Bringing the environment into bank lending: implications for environmental reporting
Introduction
The field of social accounting is an amorphous and shifting one, but its mission is, above all, to extend the accountability of organisations beyond the traditional role of simply providing a financial account to capital providers, in particular shareholders (Owen et al., 1997). Thus much social accounting work, particularly of the non-empirical variety, represents a reaction to the privileging of finance as a factor of production in the capitalist system. While some social accounting authors seem to want markets to work ‘better’—in a relatively narrow sense—many others are more critical of capitalism, seeing the provision of information as challenging anti-social behaviour by companies (Perks, 1993); or they are more interested in other stakeholders, such as employees (Foley and Maunders, 1977). However, there appears to be a long-standing consensus within accounting circles that loan creditors, of which banks are the major constituent, have reasonable rights to information to enable them to make decisions (ASSC, 1975). Although the decision usefulness approach as an overarching perspective has its descriptive and normative limitations (Laughlin and Puxty, 1981, Puxty and Laughlin, 1983), the behaviour and attitudes of banks as users of information are still of some relevance, even if they are not necessarily of overriding importance. Moreover, if financiers were to demand social information, their relatively powerful position could perhaps be used to leverage the volume and quality of social reporting to the benefit of all. They are therefore a legitimate focus for empirical work on social accounting.
Social accounting contains many diverse strands and themes, but with the dramatic increase in concern about the natural environment around 1990, during much of the 1990s the environment was a major focus of attention in social accounting (e.g. Deegan and Rankin, 1997, Deegan and Rankin, 1999, Gray, 1990, Owen, 1992). Indeed, the environment moved from being an ‘also’ to being a matter of ‘central importance' (Gray, 1992, p. 400). At the same time, there were increasing calls for banks to take account of the environment in their lending activities. Bankers would appear to need appropriate information if they are to factor environmental issues into lending decisions. If their needs were met, this might be of value to other user groups too.
The aim of this paper is to generate insights into the environmental information used or desired by banks when making lending decisions which take account of environmental issues. In particular, the paper reports on:
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the reasons behind incorporating environmental criteria into the lending decision process;
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the environmental issues of most importance to the lending institutions;
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the major information sources used when making a lending decision where environmental factors are significant, with particular attention paid to the relative importance of the corporate annual report;
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the usefulness of various parts of the corporate annual report in providing information on environmental issues and a company's environmental performance;
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the degree of satisfaction with the corporate annual report in providing environmental information for lending decision-making purposes and the ways in which environmental reporting practice could be improved from a lender's point of view.
Banks have received little attention in the social accounting literature, and although there has been a significant amount of research into lending decisions generally, there has been very little work which has studied how banks satisfy their perceived needs for information relating to the environment and how they might wish the provision of information to develop in the future. Thus the paper offers a contribution to the literature on bank lending, in addition to the important environmental strand within the literature of social accounting.
The remainder of the paper is structured as follows. First, the empirical study is put in context by means of a discussion of bank lending and the environment. Second, the research method is described. Third, the principal results are presented and discussed. Finally, the results are discussed as a whole and related back to the issues covered in the early part of the paper.
Section snippets
Bank lending and the environment
Lending institutions, such as banks, do not produce hazardous chemicals or discharge toxic pollutants into the air, land or water. However, it has been increasingly recognised that through their lending practices banks are inextricably linked to commercial activity that degrades the natural environment (Sarokin and Schulkin, 1991, Smith, 1994, Gray and Bebbington,. 2001). They can be seen as facilitators of industrial activity which causes environmental damage.
Recognition of the relevance of
Research method
The main part of the study involved a postal questionnaire survey. The questionnaire—which was based on the research of Harte et al. (1991), who in turn had based their work on Rockness and Williams (1988)—was pilot-tested with two prominent academics in the field of environmental accounting, two senior bank executives and two representatives from organisations involved with environmental issues—Business in the Environment and the Ethical Investment Research Service (EIRIS). The feedback
Findings
The findings from the questionnaire survey, supplemented by material from the interviews where appropriate, will be presented in five sub-sections: the incorporation of the environment into lending decisions; the environmental issues addressed; the information sources used; areas of the corporate annual report used; and views on environmental disclosure.
Incorporating the environment into lending decisions
A clear but not overwhelming majority of respondents (60%) had a formal corporate lending policy which incorporated environmental considerations. Using the χ2-test, signatories of the UNEP statement were found to be significantly more likely (at the 5% level) to have such a policy than non-signatories. However, in practice the two groups appeared equally likely to include an appraisal of environmental risks as a part of their credit risk assessment procedures (87% overall). One reason is that
Environmental issues addressed
Respondents were asked whether they thought there were reasons to avoid lending to a company altogether (see Table 2).
As can be seen from Table 2, few respondents indicated that they avoid lending to companies involved in those industry sectors which are commonly regarded as environmentally sensitive and accordingly of high risk—including, perhaps surprisingly, the nuclear industry. Rather than placing a blanket exclusion on particular industries, the only factor that came out as important was
Information sources used
Respondents were asked to indicate how often they used different sources of information when making a lending decision where environmental factors were significant. Drawing on Harte et al. (1991), a list of sources was provided with five categories of frequency ranging from ‘never use’ to ‘always use’. Respondents were requested to tick the appropriate box. The results are presented in Table 4.
Published annual company reports and accounts, followed by information obtained on company visits and
Areas of the corporate annual report used
Respondents were asked for their views regarding the usefulness of specific parts of the annual report and accounts in providing information concerning a company's environmental performance. The results are shown in Table 5.
Table 5 shows that the most useful parts of the annual report are, in general, the more text-based ones—the directors' report, chairman's report and notes to the accounts.
These results are broadly similar to the findings reported by Harte et al. (1991) on ethical investment
Discussion and conclusions
Proponents of a decision usefulness approach would tend to argue that loan creditors are a key user group and should, ceteris paribus, accordingly be provided with relevant and reliable information. Based on the findings of the postal questionnaire survey, together with interview findings, discussed in the previous section, there is evidence of some interest by banks in environmental information on companies, including some desire for the information available to them to be improved in various
Acknowledgements
The financial assistance of the Nuffield Foundation in conducting the empirical study drawn upon in this paper is gratefully acknowledged. The authors are grateful for the help and suggestions of Andrea Coulson, Colin Drury, Rob Gray, Linda Lewis, David Owen, Brian Strudwick and David Woodward regarding the conduct of the research.
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