What Makes a Bank ‘Ethical’

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The word ‘ethical’ is hard to pin down. A single behaviour or act can be ethical while the overall nature of an enterprise or philosophy might be said to be unethical. When it comes to banks and financial institutions, there are different metrics we can use to evaluate whether they are ‘ethical’ banks or not. It is important to have these metrics clear, as people increasingly want to know what their bank is doing with their money and look for opportunities to bank more ethically. With that in mind, below are some of the defining characteristics and criteria of and for ethical banks. 

Ethical investment

Ethical banks are defined, first and foremost, by the extent to which their investments can be said to be ethical. When banks take their clients’ capital and invest it into money-making ventures, they can either do so with the philosophy that they will not invest in companies that have little or no social or environmental conscience or not. A bank’s commitment to making ethical investment decisions is largely what determines its status as an ethical bank because all other investment decisions will flow from this core principle. 

While many of the world’s largest banks continue to support harmful industries like fossil fuel and tobacco, there are plenty of ethical banks that people can choose to do business with. They are located around the world and make ethical investing the focal point of their value proposition to their customers. 

Impact investment

Impact investment is another defining characteristic of ethical banks and ethical banking. These are investments that are made with the objective being to generate a positive ROI at the same time as they create positive social and environmental impact. The reason impact investing continues to grow in popularity as a form of investing is because it continues to show returns for investors. 

Banks that participate in impact investing may run their own impact funds, offer opportunities to invest in them to their clients and/or have some or a substantial percentage of their portfolio invested in these funds. Banks without this ethical core or imperative may also have money invested in these kinds of funds, but they would not be part of their primary investing model and the ethicality of the fund would not be the main consideration. 

Socially responsible investment

Socially responsible investing is a form of impact investing that focuses on the social component of an investment, and particularly the impact that an investment will have on social justice. As with any form of impact investing, socially responsible investing is not charity, but a way to generate returns while concentrating on positive social change. 

Some banks, in the wake of the protesting and rioting during the summer of 2020, have started to focus on providing black and minority-owned banks better terms on things like supply chain financing. This investing in black, minority and female-owned business still aims to generate a profit for the bank while allowing easier access to capital for people who have been historically marginalized and, for various reasons, unable to access the financing required to start small businesses. 

Corporate social responsibility 

Corporate social responsibility is another metric with which one can evaluate a bank’s commitment to ethical behaviour. Examples of corporate social responsibility include banks that make efforts internally to reduce their carbon footprint, improve their labour policies, participate in fairtrade, have a clearly defined and consistent charitable giving strategy, participate in the community and provide employees with opportunities to volunteer, enact corporate policies that have a positive environmental impact, and invest with the intention of positively impacting the environment and society. 

Divestment

It is not only what a bank does that makes it ethical or not, it’s what it does not do as well. Investment is one way to engage in ethical behaviour, and divestment is another. Of all the major banks and financial institutions around the world, some are currently in the process of doing things like divesting from fossil fuel industries, while other banks continue to support this paradigm. 

Banks in different countries are engaged in, to varying degrees, the funding and defunding of industries that engage in environmentally and ecologically degrading activities like deforestation, peat forest destruction, destructive fishing techniques, freshwater pollution and more. 

Conclusion 

The private sector, and particularly the financial sector has a very important role to play in creating a more socially just and environmentally secure future for humanity. As the drivers of global capitalism, big banks and financial institutions, because they are in a position to have such a large impact, have an obligation to behave ethically, and at the very least to begin to offer their clients more opportunities for ethical investing. Keep in mind the above criteria when evaluating your future banking decisions and be confident that you are giving your money to an ethical bank.