CSR and banking soundness: A causal perspective

• Author: Dhafer Saïdane,Sana Ben Abdallah,Mehrez Ben Slama
• DOI: http://doi.org/10.1111/beer.12294
• Published date: 01 October 2020
• Date: 01 October 2020

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  wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:706–721.© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

The last global c risis confirmed the impor tance of soundness for fi-

nancial instit utions in general and large ban ks in particular. Seeking

to improve their sou ndness after t he crisis, severa l banks star ted

to consider adopt ing an alternativ e approach based o n sustainabl e

development and the application of corporate social responsibil-

ity (CSR) pr inciples. Accor ding to the Europea n Commission, th is

approach integ rates social and e nvironmental co ncerns and takes

into account the opi nions of all the various stakeho lders (Renouard

& Ezvan, 2018). Ban ks play a very imp ortant role i n introducing

sustainable development practices in economic activities. Some

studies on this t opic have introduce d the concept of sust ainable

banking (Ben Ab dallah, Ben Slama , Fdhila, & Saïdane, 2018; Pa uget &

Saidane, 2010; Reba i, Azaiez, & Saidane, 2012 , 2016). A sustainable

bank is defined a s a strong instit ution with sta ble service s, aware

of its responsib ility toward soc iety, the environme nt, and its main

stakeholders. The emergence of this concept raises questions about

whether sustainable development plays a relevant role in banking

soundness and whether sustainable banks are really strong and solid.

Issues relating to sustainability and soundness and their mea-

surement have bee n the subject of rich and v aried empirical an d the-

oretical liter ature. However, the stu dy of the relations hip between

these two conce pts has not receive d the attention i t deserves in

academia and remains unexplored even today. In the wide diver-

sity of researc h articles ad dressing the issu e of sustainabil ity, the

key question that a rises repeate dly is the correlat ion between so -

cial perform ance (CSP) and fi nancial perfo rmance (FP) (Adeg bite,

Guney, Kwabi, & Tahir, 2019; Makni, 2009; Or litzky, Louche, Gond,

& Chapple, 2017; Simpson & Koh ers, 2002; Wang , Lu, Ye, Chau,

& Zhang, 2016a; Wang, Do u, & Jia, 2016b; Zhao & Murr ell, 2016).

Another recent q uestion less d iscussed in the lit erature concer ns

the correlatio n between CS R and risk (Albu querque, Koskin en, &

Zhang, 2019; Chollet & S andwidi, 2018; Monti, Patt itoni, Petracci, &

Randl, 2019). Many resea rchers agree on the im portance of CS R, and

have shown that CSR s trategies lead to higher f irm value (Harjoto &

Laksmana, 2 018; Jadiyappa, Iyer, & Jyothi, 2019; Jo & Har joto, 2011;

Servaes & Tamayo, 2013), redu ced risks (Cuesta-Gonzál ez, Muñoz-

Torres, & Fernández-Izq uierdo, 2006), an d lower cost of capit al

(El Ghoul, Gue dhami, Kwok, & Mishra, 2011; Nandy & Lo dh, 2012).

Received: 5 July 2 019 

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  Revised: 2 May 2020 

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  Accepted: 7 May 2020

DOI: 10 .1111/bee r.12294

ORIGINAL ARTICLE

CSR and banking soundness: A causal perspective

Sana Ben Abdallah1 | Dhafer Saïdane2 | Mehrez Ben Slama3

1Université de la M anouba, ESCT, Mano uba,

Tunisia

2Skema Business School, Université Nice

Côte d'Azur, Lille, Fr ance

3EAS-FSEG Ma hdia, Universit y of Monastir,

Monastir, Tunisia

Correspondence

Sana Ben Abd allah, Université d e la

Manouba, Ecole Supérieure de Commerce

de Tunis, La Manou ba, Tunis 2010, Tunisia.

Email: sana.benabdallah@esct.rnu.tn

Abstract

This is the first s tudy to examine the relationship bet ween sustainability and sound-

ness in banking as par t of an integrated repor ting approach . We consider 12 major

European banks over th e period 2006–2016. To test the relationship, t wo indexes

were constructe d, the sustainab le performance in dex, which attemp ts to measure

sustainabilit y, and the banking soundne ss index, which mea sures bank soundnes s.

The results show a bidirectional causality between sustainabilit y and banking sound-

ness. More specif ically, soundness encourages banks to e ngage in sustainable devel-

opment activities, while the implementation of a sustainable development approach

has a negative effec t on banking soundn ess. Our research co ntributes to the liter a-

ture on this topic in two w ays. First, we propose a new met hod for measuring banking

soundness based o n a Bayesian approach. Th is approach allows us to st udy a large

number of criteria and a llows us to determine proa ctively the impo rtance and the

contribution of dif ferent determinant s in achieving soundne ss. In addition, to th e

best of our knowledge , this is the first s tudy that attempt s to study the relationship

between bank soundness and sustainability.

    

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BEN ABDALLA H Et AL.

In this paper, we examine the relationship between sustainability

and bank soundn ess in general r ather than focus ing on FP or risk

only. In order to test th is relationship, we d eveloped two in dexes.

We measured sustainability using a Sustainable Performance Index

(SPI). This index is ba sed on the three d imensions of sust ainable

development: economic, environmental, and social, and also takes

into account the inte rests of six stakeholders . We tried to measure

the overall per formance of bank s in creating valu e for different

stakeholde rs as promoted by the Internat ional Integrated Report ing

Council (IIRC). Ho wever, none of the tools curr ently available we re

sufficient to provide an overall measurement of the interactions

between the different dimensions of performance. Since the per-

formance measu rement propose d by the IIRC remains i llustrative,

we propose a SPI that i s based on the CSR approach an d promotes

integrated reporting.

Similarly, we measure d bank soundne ss using a banking s ound-

ness index (SI). Th e analysis of bank soundness is com plex because

of the multiple f actors that ca n influence it. S everal studie s have

chosen to use proxi es of financial soundne ss, such as a z-score, non-

performin g loans, Default Dist ance, and Return On As sets or Return

On Equity volati lity (Zigraiova & Havranek , 2016), to measure bank

soundness. Other researchers and practitioners have used stress

testing techn iques to assess bank soundnes s (e.g., Anderson, 2016;

European Centr al Bank, 2014). Several bank s have developed aggre-

gate indexes in pla ce of financial soundness indic ators (IMF, 2006),

and these have bee n studied by different a uthors, such as Cihák an d

Schaeck (2007 ), Gray, Merton, an d Bodie (2007), a nd Navajas and

Thegeya (2013). The com plexity of meas uring bank soun dness

makes it diffic ult to base the conce ptual framewor k on a single in-

dicator and cho ose explanator y variables. C urrent indexes of b ank

soundness are c alculated using o nly a limited numb er of relevant

variables. For t hese reasons , we used a Bayesian ear ly warning

model to choose t he main indicato rs of soundness , which we then

used to constru ct the banking S I. To identify the opt imal combi-

nation of banking s oundness dete rminants, we fi rst need to know

the importance and contribution of each determinant in achieving

soundness. We therefore identified the main indicators of sound-

ness based on a Baye sian approach.

Our research co ntributes to the li terature on this to pic in two

ways. To the best of our kno wledge, this is the f irst study t hat at-

tempts to stud y the relationship between b ank soundness and sus-

tainabilit y. In addition, we prop ose a new method for m easuring

banking sound ness. This approach al lows us to study a large numb er

of criteria and give s us a proactive id ea about the imp ortance and

the contribution of different determinants in achieving soundness.

This article i s organized as follow s. The “Theore tical Foundati ons”

section is devote d to a literature review where we f ocus on sustain-

ability measu rement and the interaction of s ustainability with bank

soundness. The “Methodology” section, details the adopted meth-

odology and i s followed by the “Result s and Discussion” sect ion. The

“Conclusion and Implications” section summarizes the main find-

ings. The fina l section presents the “ Limitations and Future Lin es of

Rese arc h.”

2 | THEORETICAL FOUNDATIONS

2.1 | Measu ring sustainability: The quest for

multi-criteria models

Recently, with the emergence of the concept of sustainable devel-

opment, the debate has arisen about the methods of measuring

sustainability. Since sustainability is a multidimensional concept, its

measurement is still a laborious and difficult task. Several sustain-

ability measu rement systems were adopted as a re sult, such as the

Balanced Score card (Kaplan & N orton, 1992), Triple Botto m Line

reporting (E lkington, 2000) , and Global Reportin g Initiative (GRI) re-

porting (Bro wn, De Jong, & Lessidrens ka, 2009).

At end of 2013, a new frame work was introduced which revo lu-

tionized the fie ld of sustainab le information. T his framework is t he

integrated repo rting proposed by th e IIRC. This indepen dent organi-

zation followed t he proposals made by the G RI and the Internation al

Organization for Standardization (ISO), and the recommendations

of WICI Europe to st andardize intan gible capita l information. Th e

IIRC proposes a co nceptual frame work for repor ting societal p er-

formance, whic h includes an exp lanation of the bus iness model as

well as differe nt forms of fundame ntal intangib le capital. Today,

proponents of i ntegrated repor ting are atte mpting to introdu ce fi-

nancial and ex tra-financial measures in ord er to assess a company's

overall perfo rmance in its ecosys tem. Integrated rep orting is define d

as “a process that resu lts in communication, most v isibly a periodic

integrated repo rt, about value creatio n over time. An integrated re-

port is a concise communication about how an organization's strat-

egy, governance, per formance and p rospects l ead to the creatio n

of value over the sho rt, medium an d long term” (The I nternational

Integrated Repo rting Counci l, 2013). Integrated rep orting, is a step

forward in mea suring a company's overall per formance; it improves

decision-making and strengthens stakeholders' confidence in the

long term.

In the meantime , several agencies h ave created their own su stain-

ability score s, such as the ESG Sco re developed by Thoms on Reuters,

the Dow Jones Sus tainability Index (DJSI), the MS CI ESG Research

Indexes, and so f orth (see Huber, Comstock, & Polk , 2017 for more

details on the m ethods involved). Studie s by Rebai et al. (2012, 2016)

and Ben Abdall ah et al. (2018), among others, h ave integrated all the

dimensions of sustainable development in the evaluation of bank-

ing sustainability. First, they took into account the multidimensional

character of su stainabilit y. Second, they intr oduced the opini on of

various stake holders. From th eir work arose the c oncept of sus-

tainable per formance. This perform ance is assessed on the basis of

all the dimensio ns of sustainabil ity that intera ct with a produ ctive

entity: economic, environmental, and social dimensions, measured

simultaneously by a synthetic indicator.

The current methods for defining sustainability take into account

the expectations of stakeholders. Management of the stakeholder

relationship ha s become a key factor in the succ ess of an enterprise.

This relationship provides an opportunity to combine economic, so-

cial, and environ mental respo nsibilities. Th us, sustaina bility can be