Examination of sustainability reporting practices in Indian banking sector

The emergence of GRI guidelines, UNGC principles, NVGs, and their role in promoting corporate sustainability

In the past two decades, various standards frameworks and guidelines have been developed that helps the business organizations to understand and incorporate the critical sustainability issues into their corporate strategy. The GRI guidelines, UNGC principles, and NVGs are widely adopted by the business organisation to enhance the understanding and adoption of sustainability reporting practices (Weber et al. 2014). The driving spirit behind these guidelines and principles is to make business organisations more responsible and drive them towards sustainable development. The companies adopting these principles and guidelines need to disclose information about their economic, environmental and social performance.

Global reporting initiatives (GRI)

GRI was established in 1997 as a non-profit independent organisation in Boston USA, to enable the business organisations to assess and disclose economic, environmental and social performance. GRI is the most widely used standard for sustainability reporting by business organisations. It has been adopted by almost 93% of the world’s largest 250 corporations across 100 countries (GRI 2018). It helps the companies to not only disclose nonfinancial performance but also encourages them to manage the impact of their activity on environment and reflect how they contribute towards sustainable development (Sethi 2017).

United nation global compact principles

The UN Global Compact’s ten principles are derived from; The Rio Declaration on Environment and Development, Universal Declaration of Human Rights, The International Labour Organization's Declaration on Fundamental Principles and Rights at Work, and The United Nations Convention Against Corruption. It encourages the companies to adopt a principle-based approach to incorporate sustainability by embracing the core values of human rights, labour standards, environment, and anti-corruption.

National Voluntary Guidelines (NVGs)

It is the most progressive framework for responsible business conduct and corporate sustainability in India. These guidelines were the result of the need for standardised framework in Indian context similar to other internationally accepted sustainability reporting frameworks (Mitra & Schmidpeter 2017). The basic rationale behind these guidelines is to provide a platform to companies in India to adopt and disclose their environmental and social performance through reporting of NVGs.

Sustainability reporting

The need for corporate sustainability and reporting of sustainable practices has acquired a pivotal importance in the past two decades. Disclosure of environmental and social performance has become an integral part of the company’s overall business strategy (Ghosh 2017). Nonfinancial performance disclosure in the form of CSR reports, BRR and Sustainability reports are perceived as strong commitment of the organisations towards adoption of sustainable practices by various stakeholders (Raman 2006). The nonfinancial reporting by companies started with disclosure of socially responsible practices followed by environmental performance disclosure as a part of corporate social responsibility reporting (Jenkins & Yakovleva 2006). The concept of nonfinancial reporting has been continuously evolving over the past three decades. Companies have now evolved the structure of non financial reporting from a miniscule couple or more sections in the annual report of the company to separate sustainability reporting. Such extensive reports involve complete disclosures of social and environmental performance of company’s operations (KPMG 2017). Business organisations have become more responsible and have adopted international guidelines on sustainability reporting like GRI. This creates benchmarks and higher levels of transparency in the disclosure (Milne & Gray 2007). According to KPMG (2015), more than 95% of the 250 world’s largest corporations publish sustainability reports. Various researches also suggest that organisations can benefit in many ways from CSR/sustainability reporting (Healy et al. 1999; Khan et al. 2009). There has been extensive research in developed and developing countries highlighting the nature and content of CSR disclosure of companies (like Gray et al. 1995; Willis 2003; Frost et al. 2005; Raman 2006; Roca & Searcy 2012; Khan et al. 2009; Boiral & Henri 2017; Ali et al. 2017).

Recently there is increased consciousness to adopt and report sustainability issues in financial institutions (Khan et al. 2009). Islam et al. (2016) noted that banks have exhibited conscious efforts to comply with environment related regulations and disclosure of environment management policy to incorporate environmental considerations in banking operations. The disclosure of environmental management policy is an integral part of sustainability reporting (Lock & Seele 2015). Banks are increasingly engaged in implementation of environment management system as it leads to reduced resource consumption and costs optimisation (Sahoo & Nayak 2007; Jizi 2014; Ihlen et al. 2014; Chaklader & Gulati 2015). Jeucken (2001) stressed on the disclosure of both qualitative and quantitative data on environmental care practices undertaken by banks in their nonfinancial reporting.

In sustainability reporting literature, social conduct of the financial institutions is most commonly measured through the extent of disclosure of various sustainability indicators in nonfinancial reporting i.e. community development programs, health care programs and training and development programs (Frost et al. 2005; Raman 2006; Murthy 2008; Belal 2008; Adams et al. 2008; Kopnina 2017). Banks are increasingly reporting financial literacy and financial inclusion initiatives as part of their nonfinancial disclosure to communicate socially responsible business conduct to various stakeholders (Kamath 2007; Sarma & Pais 2011). The disclosure of policies related to business ethics/values and human rights is an important tool to upturn transparency and sustainability performance of banking institutions (Jeucken 2001; Scholtens 2009). Islam et al. (2016) emphasised that implementation of anti-corruption and decent labour practices is essential to improve sustainability performance of financial institutions. Khan et al. (2009) noted that sustainability practices like environment management system, community development initiatives, business ethics, human rights and environmental policy are the basic content of global frameworks on sustainability such as GRI, UNGC principles etc.

Prior researches on CSR reporting in India

In one of the studies in the past century, Singh and Ahuja (1983) studied thirty three items of social disclosure in the annual reports of 40 public sector companies in India using content analysis. Porwal and Sharma (1991) conducted a study on public and private sector companies in India and concluded that private sector companies made lesser disclosure as compared to public sector companies. Raman (2006) analysed the extent and nature of social reporting of top 50 companies in India by studying how top management perceives CSR and CSR report. It was found the community involvement is a key component in the social reporting and more emphasis is placed on development of human resource. Chaudhri and Wang (2007) examined CSR disclosure of top 100 IT companies in India and found that CSR disclosure was considerably low and companies have not been able to leverage in terms of style of communicating CSR on to their websites. The quantity of CSR disclosure too is a question of concern. Murthy (2008) examined the annual reports of top 16 IT companies in India using content analysis and concluded that community development activities were the most common disclosure practices, then followed by environmental activities in the CSR reporting. Sustainability reporting in India is still in nascent stage and corporate sector is yet to fully recognize the relevance of CSR reporting for building a corporate reputation in a highly transparent market environment (Ghosh 2015). Ghosh (2017) also conducted empirical study on CSR reporting of select companies from 2009 to 2014 and analysed the CSR reporting practices for pre and CSR reporting mandate onset period. It was found that average CSR activities disclosure has increased in social reporting but still few companies publish a sustainability report separately. Jain & Winner (2016) examined CSR/ sustainability report of 200 largest public and private sector companies in India and concluded that standard CSR/sustainability reporting is still low but shows positive signs of reforms. Kumar & Kidwai (2018) conducted research on CSR disclosure of top 100 ET (2014) companies. It was found that only eight companies showed high transparency in their CSR disclosure and the companies focus heavily on social initiatives and human resource oriented activities in their disclosure. According to KPMG (2017) India has emerged as the top CSR reporting country along with Japan and Malaysia in Asia. CSR reporting by the companies has seen an improvement following the implementation of CSR rule of Indian Companies Act 2013. Education and health spending has been the major focus of companies CSR reporting. However, the quality of disclosure in CSR reporting is yet questionable and needs improvement.

Although CSR reporting by companies in India has witnessed an upsurge, the disclosure of sustainability report is in infant stage (Goel & Misra 2017). Given the role of banking sector in promoting sustainable development, it is pertinent to examine the current status of sustainability reporting practices in Indian banking sector.

Initiatives taken to promote corporate sustainability in India

The following discussion lists out the steps taken by The Government of India (GOI) to address sustainability issues in corporate conduct in the recent past. With a view to review the CSR practices and to ensure responsible business conduct at par with the global frameworks on sustainability (for example GRI, CDP), the Ministry of Corporate Affairs Government of India established National Voluntary Guidelines (NVGs) based on social, environmental, and economic responsibilities of business in July 2011. Following this, The Securities Exchange Board of India (SEBI) in August 2012 made it mandatory for top 100 BSE and NSE listed companies to disclose their CSR initiatives and adherence to the NVGs framework through their business responsibility reports (SEBI 2012). In 2013, India took a lead and has become the first country in the world to legislate spending of profits on CSR activities. Section 135 of Indian Companies Act, 2013 mandates all companies operating in India with a minimum net worth of Rs 500 crore or turnover of Rs 1000 crore or the net profit of at least Rs 5 crore, to spend at least 2% of their profits of the last three proceeding years on CSR activities. Schedule VII of Indian Companies Act 2013 specifically provides the list of ten activities where a company can spend to deliver its CSR obligations. The companies have to constitute CSR committee comprising three or more Board of Directors, responsible for preparing the CSR policy and review the practices undertaken by the company as per their CSR policy. The Reserve Bank of India (RBI) is also working on formulating policy framework for green financing to align Indian banking sector with other nations already having such policies (RBI working on green finance framework 2017). Rajput et al. (2013) noted that banking industry in India is running far behind when it comes to adoption of sustainability issues. It is high time to takes some major steps to gradually adhere to the international principles, guidelines that provide environmental and social performance parameters apart from financial viability criteria in project financing. The RBI notification, dated 20th November 2007 (RBI 2007–2008/216) highlighted banks need to act with responsibility and contribute to sustainable development so that the adverse impact on the environment can be reduced. RBI also advised banks to formulate an appropriate and efficient action plan with the approval of their respective board for helping the cause of sustainable development in India.

Overview of Indian banking sector

The Indian banking system is broadly classified into five categories- public sector banks (PSBs), private sector banks, foreign banks, regional rural banks (RRBs) and co-operative banks enshrined in the second schedule of Reserve Bank of India Act, 1934. There are 21 PSBs, 21 private sector banks, 43 foreign banks, 56 RRBs, 1589 urban cooperative banks and 93,550 rural cooperative banks (RBI 2017). In FY 2017, total banking sector assets in India aggregate to US$ 2.202 trillion and have increased at a CAGR of 8.83% between FY 2013 to 2017. The PSBs and private sector banks in India account for more than 90% of the total banking assets (RBI 2017). The PSBs occupy most dominant position in commercial banking in India. In term of total banking system assets, PSBs account for more than 70% (US$ 1.52 trillion) of the total banking assets, thereby leaving comparatively smaller share for private sector banks and foreign banks (RBI 2017). Traditionally, the burden of social development has largely been shouldered by PSBs and they have been in the forefront of channelizing financial resources from remote areas as well as expanding the outreach of banking services in the remotest part of the country (Chaudhary & Sharma 2011). Both PSBs and private sector banks have played a crucial role in meeting the resources required for a rapidly growing Indian economy and have been the main source of credit for various sectors of the economy (Kumar et al. 2016).

Content analysis

Content analysis is used as a research technique to focus on actual content (Miles & Huberman 1994). It is used to capture the data from reports or any other document and to quantify the presence or absence or extent of the required information (Gray et al. 1995; Kothari et al. 2009). Content analysis has been consistently used in prior social and environmental reporting researches (Hackston & Milne 1996; Unerman 2000; Adams & Frost 2008; Scholtens 2009; Haque & Deegan 2010; Islam & McPhail 2011; Pistoni et al. 2018; Landrum & Ohsowski 2018). With respect to the research questions, broad sustainability disclosure indicators were identified and then investigated from various reports of the banks. These indicators are derived from available literature and prominent sustainability standards & guidelines like GRI G4 guidelines, UNGC principles and NVGs. These standards have been used in previous researches as the basis for examining the extent of nonfinancial disclosure as discussed in the literature. The indicators are divided into three groups;

The first set is grouped as environmental indicators, which reflects how the banks take care of environmental issues. It includes environment policy, environmental management system, the disclosure of qualitative data about environmental care, and the disclosure of quantitative data about environment care (Jeucken, 2001; Scholtens 2009; Jizi 2014; Ihlen et al. 2014; Lock & Seele 2015; Islam et al. 2016). The second set is grouped as the social development conduct of the bank, which reflects on the broad areas of banks socially responsible practices and involves community development programs, health care program, training & education program, and financial literacy and access of financial services to deprived section of the society (Frost et al. 2005; Raman 2006; Belal 2008; Kamath 2007; Sarma & Pais 2011; Kopnina 2017). The third set is grouped as the internal socio-environmental conduct of banks, which reflects the various policies of banks related to business ethics/values, anti-corruption, human rights and labour practices (Jeucken 2001; Scholtens 2009; Islam et al. 2016). Further, this study identifies sustainability disclosure by banks, who specifically embrace environmental and social indicators provided in prominent sustainability-related disclosure frameworks such as GRI G4 guidelines along with specific financial service sector indicators, and NVGs on social environmental and economic responsibilities of business. However, it must be noted that certain indicators of GRI G4 guidelines were not included as it seemed impractical keeping in mind the nature of banking operations. Each bank was given a score of either 1 (present) or 0 (absent) for each indicator on the basis of whether the practices are undertaken by the bank or not and subsequently whether the bank discloses the same.

Hypotheses

The third objective of the study was addressed by testing following hypotheses.

H1: There is a significant variation in the disclosure of environmental consideration indicators between the PSBs and private sector banks in India.

H2: There is a significant variation in the disclosure of social development indicators between the PSBs and private sector banks in India.

H3: There is a significant variation in the disclosure of internal socio-environment conduct indicators between the PSBs and private sector banks in India.

Environmental consideration practices, social development practices, and internal socio-environment conduct are the three crucial dimensions of sustainability reporting. The understanding of the extent of disclosure by PSBs and private sector banks regarding these indicators is important for the development of sustainability reporting in Indian banking sector.

Analysis and findings

The nonparametric Mann-Whitney U test was performed in order to determine significant variation among the three categories of sustainability disclosure between PSBs and private sector banks in India. H1 and H3 are supported whereas, H2 is not supported. The results of Mann-Whitney U test reveal that the disclosure of environmental consideration indicators by PSBs (Mean = 25.5) is significantly higher than private sector banks (Mean = 17.5), U = 136.5, z = − 2.178, p = .029. The disclosure of internal socio-environmental conduct indicators by PSBs (Mean = 25.93) is also significantly higher than private sector banks (Mean = 17.07), U = 127.5, z = − 3.043, p = .002). However, there is no significant variation in the disclosure of social development indicators between PSBs (Mean = 22.50) and private sector banks (Mean = 20.5), U = 199.5, z = − 1.039, p = .299. The findings of the study show that both PSBs and private sector banks disclosed most of the social development indicators in their nonfinancial reporting whereas, the disclosure of environmental consideration indicators and the internal socio-environment indicator is better among PSBs as against private sector banks in India. The increased level of adherence to the NVGs and BRR disclosure by PSBs has lead to a higher level of sustainability disclosure.

The adherence to NVGs was quite low in case of private sector banks. Only eleven banks out of twenty-one private sector banks report NVGs in BRR. Principle 7 of NVGs was also the least reported principle with only 19% of total private sector banks reporting some kind of public policy of the bank. The detailed disclosure of each of the principles by the PSBs and private sector bank is shown in Table 2.