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. 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, such as fair trade, have comprehensive codes and regulations to which all industries that wish to be certified as fair trade must adhere. Ethical banking has not developed to this point; because of this it is difficult to create a concrete definition distinguishing exactly what it is that sets an ethical bank apart 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 common set of principles, the most prominent being transparency and social and/or environmental aims of the projects they finance. 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

The banking system was born in Ancient Greece and Ancient Rome, travellers and citizens trusted banks as a mean of protection in troubled times. The first two modern banks were open in Genoa in 1406, Banco San Giorgio and in Florence, Banco Soranza. Since old time Christian communities were based on the anti-materialism of Jesus, banking was ethical and any form of "Usura" (High interest lending), was considered as immoral. In England, King Offa of Mercia in 791, then King Alfred the great (849-899), as well as King Edward the Confessor (1042-1066), made usurers outlaw. Following the defeat of King Harold the 2nd in the Battle of Hastings by King William the Conqueror, a Jews community arrived in England in 1066, from Rouen, France. The role of this community was, in fact, financing the invasion of England. As prize for the help given to the king, they were granted the permission to practice private banking. Due to the very high percentages applied to money and land financing, in 1290 the Jews community was expelled by King Edward I of England (1239-1307). William Cunningham (economist), made a clear point describing the practice of usurers as an obstacle to the development of the British Islands since the 11th century.^[1] The development of the changes in the banking system, due to the influx of Jews in Europe, is written by Stephen Goodson, in "Barnes Review". One of the most controversial issue in the 21st century is the role played by finance in wars and revolutions in Middle East and North Africa. Noam Chomsky, mention the Us Dollar as a source of several changes in societies: Currency substitution, and the Islamic banking and finance, are among the reasons for the prolonged destabilization of several developing countries.

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 all banks play an intermediary role in the economy; because of this the possibility for banks to contribute to sustainable development is potentially profound. ^{Jeucken 2002} Banks have extensive and efficient credit approval systems, which gives them a comparative advantage in knowledge (regarding sector-specific information, legislation and market developments).^{Jeucken & Bouma 1999} Banks are well seasoned and well equipped to weigh risks and attach a price to these risks; because of this banks can fulfill an important role in reducing the information asymmetry between market parties, for example between the business and consumers. This is important not just to consumers but also to depositors. When depositors allow a bank to invest for them they are able to assume that the bank will know which investments will maximize their returns. Conventional banks are legally bound to maximize return for their clients. If clients are concerned with more than simple return (i.e. the costs of the return on other areas such as society and the environment) then they may need to turn to an ethical bank to find ways in which they can garner return while keeping to their own moral concerns.

Some businesses externalize costs onto the environment and society. An example of this would be water pollution. A wood mill, for example, could dump its waste into a local river instead of paying to dispose of it properly. This cost is then put onto to the public who uses this water; the costs could come in the form of poor health or as a cost to the local water treatment plant. In order to create more equitable distribution of costs amongst consumers, the environment, and businesses, banks can raise interest rates or apply tariffs on loans given to clients with high environmental risks. This tariff differentiation by banks will stimulate the internalization of environmental costs in market prices.^{Jeucken & Bouma 1999} Meaning 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. Through such price differentiation, banks have the potential to foster sustainability.^{Jeucken & Bouma 1999} This potential would be determined by the extent to which all banks worked in unison to create similar regulations that would result in the loss of access loans that treat the environment and/or society as an externality.

Through their intermediary role, 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.^{Jeucken & Bouma 1999} Banks can also develop more sustainable products, such as environmental, social, or ethical investment funds. In addition, there is great scope for banks to improve their internal environmental performance.^{Jeucken & Bouma 1999} In creating environmental and social screens, banks can promote socially/environmentally geared companies and penalize those who do not conform to these standards. However it is important that these different possibilities (i.e. social/environmental screens, ethical products, and internal environmental practices) be used as a package. If not, there is a danger that banks could simply do the things that make them look the most ethical (i.e. advertise their recycling program) while not changing other areas that would have a larger impact. If the changes are solely driven by customers, the bank will be pressured to offer preferential treatment to what depositors deem as desirable, but will have limited ability to punish undesirable action. Governmental regulation, initiated by an informed and involved public would be an effective way to ensure that all banks follow socially accepted morals and ethics.

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;^{Coro Strandberg 2005} credit cards that benefit charities^[4] or lower interest rate loans for low emission cars.^[5]

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)
• Many banks/credit unions try to increase 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

Environment is a key focus amongst ethical banks (in this field specially called sustainability or green banks) as well as amongst many conventional banks that wish to appear more ethically oriented or that see switching to more environmental practices to be to their advantage. Some view this move as green washing. 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."^{Jeucken 2002} While the desire to not meddle in the business of the client is valid, one could also note 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.

Internal ethics: processes in banks

Internal ethics are concerned with the well being of employees, employee and customer satisfaction, benefits, wages, unionization, 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.^{Jeucken & Bouma 1999} 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

In general banks are reluctant to broaden the scope of their external ethical policies because require a broad interference in the banking sector. Ethic in external relation provide the bank with optimal marketing tools, while the activities of clients and the transparency in the general activities, are kept as corporate secrets.

Ethical banking is a relatively new sector; along with this fact come problems. These problems fall under two categories; the first concerns depositors, and the second concerns ethical banks.

In the first category lies the problem of really knowing 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 statements sound nice but they do not tell potential depositors how the bank evaluates or uses these statements. This is insufficient. Even when given the opportunity to view an accountability report it is difficult to truly understand what their screening processes are. For example, the 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 s/he needs 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^{Coro Strandberg 2005}, 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. 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. 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."^{Cowton & Tompson 2000} They concluded that, for codes to be more effective; regulators, monitors, and methods of enforcement need to be in place.^{Cowton & Tompson 2000} 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.

Judging what is ethical

Claiming to be an "ethical" bank requires an objective way to determine what is ethical. Popular ethical theories that could be used include those of Mill, Kant and Aristotle.

John Stuart Mill

The premise of John Stuart Mill's utilitarian ethical theory is that an action's moral status is dependent on the extent to which if it contributes to happiness. Therefore, in Mill's perspective a bank would be moral if it tended "to promote happiness".(p. 10)^{Mill 1957} If the bank in question acts in way that produces the greatest amount of happiness for the greatest amount of people then it will be acting morally according to Mill. Because the banking sector is so large, complex and far-reaching in its effects it is difficult to accurately judge the happiness of everyone affected by the conduct of banks in general or by certain banks in particular. However it sometimes possible to discern which of different possible courses of action would produce the most happiness. For example, the act of generous philanthropy in forms such as giving back to communities, employees, members, environmental/development groups, etc. will on the whole increase happiness. Similarly lending to businesses that do not "produce the reverse of happiness"(p. 10)^{Mill 1957} by, for example, giving to businesses that treat employees fairly and are concerned with such public goods as the environment would also be considered ethical according to Mill. Given that things such as global warming, air pollution, water contamination, and soil pollution negatively affect large groups of the population, if not all of the population (in the case of global warming), banks that chose to partake in the above examples could be viewed as contributing to the overall happiness of all people and would hence have moral value.

Immanuel Kant

According to Immanuel Kant's Categorical Imperative, morality concerns intentions, and not outcomes. A person is moral insofar as they act with a good will, regardless of the consequences. With this knowledge one could propose that the act of lending money is not in and of itself immoral and according to Kant's perspective banks should not be judged as moral or immoral based on the outcomes of their lending. However the second formulation of Kant's categorical imperative states: "act in such a way that you always treat humanity, whether in your own person or in the person of any other, never simply as a means, but always at the same time as an end" (pg. 66–67)^{Kant 1956}. Based on this formula, one could argue that the whole practice of lending is not ethical, since it treats human persons merely as means to gaining money, ('mere means') rather than as ends in themselves.

Aristotle

For Aristotle, lawfulness is important in the measurement of morality, as is equality and justice. Whether an action is or is not in accordance with the law is an important measurement of morality for Aristotle. Many banks do business in accordance with the law in all practices. They may also specifically seek to do business with law-abiding clients. Nevertheless, this can be problematic, as laws vary internationally. This means that a bank could be viewed as ethical even while funding clients who lawfully conduct business in harmful manners. However this measurement is challenged by Aristotle's statement: "what is just in transactions is something equitable, and what is unjust is something inequitable" (p. 84)^{Aristotle 2002}. This means that a bank needs to take into account the unjust/inequitable behavior of its borrowers to qualify as an ethical bank. For example, lending to a law-abiding corporation that does not pay its employees a sufficient living wage would be immoral.

Thoughts from Indian scriptures

1. The Puruṣārtha (Dharma, Artha, Kama, Moksha) Concept: This ethical guideline speaks about the necessity to keep Dharma (Righteousness) as the foundation for every choice that is made. Artha stands for generation and sustenance of wealth, including monetary wealth. Kama is related to choices made regarding fulfillment of desires, and Moksha is about spiritual fulfillment. Exploration related to Artha and Kama has to be done within the contexts of Dharma and Moksha. Moksha is considered the supreme goal. These four are considered to be Purushaartha.

2. Paropakaaraartham Idam Shareeram: The body is meant for the service of the noblest ideas and to contribute to the well-being of all.

3. Atmano Mokshartham Jagat Hitayacha: The actions one perform in achieving one's liberation/ fulfillment has to be done in the context of the well-being of the world.

Bank regulations and the free market

The argument against regulating banks is that the regulations would violate the proper functioning of the free market economy. Severyn T. Bruyn disputes this argument in his article "The Moral Economy".^{Bryun 1999} He states that the extreme disconnection between market actions and morals was never the intent of the market economy's founding thinkers, specifically Adam Smith. He argues 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. His conclusion is based on statements made by Adam Smith. When Smith first envisioned the market economy, he did not divorce morals from the market. In fact, morals were supposed to be a natural part of the workings of the market economy. He believed that economic transactions should be the result of mutual agreement and should involve morality and friendship. He stated that selfishness could obstruct the market economy from running morally. If interpersonal relationships did not play a part, then the interdependency experienced by individuals could vanish and unfair play based on greed and mistrust would exist. Bruyn discusses today's society as one that has lost its basic morals in the market. He states that there is a need for a reigniting of civil society.^{Bryun 1999} Originally, civil society was assumed to be naturally able to regulate the morality of the market, but with the great distances between individuals involved in transactions as time has passed, governments became the prime regulators of morality in economic exchanges. In recent history governments have been pressured to stop interfering in the economy. This has allowed bodies such as corporations, which operate immorally or at best amorally, to create extremely damaging outcomes without legal or societal penalty. Bruyn promotes the resurrection of civil society, calling society to demand fair practices and to regulate the morality of the economy.^{Bryun 1999}

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.^[6] (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 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.

List of ethical banks

Europe

Denmark

• Andelskassen Oikos
• Arbejdernes Landsbank
• Dragsholm Sparekasse
• Folkesparekassen
• Merkur Andelskasse

Germany

• GLS bank
• EthikBank (German wiki-article)
• Triodos Bank, triodos.de
• Umweltbank (German wiki-article)

Spain

• Colonya Caixa Pollença
• Caixa Ontinyent
• Coop57
• Fiare
• Triodos Bank, triodos.es

Switzerland

• Alternative Bank Schweiz ABS

United Kingdom

• Charity Bank, charitybank.org
• The Co-operative Bank
• Ecology Building Society
• Islamic Bank of Britain
• Reliance Bank
• Shared Interest
• Triodos Bank, triodos.co.uk
• Unity Trust Bank

Other European countries

• Austria: EthikBank (German wiki-article)
• Belgium: Triodos Bank, triodos.be
• France: Crédit coopératif, (French wiki-article)
• France: NEF (French wiki-article)
• Hungary: MagNet Bank
• Italy: Banca Etica
• Netherlands: ASN Bank
• Netherlands: Triodos Bank, triodos.nl
• Norway: Cultura Bank
• Sweden: JAK members bank
• Sweden: sv:Ekobanken (Swedish wiki-article)
• Switzerland: Alternative Bank Schweiz

North America

Canada

• ATB Financial, Based in Edmonton, Alberta. owned by the Province of Alberta

USA

• Urban Partnership Bank, Based in Chicago. Successor to ShoreBank
• RSF Social Finance, based in San Francisco, not a 'bank,' but offers social investment accounts with rates comparable to bank CDs
• New Resource Bank, based in San Francisco. New Resource is a commercial bank that focuses on businesses that share their mission to progress sustainability within their community.
• First Green Bank, Based in Mount Dora, FL is a commercial bank dedicated to ethical practices and environmentally friendly investments.
• One Pacific Coast Bank, Based in Oakland, with branches in Seattle, Portland, and Illwaco, WA.
• Spring Bank, Based in the Bronx, New York, with branches in the Bronx and Manhattan, New York. Spring Bank is an FDIC insured commercial lender and certified community development financial institution (CDFI) with a stated mission to expanding financial inclusion in low-income neighborhoods.

Oceania

Australia

• Bankmecu

New Zealand

• Prometheu

Alliances and networks

Global Alliance for Banking on Values

The Global Alliance for Banking on Values (GABV) is a membership organization founded in March 2009 by BRAC Bank in Bangladesh, GLS Bank in Germany, ShoreBank in the US, and Triodos Bank in the Netherlands.^[7] It is currently made up of 27 of the world’s leading sustainable banks, from Asia, Africa, Latin America to North America and Europe.^[8]

National Community Investment Fund

National Community Investment Fund (NCIF) invests in mission-oriented banks and other financial institutions that provide responsible financial services in underserved communities.^[9] The NCIF Network includes over 30 US banks that qualify for inclusion based on their Social Performance Metrics and on their participation with NCIF initiatives to advance mission-oriented banking.^[10]

See also

• Carbon Disclosure Project
• Climate ethics
• Corporate social responsibility
• Equator Principles
• Socially responsible investing

References

Further reading

• Ben Cohen and Mal Warwick, Values-Driven Business, ISBN 1-57675-358-1
• 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 http://greenbankreport.com/green-bank-deals/what-is-the-meaning-of-green-banking/
• 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).

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.