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 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

Since old time Christian communities were based on the anti-materialism of Jesus, banking was ethical and any form of "Usura" (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), outlawed usurers.

Mainstream financial banks have had varying relationships with corporate social responsibility and ethical investment. 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, NGOs, 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..

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) 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 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.

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. 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, 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 they 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, 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. 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.

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

John Stuart Mill expanded on Jeremy Bentham's utilitarian theory. Bentham's fundamental axiom holds "it is the greatest happiness of the greatest number that is the measure of right and wrong". Mill observed that this axiom alone would allow for actions that lacked morality, in the ethical and even legal sense. For example, under Bentham's unqualified fundamental axiom, it would not only be admissible, but "right" to live in a Robin Hood society, where one person's happiness (the robbed rich man's) is sacrificed in favor for the substantially improved happiness of the greatest number. On this account Mill elaborated on the ethical dimension of Utilitarianism, measuring the right- and wrongness of an action both in terms of aggregate happiness, or "utility", following Bentham's fundamental axiom, but not without disregard of moral or ethical quality of the action itself.

Therefore, in Mill's perspective a bank would be moral if it tended "to promote happiness".(p. 10) 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) 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). 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). 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

See also: Wall Street reform

One 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". 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. 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.

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. (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
• Ikano Bank

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
• Handelsbanken, [1]
• 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: Handelsbanken
• 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.
• Beneficial State Bank, Headquartered in Oakland, with branches throughout California in Sacramento, East LA, North Hollywood, Fresno, Bakersfield, Santa Rosa, Porterville, and Visalia, as well as Portland, OR and Seattle, WA. Beneficial State Bank is a community development financial institution (CDFI), certified B Corporation, and a Global Alliance for Banking on Values member.
• 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.
• City First Bank, Based in Washington, DC, First City Bank is an FDIC insured, nationally chartered commercial bank with a mission to support and strengthen underserved communities in Washington DC and the surrounding suburbs.

Other value-based banks in the USA and around the world can be found with Global Alliance for Banking on Values.

Oceania

Australia

• Bank Australia, based in Kew, Victoria, is a financial co-operative that attempts to operate responsibly by upholding environmental, social and economic values.

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. It is currently made up of 27 of the world’s leading sustainable banks, from Asia, Africa, Latin America to North America and Europe.

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. 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.

See also

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

References

• ^ Aristotle, and Joe Sachs. Nicomachean Ethics; Nicomachean Ethics. English. Newbury, Massachusetts: Focus Pub./R. Pullins, 2002.
• ^ Bruyn, S. T. "The Moral Economy." Review of Social Economy 57.1 (1999): 25–46.
• ^ Cowton, C. J., and P. Thompson. "Do Codes make a Difference? the Case of Bank Lending and the Environment." Journal of Business Ethics 24.2 (2000): 165–178.
• ^ Coro Strandberg. (2005). Sustainability finance study:A study of best practices, standards and trends in corporate social responsibility
• ^ Fairbairn, B., et al. Credit Unions and Community Economic Development. Centre for the Study of Co-operatives, University of Saskatchewan, 1997.
• ^ Green, C. F. "Business Ethics in Banking." Journal of Business Ethics 8.8 (1989): 631–634.
• ^ Greenspan, Alan, "Gold and Economic Freedom," Capitalism: The Unknown Ideal, 101. Inflation, Ayn Rand Lexicon.
• ^ Greenspan, Alan, "Gold and Economic Freedom," Ayn Rand — Capitalism: The Unknown Ideal, 96. Gold Standard, Ayn Rand Lexicon.
• ^ Harvey, B. "Ethical Banking: The Case of the Co-Operative Bank." Journal of Business Ethics 14.12 (1995): 1005–1013.
• ^ Jeucken, M. "Banking and sustainability—slow Starters are Gaining Pace." Ethical Corporation Magazine 11 (2002): 44–48.
• ^ Jeucken, M. H., and J. J. Bouma. "The Changing Environment of Banks." GREENER MANAGEMENT INTERNATIONAL (1999): 21–35.
• ^ Kant, Immanuel, and H. J. Paton. The Moral Law : [Or] Kant's Groundwork of the Metaphysic of Morals. [3 .] ed. London: Hutchinson University Library, 1956.
• ^ Mill, John Stuart, and Oskar Piest, eds. Utilitarianism. Indianapolis ; New York: Bobbs-Merrill, 1957.
• ^ Missbach, A. "The Equator Principles: Drawing the Line for Socially Responsible Banks? an Interim Review from an NGO Perspective." Development 47.3 (2004): 78–84.
• ^ Rand, Ayn, "The Objectivist Ethics", The Virtue of Selfishness, 23. Morality, Ayn Rand Lexicon.
• ^ Rand, Ayn, "Moral Inflation," The Ayn Rand Letter, III, 12, 1. Inflation, Ayn Rand Lexicon.
• ^ Rand, Ayn, "Who Will Protect Us from Our Protectors?", The Objectivist Newsletter, May 1962, 18. Inflation, Ayn Rand Lexicon.
• ^ Rand, Ayn, "America's Persecuted Minority: Big Business," Capitalism: The Unknown Ideal, 48. Free Market, Ayn Rand Lexicon.
• ^ Rand, Ayn, "America's Persecuted Minority: Big Business," Capitalism: The Unknown Ideal, 47. Free Market, Ayn Rand Lexicon.

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).

San-José, L. de al. (2011). Are ethical banks different? A comparative analysis using the radical affinity, Journal of Business Ethics. indexhttp://www.springerlink.com/index/3533206g86u841j0.pdf

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.