Ethical banking

An ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank concerned with the social and environmental impacts of its investments and loans.[1] The ethical banking movement includes: ethical investment, impact investment, socially responsible investment, corporate social responsibility, and is also related to such movements as the fair trade movement, ethical consumerism, and social enterprise.

Other areas of ethical consumerism, such as fair trade labelling, have comprehensive codes and regulations which must be adhered to in order to be certified. Ethical banking has not developed to this point; because of this it is difficult to create a concrete definition that distinguishes ethical banks from conventional banks. Ethical banks are subject to the same regulatory authorities and must comply with the same rules as traditional banks. While there are differences between ethical banks, they do share a desire to uphold principles in the projects they finance, the most frequent including: transparency and social and/or environmental values. Ethical banks sometimes work with narrower profit margins than traditional ones, and therefore they may have few offices and operate mostly by phone, Internet, or mail. Ethical banking is considered one of several forms of alternative banking.

History

Mainstream financial banks have had varying relationships with corporate social responsibility and ethical investment. However, a clearer movement has emerged since the 1990s.[2] With changing social demands, and as more is known about the effects that banks can have through their lending policies, banks have begun to feel pressure from the general public, NGOs, governments, regulatory bodies and others to consider their social and environmental impact.[3]

Environmentally and socially conscious business practices

In general, banks play an intermediary role in the economy; because of this, the possibility for banks to contribute to sustainable development is extensive. Banks have efficient and tested credit approval systems, which gives them a comparative advantage in knowledge (regarding sector-specific information, legislation and market developments). Banks are experienced and capable of weighing risks and attaching a price to these risks; because of this banks can fulfill an important role in reducing the information asymmetry between market parties and allow them to make better decisions. When depositors allow a bank to invest for them they may assume that the bank will attempt to select investments to maximize their returns. However, if clients are concerned with more than the simple monetary return and they, for instance, are interested in the costs to society and to the environment, then they may turn to an ethical bank which takes their ethics and morality into account when investing.

Some businesses externalize costs onto the environment and society. Aiming to create a more equitable distribution of costs in society, banks can raise interest rates or apply tariffs on loans given to clients and projects with high external costs. This would mean that companies would pay more if their business caused extensive environmental damage; taking some of the cost off of society as a whole and putting it on the company. This sort of tariff differentiation could stimulate the internalization of environmental costs in market prices. Through such price differentiation, banks have the potential to foster sustainability..

Banks may be able to support progress toward sustainability by society as a whole—for example, by adopting a 'carrot-and-stick' approach, where environmental and social front-runners would pay less interest than the market price for borrowing capital, while environmental laggards would pay a much higher interest rate. Banks can also develop more sustainable products, such as environmental, social, or ethical investment funds. By investing selectively based on values, ethical banks can promote socially/environmentally responsible companies and penalize those who do not conform to these standards.

Ethical initiatives

Numerous ethical banks (as well as some conventional banks) allow customers to contribute to organizations that have positive societal/environmental impacts either in the local community or in developing countries. Examples include an evaluation of the energy efficiency of a home and potential improvements in this; carbon-offsets; credit cards that benefit charities or lower interest rate loans for low emission cars.

Community involvement

Ethical banks excel in community involvement, as do other financial institutions such as credit unions. Community involvement is not limited to ethical banks as conventional banks also partake in such actions. The following are a few examples of community involvement done by ethical banks, credit unions, and conventional banks:

• Affordable housing projects (ex. Vancity & Citizens bank)
• Projects to improve financial literacy in the community
• Give local scholarships & sponsorships.
• Financially support community events (for ex. each year TD Canada trust donates to a local cause).

Environmental standards for lending

The environment is a key focus for ethical banks as well as for some conventional banks that believe adopting more environmentally ethical practices to be to their advantage. Banks operating in this field are often referred to as sustainable or green banks.

In general, bankers "consider themselves to be in a relatively environmentally friendly industry (in terms of emissions and pollution). However, given their potential exposure to risk, they have been surprisingly slow to examine the environmental performance of their clients. A stated reason for this is that such an examination would 'require interference' with a client's activities." While the desire not to interfere with the business of the client is valid, it could also be noted that banks are required to interfere in the business of their clients regularly to ensure that the clients’ business plan is viable before issuing them a loan. The kind of analysis that all banks partake in is termed a single bottom line analysis (this analysis only considers financial performance). It is arguable whether or not performing a triple bottom line analysis (an analysis that takes into account environmental, social, and financial performance) would be any more intrusive.

Internal vs. external banking ethics

Conventional banks deal with mostly internal ethics, ethical banks add to internal concerns by applying external ethics.c

Bank regulations and the free market

One argument against regulating banks is that the regulations would violate the proper functioning of the free market economy. Severyn T. Bruyn suggested that the extreme disconnection between market actions and morals was never the intent of the market economy's founding thinkers, specifically Adam Smith and that putting standards and regulations in place that rest on the basic morals of society should not conflict with the free market, but are actually an important part of the proper functioning of the free market.[4]

Rudolf Steiner suggested that capitalism has the task of funding economic initiatives; capital should be directed into directions productive for society. He proposed that rather than prices being set through either the total control of government regulation, or the total lack of control of a free market, each industry could have self-regulating associations of producers, wholesale and retail businesses, and consumers. These associations would determine prices fair to all three groups. The state would not interfere with purely economic decisions but would be responsible for protecting human rights (this could include a minimum wage and safety in the workplace) and equality of its citizens' rights.[5] (See Steiner's Threefold Social Order.)

Differences from credit unions

Credit unions are not banks but they offer many of the same services as banks (e.g. investment opportunities, commercial and business loans, checking & savings accounts, etc.). Credit unions are member-owned rather than shareholder-owned. This gives each member equal vote in the decision-making process. When a credit union has surplus, the profits made will either be invested into the community or will go back to the members in the form of "patronage rebates" (i.e. cheques). Credit unions focus on the members because they are also the owners, and on the communities in which they are situated. Credit unions put a higher focus on local community development than banks do. Most credit unions lend strictly to people and businesses in the community where the union is located. This fact leads credit unions to affect communities more positively than regular banks.

However, credit unions do not necessarily have the same potential to cause widespread change in business practices as ethical banks do. This is because credit unions largely avoid the problem of funding unethical corporate/business activities by focusing on funding local businesses, which are easier to monitor and arguably less capable of generating wide-reaching social and environmental benefit.

Alliances and networks

See also

• Bankers' bank
• Carbon Disclosure Project
• Climate ethics
• Corporate social responsibility
• Equator Principles
• Socially responsible investing
• Sustainable finance

Further reading

• Clark Schultz, "What is the Meaning of Green Banking", Green Bank Report
• Paul Thompson & Christopher J. Cowton, "Bringing the Environment into Bank Lending: Implications for Environmental Reporting", British Accounting Review, v.36, n.2, pp. 197–218 (June 2004).
• San-José, L. de al. (2011). Are ethical banks different? A comparative analysis using the radical affinity, Journal of Business Ethics

External links

• FEBEA, European Federation of Ethical and Alternative Banks
• INAISE, International Association of Investors in the Social Economy
• GABV, Global Alliance for Banking on Values
• "At Estonia's Bank Of Happiness, Kindness Is The Currency" National Public Radio, July 18, 2013.