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An ethical bank, also known as a social, alternative, civic, or sustainable bank, is a
bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...
concerned with the social and environmental impacts of its investments and loans. The ethical banking movement includes:
ethical investment Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
,
impact investment Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an al ...
, socially responsible investment,
corporate social responsibility Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
, and is also related to such movements as the
fair trade Fair trade is an arrangement designed to help producers in developing countries achieve sustainable and equitable trade relationships. The fair trade movement combines the payment of higher prices to exporters with improved social and enviro ...
movement,
ethical consumerism Ethical consumerism (alternatively called ethical consumption, ethical purchasing, moral purchasing, ethical sourcing, or ethical shopping and also associated with sustainable and green consumerism) is a type of consumer activism based on the conc ...
, and
social enterprise A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners. Social enterprises ca ...
. 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 regulated by the same authorities as traditional banks and have to abide by the same rules. 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

In England, King
Offa of Mercia Offa (died 29 July 796 AD) was List of monarchs of Mercia, King of Mercia, a kingdom of History of Anglo-Saxon England, Anglo-Saxon England, from 757 until his death. The son of Thingfrith and a descendant of Eowa of Mercia, Eowa, Offa came to ...
in 791, then King
Alfred the great Alfred the Great (alt. Ælfred 848/849 – 26 October 899) was King of the West Saxons from 871 to 886, and King of the Anglo-Saxons from 886 until his death in 899. He was the youngest son of King Æthelwulf and his first wife Osburh, who bot ...
(849-899), as well as King
Edward the Confessor Edward the Confessor ; la, Eduardus Confessor , ; ( 1003 – 5 January 1066) was one of the last Anglo-Saxon English kings. Usually considered the last king of the House of Wessex, he ruled from 1042 to 1066. Edward was the son of Æth ...
(1042-1066), outlawed usurers. Mainstream financial banks have had varying relationships with
corporate social responsibility Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
and
ethical investment Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
. However, a clearer movement has emerged since the 1990s. 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,
NGO A non-governmental organization (NGO) or non-governmental organisation (see spelling differences) is an organization that generally is formed independent from government. They are typically nonprofit entities, and many of them are active in h ...
s, governments, regulatory bodies and others to consider their social and environmental impact.


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 need to 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 Specific definitions of sustainability are difficult to agree on and have varied in the literature and over time. The concept of sustainability can be used to guide decisions at the global, national, and individual levels (e.g. sustainable livi ...
.. 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. But there is a risk that banks could simply adopt certain practices that make them appear ethical (see
greenwashing Greenwashing (a compound word modeled on "whitewash"), also called "green sheen", is a form of advertising or marketing spin in which green PR and green marketing are deceptively used to persuade the public that an organization's products, aims ...
) while not adopting other practices that would have a greater impact.


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 bank A green bank (sometimes referred to as green investment bank, clean energy finance authority, or clean energy finance corporation) is a financial institution, typically public or quasi-public, that uses innovative financing techniques and market ...
s. 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 In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, a ...
analysis (this analysis only considers financial performance). It is arguable whether or not performing a
triple bottom line The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and economic. Some organizations have adopted the TBL framework to evaluate their performance in a broader ...
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.


Internal ethics: processes in banks

Internal ethics are concerned with the well being of employees, employee and customer satisfaction, benefits, wages,
unionization The organizing model, as the term refers to trade unions (and sometimes other social-movement organizations), is a broad conception of how those organizations should recruit, operate, and advance the interests of their members, though the specific ...
, fair sex and race representation, and the banks environmental standing. Environmentally, the potential combined effect of banks switching to more environmentally friendly practices (i.e. less paper use, less electrical use, solar power, energy efficient light bulbs, more conscientious employee travel policies with concern to commuting and air travel) is huge. However, when compared with many other sectors of the economy banks do not incur the same burden of energy, water and paper use. Many times such energy efficient changes are not based on moral concern but on cost efficiency.


External ethics: products of the banks’ relationships/products

External ethics are concerned with the wider ramifications of banks actions. External ethics looks at the impacts that their business practices, such as who they loan to or invest in, will have on society and the environment. In applying external ethics, one looks at how the products of banks can be used unethically, for example how borrowers use the money that is lent out by the bank.


Discussion

Banks are often reluctant to broaden the scope of their external ethical policies because of the significant nature of the changes. However, by incorporating ethics that account for societal costs in their practices, banks may improve their reputation. Ethical banking is a relatively new sector and this relatively undeveloped nature causes some problems. These problems can be divided into two categories: the first concerns depositors, and the second concerns ethical banks. In the first category lies the issue of understanding how ethical banks measure or qualify their ethical policies. For example, when Vancity/Citizen Bank states ‘we seek to work with organizations that demonstrate a commitment to ethical business practices,’ the depositor is unable to understand what ‘seek’ means. These claims do not reveal to potential depositors how the bank evaluates or uses these statements. Even when given the opportunity to view an accountability report, it is difficult to truly understand what their screening processes are. For example, th
Van City Accountability Report
for 2006/07 (for Van City credit union and Citizens Bank in Canada) states:
the Ethical Policy requires that all business accounts are screened at the time of account opening by the staff person dealing with the member. Social and environmental risks of larger business banking loans (non-credit-scored loans) are assessed at the time of the loan application, guided by the Ethical Policy and Lending Policies.
This statement does not give the reader the information they need to understand the criteria used in assessing clients. However, statistics, such as that given by the Cooperative Bank (UK), stating that in 2003 they reviewed 225 potentially problematic financial opportunities and of these 20% were found to be in conflict with their ethical statements and were subsequently denied further business, costing the bank 6,887,000 pounds, give the consumer the impression that the banks’ proposed ethics, however ambiguous, are being taken seriously. Another issue in this category is that of codes of conduct. Many ethical banks, as well as conventional banks, voluntarily join larger bodies that put forth certain regulations that, according to the rules set by the body, should be followed by members. Such outside bodies could act as overarching institutions that could guarantee a certain level of conformance with certain regulations. An example of this in the United States is the
Food and Drug Administration The United States Food and Drug Administration (FDA or US FDA) is a List of United States federal agencies, federal agency of the United States Department of Health and Human Services, Department of Health and Human Services. The FDA is respon ...
. Depositors who use ethical banks do not have this assurance because there is no external regulatory body that sets minimum acceptable legal standards. In the second category, ethical banks face obstacles such as losing business and consumer support to conventional banks, and having to regulate above and beyond the present international legal systems. According to Cowton, C. J., and P. Thompson, "banks that had signed the United Nations Environment Programme (UNEP) Statement, a voluntary industry code that promulgated environmental stewardship, transparency, and sustainable development, did not act significantly different than the non-signatories." They concluded that, for codes to be more effective; regulators, monitors, and methods of enforcement need to be in place. This problem is similar to the problems faced by the fair trade movement. Both the fair trade movement and ethical banks rely on people to pay extra for known ethical goods. There is a limit to how much more people will pay for that guarantee, after that point, further initiatives will undercut the banks income and therefore are likely to not be followed. Losing business to banks that do not screen so strictly is a problem for ethical banks. Many times, ethical banks must work with much lower budgets because of this. Ethical banks exclusion of unethical borrowers often results in the borrowers going to other banks, this brings up the importance of industry wide regulations. One way of raising the industry wide regulations would be for citizens to apply pressure on banks. Without this rise, it is difficult to impede unethical businesses from finding a bank to finance their projects. A rise in regulations that deal with moral topics is not out of the question. The current industry wide codes, for example, prohibit the financing of illegal drug production. This reflects the prominent societal morals against such drugs. Ethical banks cannot solely rely upon the legal system to determine whether or not a potential client has acted unethically or whether or not their future plans are unethical. This is because of the wide range of laws throughout the world. While a business may be lawful in the international setting, this does not mean that the laws were up to the moral standards in which the bank originates. For example, extensive pollution and labor laws that would not be considered lawful in many developed countries are allowed in many lesser-developed countries.


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 A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ar ...
. 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 Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
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.Bruyn, S. T. "The Moral Economy" Review of Social Economy 57.1 (1999): 25–46.
Rudolf Steiner Rudolf Joseph Lorenz Steiner (27 or 25 February 1861 – 30 March 1925) was an Austrian occultist, social reformer, architect, esotericist, and claimed clairvoyant. Steiner gained initial recognition at the end of the nineteenth century as a ...
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. (See Steiner's Threefold Social Order.)


Differences from credit unions

Credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit organization, nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including depo ...
s 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 A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
-owned. This gives each member more influence 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


Global Alliance for Banking on Values

The
Global Alliance for Banking on Values The Global Alliance for Banking on Values (GABV) is an organization of independent values-based banks. Structure The GABV consists of over 60 member banks, credit unions and microfinance institutions, from a total of 44 countries, serving more ...
(GABV) is a membership organization founded in March 2009 by
BRAC Bank BRAC Bank is a private commercial bank in Bangladesh, operated by the BRAC development organisation, focused on Small and Medium Enterprises (SME). The bank has its head office in Dhaka, Bangladesh. It has 187 branches, 18 Premium Banking lounges ...
in Bangladesh, GLS Bank in Germany,
ShoreBank ShoreBank was a community development bank founded and headquartered in Chicago. At the time of its closing it was the oldest and largest such institution, and in 2008 had $2.6 billion in assets. It was owned by ShoreBank Corporation, a regulated ...
in the US, and
Triodos Bank Triodos Bank N.V. is an ethical bank based in the Netherlands with branches in Belgium, Germany, United Kingdom and Spain. It was founded in 1980. Triodos Bank finances companies which it believes add cultural value and benefit to both people a ...
in the Netherlands. It is currently made up of 27 of the world’s leading sustainable banks, from Asia, Africa, Latin America to North America and Europe.


See also

*
Bankers' bank A bankers' bank is a financial institution that provides financial services to community banks in the United States of America. Bankers' banks are owned by investor banks and may provide services only to community banks. By leveraging positive econ ...
*
Carbon Disclosure Project The CDP (formerly the Carbon Disclosure Project) is an international non-profit organisation based in the United Kingdom, Japan, India, China, Germany and the United States of America that helps companies and cities disclose their environmental im ...
*
Climate ethics Climate justice is a concept that addresses the just division, fair sharing, and equitable distribution of the burdens of climate change and its mitigation and responsibilities to deal with climate change. "Justice", "fairness", and "equity" ar ...
*
Corporate social responsibility Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
*
Equator Principles The Equator Principles is a risk management framework adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due dili ...
*
Socially responsible investing Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
*
Sustainable finance Sustainable finance is the set of financial regulations, standards, norms and products that pursue an environmental objective. It allows the financial system to connect with the economy and its populations by financing its agents while maintaining a ...


References


Further reading

* Ben Cohen and Mal Warwick, ''Values-Driven Business'', * Christopher J. Cowton & Paul Thompson, "Do Codes Make a Difference? The Case of Bank Lending and the Environment", ''Journal of Business Ethics'', v.24, n.2 (March 2000) * 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 National Public Radio (NPR, stylized in all lowercase) is an American privately and state funded nonprofit media organization headquartered in Washington, D.C., with its NPR West headquarters in Culver City, California. It differs from other n ...
, July 18, 2013. {{DEFAULTSORT:Ethical Banking Banks Financial services