Bringing the environment into bank lending: implications for environmental reporting

Abstract

In recent years, it has come to be recognised that banks' lending operations affect, and are affected by, the state of the natural environment. In particular, rising public concern about the state of the natural environment, as reflected in legislation and consumer attitudes, poses risks for the state of a bank's lending portfolio. Even if they are not directly concerned about the environment, banks therefore have an incentive to understand the environmental implications of their lending decisions. This generates a potential demand for environmental information on companies.

This paper reports on empirical research conducted to explore the interface between bank lending and the demand for environmental information. Based on a postal questionnaire survey of banks engaged in corporate lending in the UK, supplemented by a programme of semi-structured interviews, it reports on: the extent to which UK banks incorporate environmental considerations into their corporate lending decisions; the sources of information used by banks when making corporate lending decisions which involve environmental considerations; and lending bankers' views on developments in environmental reporting.

The results indicate, inter alia, the importance that bankers attach to the annual report, notwithstanding its traditional limitations as a source of information on corporate environmental impact, and some desire for extensions to environmental disclosure. However, those desired developments are relatively narrow in scope, mirroring banks' principal interest in protecting their loans, and tend not to extend to more comprehensive forms of environmental disclosure such as might be expected to be found in a separate corporate environmental report.

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:

• the reasons behind incorporating environmental criteria into the lending decision process;

• the environmental issues of most importance to the lending institutions;

• 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;

• the usefulness of various parts of the corporate annual report in providing information on environmental issues and a company's environmental performance;

• 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.