**1. Introduction**

#### **1.1 Banks' commitment to corporate social responsibility**

The concept of Corporate Social Responsibility (CSR) stems from the need for companies to interconnect the needs of the community with the various sources of profit. The growing interest in CSR issues, especially in banks, is the result of a cultural journey that sees the company react to market changes and to be the protagonist of an increasingly sustainable future.

Corporate social responsibility is understood: "*companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis*" [1]. In other words, the company integrates social and environmental interest among its strategic objectives. Together with the financial and environmental aspects, the ethical value of banks is more important for the development of both productive and marketing strategies, representing a new tool

of competitiveness [2]. At the beginning of the 1970s, the first CSR studies were born to analyze the correlation between social issues and economic performance. However, it was in the 1990s that there was a real explosion of the CSR issue [3, 4].

The prevailing approach up to this period was that there was a negative correlation between the ethical and social orientation of the investor and the economic performance. It was believed that investing in good behavior practices would reduce the number of available investment alternatives and possibly damage economic performance.

The spread of sustainable investments in financial markets, the development of ethical stock market indices and ethical rating methodologies, has helped to affirm the belief that there are economic benefits related to the assumption of corporate social responsibility. In fact, investing in socially responsible behaviors can also bring economic benefits.

In line with these considerations, CSR is not a follow-up to profit, but sees it as a profit-making option. In banking, CSR is an important aspect of the company's strategy and it must have a substantial value in its business. In other words, it is necessary to integrate CSR into strategies, processes, operations as well as daily relationships with stakeholders. If sustainability enters these areas, then it can effectively contribute to the resilience of the economic and social fabric, foster confidence in the market and the acceleration of the recovery from the crisis [5].

Since the last economic crisis, the deteriorating economy along with numerous banking scandals has provided a new and challenging environment for the banking sector. At the beginning of the crisis, scholars discussed its impact on social investment [6, 7]. Some predicted a sharp reduction in CSR budget costs if they were perceived as non-core assets, while others believed that companies strategically engaged in CSR would continue to spend in this area, despite the challenging economic environment. Banks are blamed primarily for the financial crisis that caused economic turmoil [8, 9].

Corporate scandals, lack of transparency and subsequent government bailouts have undermined public confidence in the banking sector. Several authors argued that the positive results of the CSR be particularly remarkable in the banking sector, as banks have had a reputation tarnished in the wake of the financial crisis [8, 10]. Transparency is very relevant in restoring bank reputation, which may explain why financial companies report significantly more information about CSR than other industries [11]. CSR acts as a protection of the company's market value in times of crisis [12, 13]. While general mistrust in the financial sector has had a negative effect on reputation and therefore performance, CSR strategies could mitigate these results. In this way, CSR can be considered preventative in times of noncrisis because it improves reputation. However, it is also interesting to consider the effect of CSR in a post-crisis situation as a tool to restore reputation and mitigate a reputational crisis following corporate scandals [14, 15].

Absent or incorrect CSR policies have a much greater negative effect on performance than the positive effects of correct policies. However, the recent recession in the world economy, particularly in Europe, has shed light on some management scandals and the lack of integrity in the European banking sector. This has had a negative impact not only on bank returns but also on bank reputation. Banking governance plays a crucial role in the implementation of CSR practices. It is believed that sustainable measures lead to reputation and performance improvement when management demonstrates strong ethical leadership [16, 17]. In the banking sector, some sustainable policies have not been able to improve reputations and returns since the start of the financial crisis [18]. Unethical practices and mismanagement in several European banks have caused anger, and distrust of the sector that has received public bailouts, while some bank executives have been paid exorbitant

#### *A State of the Art of Corporate Social Responsibility in Financial Institutions DOI: http://dx.doi.org/10.5772/intechopen.94477*

bonuses. As a result, the ethical leadership and credibility of the banks were called into question, resulting in a major loss of reputation, as the public perceived discrepancies between the CSR directives of bank executives and their effective behaviors [19]. In this scenario, investments in CSR have failed to improve reputation due to weak business leadership. After one of the deepest economic crises in history, banks perceive CSR as a means of restoring their image and credibility [20–23]. The banking sector's commitment to more sustainable practices has interesting implications. In fact, banks can play an important role in economic development [24] because they decide how to allocate financial resources to different companies and sectors. Non-responsible companies pay an additional cost on bank financial income than the companies responsible because investments in CSR reduce risk and are more attractive to lenders [25]. Therefore, the involvement of banks in CSR practices should benefit the bank itself and promote the adoption of sustainable practices by potential borrowers, thereby having a positive impact on sustainable growth [26]. This makes the financial sector unique when considering the effects of CSR practices. In the banking sector, CSR covers many activities such as lending, wealth management, the operation of payment systems and risk management [27]. All of these factors are able to significantly influence society and its surroundings. For this reason, banks should fully integrate CST into their business strategies and see it as a strategic tool that can improve relationships with stakeholders, resulting in positive impacts both in terms of consensus and confidence and performance. If a bank acts in a socially responsible way, it creates the basis for consolidating its long-term presence in the market, emphasizing its contribution to environmental quality and society. CSR's business affects all stakeholders involved in the business with different capabilities and with different expectations [28]. The CSR is taking on a crucial role among academics and researchers, thanks to its ability to jointly consider all aspects of operations: economic, environmental and social [29]. This is the approach of the so-called triple bottom line [30], according to which the assessment of benefits must cover not only the economic aspects, but also the environmental and social aspects.

Undoubtedly, there is the need for integrated communication between the criteria for implementing CSR practices. Disclosure of CSR is regulated by national and international self-regulatory measures. It is a voluntary disclosure and this faculty is linked to the very essence of ethics, inevitably influenced by specific business activities and difficult to define without proper contextualization.

Among the most relevant CSR provisions are the OECD Guidelines [31], which suggest that integrated relationships should be adopted. In addition, the Global Reporting Initiative (GRI) guidelines for sustainable reporting include the principles needed to define report content (Materiality, stakeholder inclusion, sustainable context and comprehensiveness) and relationship quality. They also include standard disclosure: organizational strategy and profile, management approach and performance indicators (economic, environmental and social).

European banks are more concerned about environmental, social and governance issues than their competitors based in other parts of the world. This can be confirmed, for example, by the proportion of signatories to Equator Principles [32], with European institutions accounting for 42% of all adopters compared to North American, Latin American and Asian entities, representing 17%, 12% and 9% of all signatories respectively [33].

European banks, as the first to adopt sustainability practices, can be a benchmark for their peers in other regions. In addition, in Community area the banking sector is known for the relevance of bank income in overall financial intermediation compared to other regions, such as the United States, where capital markets are the main source of financing. In fact, in the European banking-based financial system [34], banking is three times the EU's total GDP [35], unlike other advanced

#### *Corporate Social Responsibility*

economies, namely the United States, where a market-based system prevails that derives in a lower percentage of banking intermediation in the economy, where bank assets roughly correspond to GDP.

Today, banks pay attention to corporate social responsibility as an additional lever of innovation and development to better compete in the market in the medium and long term. Taking a CSR path is an opportunity for the bank to: (i) improve proactive risk governance by integrating social, environmental and government variables into their corporate governance system; (ii) listen to the needs of your stakeholders and innovate the development of products, services and business models; (iii) make explicit the implications that the role of money brokerage has on the company and maximize the creation of a shared value.
