Broadly, banks that operate from a foundation of community-based values are considered ethical banks. These values include a focus on values of transparency, fairness, responsible citizenship and accountability.
While all banks and financial services are required to operate according to relevant national and international laws, some banks and financial services take it upon themselves to focus on core values that have a social impact. This usually includes a commitment to a cause, such as a charity to support, environmental causes to follow or social responsibility to follow. This makes banks more attractive not only to customers but to investors as well.
Banks can leverage their ethical credentials to choose the potential investors that best fit with their model, in turn, generate higher profits. For example, a bank might publicly announce that they are opposed to open-cut mining, which could be attractive to some investors who are committed to environmentalism. This means that banks and financial institutions can cover a range of ethical or moral subject areas, and spread investment. Private and corporate investors want to be seen to be adhering to a moral code, and choosing which bank to use or invest in is motivated by these codes.
The ethical banking movement includes:
- ethical investment
- socially responsible investment
- impact investment
- social enterprise
- corporate social responsibility
- ethical consumerism
- fair trade movement
The role of ethics in consumerism has become increasingly formalized since the 1990s. Consumers started to demand greater transparency from brands, including service institutions. People wanted to know more about how they were spending their money. This prompted consumer brands to introduce regulations and certifications so that people were able to make informed choices. While this extended to an expectation that banks be transparent about how they invested customers’ money, there have not been the same codes and regulations introduced to control the industry.
This prompted the rise of ethical banking. Such banks promise to work with transparency and commit to social and/or environmental values. Most ethical banks are smaller institutions and often work exclusively online because they are investing in the causes they support. Such institutions use their corporate social responsibility commitment as leverage.
Banks play an intermediary role in the economy, and because of their knowledge regarding deals and mergers, company activities and partnerships and other sensitive information, they are in a position of extreme influence. There is a general expectation that they will act with integrity and mitigate risks in order to act in the best interest of investors and customers, as well as the local and global economy.
One of the ways that banks act is to raise interest rates or apply tariffs on loans given to clients and projects with high external costs. Companies that cause extensive environmental damage or operate in ‘grey’ areas, such as medical cannabis, are either charged at higher rates by traditional banks or refused service and pushed onto smaller players so that their investment books remain ‘clean’. While some would argue that this allows ethical banks to thrive and offer customers services, they are ultimately conduits for the bigger banks that control the image of banking for investors who want to be seen to publicly support certain causes. This ‘greenwashing’ of banking is common, however, there are ethical players in financial services that strive to force the transparency of the big banks so that the general public can make informed choices.
Some ethical banks and even conventional banks, allow customers to contribute to organizations that support societal or environmental causes in the local community or in developing countries. This can be done in many ways:
- evaluation of the energy efficiency of a home to receive carbon-offsets
- issuing credit cards that benefit charities
- offering lower interest rate loans for low emission cars
Real ethical banking is often focused on improving situations, and while the motives can seem altruistic, all banks are businesses and they are motivated by making money. For this reason, not all customers qualify for their services. Banks don’t want to take on customers who will cost them money, they want customers who will make money, even if they are committing a certain percentage of profits to philanthropic causes.
Most ethical banks have the following characteristics in common:
- Client screenings: Banks screen prospective clients to avoid doing business with individuals, organizations and corporate entities that have a history of unethical or immoral practices. For example, most banks will not offer accounts to clients who have a proven history of using child labour.
- Consistent internal and external ethics: The bank walks the walk and talks the talk, meaning that internal and external practices are inline. For example, a bank that supports women’s equality would also need to show that it promotes qualified women to roles traditionally dominated by men.
- Community involvement: The bank is an active and responsible contributor to its community. For online banks, this can mean hosting information about online security and data privacy. For example, such banks might promote the free use of blockchain in developing nations for the unbanked.
- Sustainable practices: The bank makes an effort to apply environmentally-friendly practices and it supports clients who practice such policies. For example, a bank might not accept a client account from a crude oil company.