Case Study Arab African International Bank (AAIB)

Case Study Arab African International Bank (AAIB) 1

Case Study Applying Environment Principles to the Core Business AAIB s Move Towards Sustainable Finance Abstract This Case Study aims at showcasing how the Arab African International Bank internalizes the UN Global Compact principles and the Equator Principles. It also traces the systematic evolution of the Bank s Corporate Social Responsibility (CSR) practices and how it changed through the years. This case study focuses on the bank s approach towards enacting sustainable finance and the steps that the AAIB undertakes to shift from Corporate Social Responsibility to corporate Sustainability. The Arab African International Bank Profile AAIB s Vision:"To be the leading financial group in Egypt providing innovative services with a strong regional presence being the gateway for international business into the region." The Arab African International Bank was established by a special law as a joint venture between the Central Bank of Egypt and Kuwait Investment Authority. AAIB was the first multinational bank in Egypt. Since its establishment in 1964, it has been known as one of the most important and prestigious commercial and investment banks in the region. AAIB strives to maintain its competency as a corporate bank through several retail activities that aims at expanding their innovation and advance their products range and geographical representation in Strategic commercial locations. The AAIB always works towards achieving a pioneering role in the Egyptian banking sector. The bank always attends its customers needs in the products and services that the bank offers in order to meet their ever growing needs. Confidence..Distinction is the slogan that governs relations with AAIB s stakeholders and clients are based on these two values. These values are preserved thanks to their experienced management team as well as their financial strength and the quality of their shareholders. 2

AAIB adopts a systematic way to apply Corporate Social Responsibility (CSR) in a good structured and organized custom in order to guarantee coherence and efficiency in the implementation process. In addition, they are committed to CSR by applying a conceptual framework that addresses all their stakeholders. Towards Sustainable Social Investment AAIB looks back at a long history of responsible business activities having always considered the community as a key stakeholder. Since 2003, the bank has been involved in a variety of projects with a focus on education and health considering both as pillars of a thriving community. Since the beginning, AAIB chose to pursue a pro-active approach to its projects. This entails that the bank is directly involved in the management and monitoring of these projects and that they are conducted under the umbrella of We Owe It to Egypt initiative since 2003 and foundation for health and social development since 2007. AAIB has broadened its philosophy of community philanthropy to support the corporate community as a whole in further developing its activities and formalizing it to strengthen its commitment to CSR values. In 2005, AAIB joined the United Nations Global Compact (UNGC). As a signatory of this global initiative and its principles, the bank started to deal with the topic of Corporate Social Responsibility (CSR) in a yet more targeted manner, learning and aligning its efforts with the Global Compact pillars and principles. In 2007, CSR practices started to receive more focused attention with the establishment of a dedicated CSR Unit that forms part of the Marketing and Communication Department. The CSR Unit reports directly to the Vice Chairman of the bank which highlights its importance within the bank. All CSR Unit practices aim to implement the UNGC principles both internally and throughout the community level through community services project activities. The financial resources allocated for administrative requirements were minimal because it did not require renting premises or hiring additional permanent top management executives. Nonetheless, the AAIB allocates an important financial budget to promote and support CSR activities both internally and externally. As its first action the newly established CSR unit hired a consultant to conduct an internal assessment of existing CSR-related activities, including current gaps and room for improvement. The consultant s report was subsequently used to define a CSR strategy and identify what the course of action needs to be to address both internal and external stakeholders adequately. By 2007, the AAIB s CSR practices had evolved from rather voluntary community contributions in form of philanthropic community projects (such as the renovation of hospitals 3

and sponsorship of educational institutions) towards more strategic core business related practices. In order to measure the impact of its community investments, the AAIB became the only Egyptian bank which joined the London Benchmarking Group (LBG) reaching out to an external group that promotes best practices in understanding and reporting on business community involvements. The LBG consists of a group of over 100 companies worldwide that are working together to measure Corporate Community Investment (CCI) (lbg-online.net). In the same year, the AAIB established the We owe it to Egypt Foundation that since then ensures the efficient management and delivery of social investment initiatives while the CSR department streamlines its efforts to core business-related initiatives. Laying the Groundwork for Core Business CSR Practices: Employees Engagement Following a phase of strengthening existing social involvements, the AAIB CSR Unit realized the importance of raising awareness for CSR and the UN Global Compact principles within the bank. In half-day training sessions, the AAIB staffs from three hierarchical levels were addressed in separate sessions: the board of directors, heads of departments and general staff. Participants learned about CSR, its relevance, implications for business processes, as well as ways to contribute. The involvement of the top management with the attendance of the Vice Chairman at the first training session sent a strong message to the rest of the bank. The buy-in of the management contributed to a collaborative and open-mindset towards the work of the CSR Unit amongst all staff members. The training laid the groundwork for all staff members to understand CSR and what it entails. One-to-one follow-up meetings with the Heads of Departments provided the opportunity to go in depth; the CSR Unit could assess the needs and ideas of each department while each department was able to raise potential concerns and clarify points that were of particular interest to them individually. Effective meeting preparation and follow-up including sending minutes to all of the participants helped to strengthen the CSR department s internal reputation. Continuous communication with other departments including staff and management has helped to build a CSR culture within the bank. Amongst the communication tools are articles in the monthly employee bulletin, regular meetings with staff members and close contact with the top management. Through working closely with other departments, the CSR team was not only able to raise awareness for CSR but also the willingness to collaborate on specific projects and information sharing in general. Together with the Human Resources Department the CSR Unit worked on more formally establishing human rights and labor standards in company policies. 4

One of the tangible outcomes of this collaboration is the internal employee Code of Conduct that serves as reference and guidance to staff members. AAIB CSR: A Stakeholder-Driven Approach AAIB CSR Unit centers its strategy on six stakeholders groups that it aims to create value for. These include shareholders, customers, employees, business partners, the community, and the environment. The specific approach to each group is outlined in the table below. Stakeholders Group Approach Shareholders The main goal of the AAIB s shareholder policy is protecting shareholder rights and interests. Maximizing the return earned over time through effective management of the bank s assets Continued growth of the bank s operations and profitability. Customers Integrating customers in the bank s day to day life. Seeking customers delight were personal preferences are taken into consideration. Changing the culture and mindset of the banking system through dealing with customers as members, providing warm environment, and seeing services being provided as privilege rather than just a task. Employees A specially tailored Code of Conduct to the AAIB employees, to help them better fulfill their duties. Guaranteed rights for freedom of association, recognition of the right to collective bargaining, the elimination of all forms of forced and compulsory labor, the effective abolition of child labor and the elimination of discrimination in respect of employment and occupation. Providing training, development, and acquisition of knowledge. Seeking productivity through improvement of problem solving and resolutions skills. Customizing a committee for the employees that concentrates on planning social and sports events. Engaging the HR department with the UN Global Compact in order to implement Human Rights and Labor Standards Principles whether in the hiring process or in the development of the code of conduct. 5

Creating a CSR Blog for employees to communicate and a monthly bulletin. Ensure that business practices are free from child labor and human abuses. Business Partners Adding clause in the contracts with their suppliers, ensuring and guaranteeing a specific level of health and safety. Example of how they applied this is showed in what was done by the CSR department when they added a clause to the contracts with the suppliers of the care service; in which they stated that as a bank the AAIB respects the Human Rights and Labor Standards Principles and that as their suppliers they also have to adhere to the same principles. Community Several community projects since 2003 were conducted with a special focus on health and education projects. The AAIB adopts a different approach, as it makes sure that the bank is directly involved in the management process of the projects, which makes the projects more sustainable on the long term. They founded We Owe It to Egypt Foundation, the AAIB Award (encouraging undergraduates to develop banking products), along with the contribution and giving regularly completed by the bank. Environment The AAIB s approach to the environment has evolved throughout the years; as it started by sponsoring El Azhar Park. Supporting greenery extended to include more core business-oriented approach through joining the Equator Principles that from its implementation the AAIB cannot give any loans above 10 million dollars to any projects that harm the environment or the society. 6

There were many challenges that faced the CSR Unit throughout their application to the UN Global Compact principles and other CSR practices; these challenges revolved around educating the different stakeholders and local media about the difference between philanthropy and Corporate Sustainable strategy, which goes beyond charitable activities and sponsorship. In other words, its aim is to focus on long-term value creation by emphasizing on the implementation of long-term sustainable plans. The Unit regularly holds information and training sessions, in addition to press conferences to alleviate this issue. For instance, the CSR Unit has organized a press conference in April 2011 to further explain the concept of corporate sustainable responsibility to the different local media leaders, in an attempt to address the confusion often made between philanthropy and sustainability, challenging in turn the process of its successful implementation. 7

Emphasizing Social and Environmental Responsibility in Core Business Activities Based on the assumption that the environment is intractably related to the good of the community and thus another corner stone to sustainability for a business to thrive, the AAIB CSR Unit considered expanding its work in this issue area. Already the internal assessment conducted in 2007 had indicated several areas and recommendations for specific action, including the reduction of the bank s carbon footprint and the conscious decrease of water and electricity consumption. In order to pursue a more holistic approach towards becoming a leader in Sustainable Finance; AAIB decided to look for options to promote environmentally and socially responsible behavior also outside of the bank. Following intensive research the CSR Unit identified the Equator Principles as the most adequate tool for this purpose, as the Principles are catered specifically to the finance sector, directly core-business related and in line with the available resources. For AAIB, strengthening its focus on the environment was considered to be a logical next step within the CSR strategy. The initial focus areas, health and education for the community, are closely linked to environmental issues. More from a community perspective, AAIB had long sponsored one of Cairo s green lungs, the Al Azhar Park, inaugurated in 2006. To expand the environment portfolio with more core-business related initiatives the Equator Principles provided an ideal match. For a number of years, banks working in the project finance sector had been seeking ways to assess and manage the environmental and social risks associated with such investment activities. In October 2002, nine international banks convened in London, together with the World Bank Group's International Finance Corporation (IFC), to discuss these issues. They then agreed on developing a banking industry framework for addressing environmental and social risks in project financing that could be applied globally and across all industry sectors. At the time, the banks concluded that the best, most commonly known and widely tested environmental and social policy framework in the finance sector were those established and used by the IFC in emerging markets. The Equator Principles were launched in Washington D.C. on 4 June 2003 and were initially adopted by ten global financial institutions. Subsequently there were over forty further EP adoptions during the first three year implementation period. The Equator Principles (EPs) are a set of voluntary principles for managing social and environmental risks for project finance. The principles are based on the International Finance Corporation (IFC) performance standards on social and environmental sustainability and on the World Bank Group s Environmental, Health and Safety general guidelines. They are developed in order to serve as a framework and baseline for each adopting institution s environmental and social policies, procedures and standards relating to project financing. The Equator Principles 8

emerged in 2003 out of international banks' desire to effectively manage and diminish environmental and social risks in projects they finance. The Equator Principles Financing Institutions commit to not providing loans where the borrower will not comply with their social and environmental policies and procedures. The principles apply to all new project financings globally with total project capital costs of US$ 10 million or more, and across all industry sectors. The adopting EP Financial Institutions view the EPs as a financial industry benchmark for developing individual, internal social and environmental policies, procedures and practices. As with all internal policies, these Principles do not create any rights in, or liability to, any person, public or private. Institutions are adopting and implementing the EPs voluntarily and independently, without reliance on or recourse to International Finance Corporation or the World Bank. Under the Equator Principles (EPs), borrowers must conduct a Social and Environmental Assessment of a proposed project. Equator Principles Finance Institutions (EPFIs) use common terminology in categorizing projects into high, medium and low environmental and social risk, based on the IFC's categorization process, and which is applied to projects globally and across all industry sectors. These categories are as follows: Category A Projects with potential significant adverse social or environmental impacts which are diverse, irreversible or unprecedented; Category B Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; Category C Projects with minimal or no social or environmental impacts. For all projects designated as either Category A or B in non-oecd countries or non-highincome countries, borrowers must establish a Social and Environmental Management System. The EPs require an independent review of all Category A projects, and, as appropriate, for Category B projects as well. In September 2008, AAIB CSR Unit sent a memorandum to the top management with a proposal to join the Equator Principals pointing out the benefits for the bank and its stakeholders. Aware of the importance and potential of CSR measures after attending the CSR workshops, the management reacted very favorably to the proposal. As a second step the CSR team set up oneon-one meetings with the heads of all departments that would be directly or indirectly involved in and / or affected by the implementation of the Equator Principles. The CSR Unit provided general information and explained the implications for internal processes. Presenting examples of a number of other financial institutions that had implemented the Equator Principles helped to make the implications, potential benefits and reputation of the initiative more tangible. During 9

the meetings the CSR department made sure to address potential concerns and issues that the heads of the departments might have. Due to the support and buy-in of the top management, the CSR team was able to convince the departments of the importance of the EP principles and its benefits. In January 2009, AAIB officially joined the Equator Principles and started working on the implementation, becoming the first Equator Bank in Egypt and the second in the MENA region. Aligning Internal Processes for Socially and Environmentally Responsible Investments The CSR Unit and AAIB overall sees several benefits arising from the Equator Principles: Starting from 2009, AAIB took on to implement the Equator Principles within its processes and issues a report elaborating how they embedded such principles in their operations. The process took several ordered steps with a sequence that allows the whole process to flow smoothly. First, they undertook the process of scanning, selecting and contracting with consultant for 3 months period, responsible for delivering an "Impact Analysis" Report. Secondly, an in-depth understanding of how applying such principles will affect their operational works flow and organizational structure (i.e. lending policies, procedures..etc). And upon the" Impact Analysis" made, some discussions and decisions were taken to ensure that all consequences were taken care of and covered appropriately (we can refer to this stage as the assessment stage). Third step focused on how AAIB can integrate the Equator Principles in its policies and procedures here comes the role of the consultant again through the formulation of specific strategies and policies for the Equator principles that will help projects financed by the AAIB to abide these principles and procedures that highlights who is responsible for what (departments and committees wise). Fourth step to be followed was conducting training course for Credit Departments and /or Risk management department's staff to enable them and introduce them to the new policies and procedures being formalized. The fifth and last step was scanning and selecting Egyptian companies that AAIB can accredit in order to provide the required environmental and social assessments needed by the bank's clients. In this context, 5 companies were assessed for the accreditation; also the bank issued an Invitation for an Expression of Interest so that companies that are interest could be assessed for the accreditation. 10

The AAIB Internal Policies and Procedures for the Implementation of EP: A manual was developed for applying the principles highlighting policies regarding an environmental and social risk (credit risk) that is applied to the AAIB and all its subsidiaries. Such manual include different roles such as; Initial Scanning, Project Review and Categorization, Social and Environmental Assessment, Environmental and Social Action Plan, Consultation and Disclosure, Grievance Mechanism, Independent Review, Loan Agreement Covenants, Independent Monitoring and Review, and Annual Reporting along with the divisions that are responsible for these roles. The manual also include how the AAIB dealt with the EPs. The Equator principles are listed in Annex 1. Lessons Learnt: The process of implementing corporate sustainability projects at AAIB has proven that several factors contribute in the success of any innovative corporate strategies. Indeed, getting the buy-in of the top management facilitates the implementation of any project. Moreover, a key factor is to create an enabling environment and a positive internal culture through continuous awareness promotion and focused training. One recognizes the impact of the business on the community and the surrounding environment, and work to minimize any negative impact and work to improve the effect on the society in large. The benefits of adopting a CSR culture are immense, as besides significant impact on the community and environment, it also fosters pride, nationalism and collectiveness amongst the bank s employees. 11

ANNEX 1 The Equator Principles Principle 1: Review and Categorization Each finance loan project will be categorized by the AAIB as category A, B and C according to the potential social and environmental impact of the project. Upon categorization, an Independent or Internal report is made to adopt the relevant credit and approval procedures. Principle 2: Social and Environmental Assessment: The process goes as follows: upon receiving the Assessment from the borrower, AAIB will conduct a review to make sure that the project meets the EP and that the assessment includes appropriate measures for risks. If by any means the information embedded in the assessment is not sufficient, further information is required from the borrower. This principle is applied to both categories A & B. Principle 3: Applicable Social and Environmental Standards: AAIB conduct an assessment for categories A &B to ensure that the project goes along with the Performance Standards and EH&S Guidelines that are relevant to such projects, if not, AAIB will try to justify the deviation taking into consideration the nature and the scale of deviation, expected benefits of the project and the borrower's response. In case of unjustifiable deviation, an improvement in the project is approached. The whole process is documented. Principle 4: Action plan and Management System: Action plan review is made to check on the consistency between the findings and the conclusion in the assessment. Corrective actions in the plan may be required in case no consistency exists. From AAIB side, they confirm that an action will be taken from the borrower side and that a social and environmental management system will be developed and that in the case of inadequacy of the system, corrective actions are ensured from the bank's side. Principle 5: Consultancy and Disclosure: Because consultation is essential, a confirmation from the bank that project-affected communities are taken into consideration in made. This principle is applied to category A and relevant category B projects based on the assessment and action plan that are disclosed to the public in appropriate manner and adequate time. Principle 6: Grievance Mechanism: 12

Appling the principle to category A and relevant category B projects based on the assessment and action plan where grievance mechanism is required, documentation is obtained and reviewed for the purpose of confirming consultation, disclosure and community engagement, borrower's resolution of concerns and grievances and informing the affected community of the project in an appropriate way-through the borrow- about the mechanism in the course of community engagement process. Principle 7: Independent Review: AAIB will play a role in ensuring that the social or environmental expert is independent from the borrower and that an Independent Review will be conducted to ensure the coherence of the borrower to the EP and that the findings of the review are documented and raised with the borrower. This principle is applied on all category A and relevant category B projects- based on the assessment and action plan. Principle 8: Covenants: AAIB role is reflected in the transaction and documentation process of working to get the borrower in compliance with the social and environmental covenants incase it does not exist. AAIB will enhance the loan agreement covenants with those relevant to the assessment and action plan. Principle 9: Independent Monitoring and Reporting: As it will be applied to all category A projects and relevant category B projects based on the assessment and action plan, the AAIB has procedures that ensure that regular reports is to be received over the life of the loan, these reports will be regularly reviewed and checked to make sure that it goes with the previously projected action plan. If such consistency does not exist, AAIB has procedures to discuss such issues with the borrower. 13

REFERENCES Tolba. S, Sherif. D & Brown. D. The Effect of Corporate Sustainability on Corporate Education: The Case of Al-Mansour Group in Egypt John D. Gerhart Center for Philanthropy and Civic Engagement & El-Khazindar Business Research and Case Study Publication. UN Global Compact (2011) - Available at http://www.unglobalcompact.org/ The London Benchmarking Group (LBG) Available at http://www.lbg-online.net/ AAIB CSR Unit: Personal interview- June 2011. 14