that the bank sees as growing areas for investment as the

transition to a low carbon economy is gradually effected.

Another major HSBC investment in climate change was the flagship US$100m, HSBC Climate

Partnership, which ran from 2007-2012. This five year programme was a collaboration with the

environmental NGOs, The Climate Group, Earthwatch, the Smithsonian Tropical Research

Institute, and WWF. It aimed at delivering pioneering climate research, developing new

methodologies and test projects, and creating new solutions to climate problems. HSBC’s

contribution was not only in terms of financial resources and expertise, but also the participation

of over 2000 employees who volunteered their time to take part in the partnership. According to

the project’s review and final report, the partnership succeeded in, among other things, delivering

the largest ever forest research project; it enabled 32 million more people to have access to

cleaner water; and protected an additional three million hectares of forestland.15

Responsibility in the workplace

The HSBC Climate Partnership is not only an example of how the company has sought to

address environmental issues, but also demonstrates something of its approach to engaging
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employees on social issues. The project as a whole involved 63,000 days of volunteering time,

and perhaps more critically, created a cadre of “climate champions” within the company who

had worked on major climate challenges along with HSBC’s partners in the project. These

projects varied from wildlife conservation to energy management within the workplace. The

partnership simultaneously offered online courses and training to help employees further the

cause of climate change. Back in HSBC, the climate champions subsequently integrated some of

their new knowledge into efforts to make the workplace more sustainable. One such project saw

the introduction of automatic shutting down of PCs overnight, which saved around 13m kw/h of

electricity and 2600 tonnes of CO2 in North America alone before being rolled out across the

entire Group during the 2010s. 16

Beyond employee engagement, one area where the HSBC workplace has received rather more

negative media attention has been its remuneration policy. In the early 2010s, when income

equality and executive pay became major touchstones of protests such as the Occupy movement,

HSBC was criticised for paying out high salaries to executives whilst simultaneously recording

falling profits and cutting back staff. For example, in 2011, whilst profits slipped 6%, the bank’s

bonus pool remained steady at £2.7bn, and more than 192 HSBC executives received pay in

excess of £1m, including £8.1m for its highest paid employee and £7.2m for its chief executive,

Stuart Gulliver17. Although union leaders denounced the situation as “astonishing” the

revelations were only made possible by the bank being the first UK bank to adopt new

transparency measures over executive pay.18

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Community initiatives

The “community” takes on many facets in a “glocal” (i.e. locally tailored, global in scope)

business such as HSBC. Programmes such as those discussed above on financial inclusion, for

example, seek to benefit underserved communities within the bank’s span of operations. Beyond

these commercial initiatives intended to generate new revenue streams, the bank also seeks to

make a contribution to the communities in which it operates through charitable donations and

support, as well as its more basic responsibilities to pay tax and thereby ensure that governments

are suitably resourced to provide for their citizens.

HSBC’s philanthropic work is largely focused around two main themes: the environment and

education. As described above, major programmes such as the Climate Partnership have been

developed to coordinate the firm’s corporate giving to environmental initiatives. Its educational

giving meanwhile includes projects such as Future First, a flagship project running in 49 of the

86 countries in which the company operates. The programme was established in 2006 as a

partnership between HSBC, SOS Children’s village, and local non profit organizations, offering

education and life skills training to orphans, homeless children and children in care. The

company’s $25 million commitment is directed towards scholarships, teacher training,

supporting school equipment, family support programmes and vocational training.19

Working within the same theme of education, HSBC also has a global financial education

programme, “JA More than Money” which teaches students about earning, spending, sharing,

and saving money, as well as potential careers. The programme is run in partnership with Junior
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Achievement (JA) Worldwide (known as Young Enterprise in the UK) and is facilitated by

HSBC volunteers. The programme currently runs in 32 countries and is targeted towards

teaching financial literacy and skills to 7-11 year olds.20

For all the impressive community development programmes established by HSBC, it has not

been immune to criticism regarding its overall contribution to the communities in which it

operates. Probably the main focus of negative attention has been its approach to taxation. In the

UK, the company joined the “least desirable club in the business world” in 2010 when it became

the latest in a line of targets of tax justice demonstrators. A number of the bank’s high street

branches were occupied by campaigners critical of the bank’s attempt to lower its tax burden by

more than $3bn through “behind closed doors” negotiations with the UK tax authorities. 21 The

following year, HSBC was investigated by the US Inland Revenue Service for purportedly

selling tax evasion services to some of its wealthy American customers of Indian origin. 22

Investigators claimed that a division of the bank had been encouraging its clients to set up

undeclared offshore accounts in India, which led to the bank severing ties with hundreds of its

clients23. A similar investigation followed in the UK regarding offshore accounts held at HSBC’s

private Swiss bank. 24 Again in 2012, the company was involved in a dispute with the UK tax

authorities over a potential $5bn tax bill for allegedly avoiding UK tax on dividends earned by

some of its overseas25

Clearly, for all its positive contributions to those in need in its many local communities, HSBC

faces the risk of major reputational risk if it is seen as evading its more basic responsibilities as a

good citizen for paying, and ensuring its customers pay, an appropriate amount of tax. Coupled
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with further scandals in its core banking functions in the 2010s, including what it acknowledged

as “shameful” system failures that allowed terrorists and drug barons to launder money through

its US and Mexico operations26, only served to underline the very real problems of putting in

place genuinely responsible banking in the world’s local bank.

Questions

1. What should constitute “responsible banking” for a company such as HSBC and how does it

differ, if at all, from normal banking practice? Does HSBC live up to expectations as a

responsible banker?

2. What are the market incentives and disincentives faced by HSBC in developing more

responsible banking? How do you think this will change in the future?

3. Using Utting’s four components of equality - social protection, rights, empowerment, and

redistribution – explain how HSBC’s approach to responsible banking contributes to greater

equality and suggest how it could realistically be enhanced.

4. To what extent do HSBC’s charitable and environmental activities contribute to the

company’s competitive advantage? From the perspective of competitive advantage, are there

any programmes that you think should be phased out or new programmes that you think that

should be developed?

5. What are the main impacts of HSBC on climate change and what is it doing to address these

impacts? What strategies might the bank have to develop in the future to move to a more

sustainable business model?

1
HSBC annual report 2010, http://www.hsbcpb.com/aboutus/about-hsbc-private-bank.html
2
HSBC in 2011, Connecting customers to opportunities: http://www.hsbc.com/1/PA_esf-ca-app-
content/content/assets/investor_relations/120420_hsbc_corporate_brochure.pdf
3
http://www.hsbc.com/1/2//sustainability
4
http://www.guardian.co.uk/business/2009/mar/02/hsbc-banking-cash-call
5
HSBC in 2011, Connecting customers to opportunities: http://www.hsbc.com/1/PA_esf-ca-app-
content/content/assets/investor_relations/120420_hsbc_corporate_brochure.pdf
6
Menon, J. 'HSBC to Raise $17.7 Billion as Subprime Cuts Profit', Bloomberg L.P., 2 March 2009:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGiiBHDGHLHY
7
http://www.equator-principles.com/
8
http://www.hsbc.com/1/2/sustainability/sustainable-finance/
9
http://www.hsbc.com/1/2/sustainability/sustainable-finance/sector-policies
10
http://www.hsbc.com/1/PA_esf-ca-app-content/content/assets/csr/chemicals.pdf
11
http://www.hsbc.com/1/PA_esf-ca-app-content/content/assets/csr/070810_mining_policy.pdf
12
http://microfinanceafrica.net/tag/grameen-jameel-microfinance/.
http://www.cpifinancial.net/news/post/1043/hsbc-amanah-to-launch-pilot-islamic-microfinance-programme-
13
http://www.hsbc.com/1/2/newsroom/news/2007/hsbc-hires-specialist-to-head-up-new-climate-change-centre-
of-excellence#top
14
http://www.hsbc.com/1/2/sustainability/sustainable-finance
15
http://www.hsbc.com/1/2/sustainability/hcp-2010
16
http://www.hsbc.com/1/2/sustainability/climate-partnership
17
http://www.guardian.co.uk/business/2012/feb/27/hsbc-192-staff-paid-one-million-pounds
18
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9109675/HSBC-chief-executive-Stuart-
Gulliver-paid-8m-as-profits-rise.html
19
http://www.hsbc.com/1/2/sustainability/future-first-achievements-aspirations
http://www.hsbc.com/1/2/sustainability/investing-in-communities
20
http://www.hsbc.com/1/2/sustainability/investing-in-communities
21
http://www.guardian.co.uk/business/2010/dec/19/big-business-defensive-tax-protesters
22
http://www.nytimes.com/2011/01/27/business/global/27hsbc.html
23
http://online.wsj.com/article/SB10001424052702304567604576456422610131228.html
24
http://www.ft.com/cms/s/2/1d318322-f5c0-11e0-bcc2-00144feab49a.html#axzz1vi0uWSkP
25
http://www.guardian.co.uk/business/2012/feb/28/hsbc-tax-bill-dispute-hmrc
26
http://www.guardian.co.uk/business/2012/jul/30/hsbc-700m-money-laundering-apology

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