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. Ethical
banks are part of a larger societal movement toward more
social and environmental responsibility in the financial sector.
This movement includes: ethical investment, socially
responsible investment, corporate social responsibility, and is
also related to such movements as the fair trade movement,
ethical consumerism, boycotting, etc. The most notable
association for ethical banking is the Global Alliance for
Banking on Values.
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
Historically banks have been viewed solely as financial
institutions, which should concern themselves with all things
financial. Morality has not entered the equation. This public
view has allowed banks significant leeway with concern to
ethical standards. This is because they have not been
associated with the actions taken by the businesses they lend
to. Banks have also stated that a reason for not mounting the
new challenges that sustainability presents is that such
inspection would require interference in the activities of
clients. However 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, and the like to go beyond
conventional business management. For example in the mid-
1990s the Cooperative Bank asked 6,000 customers what their
thoughts were on ethical banking; 84% responded that it was a
good idea. In fact the cooperative bank was formed in response
to the growing consumer base looking for ethically oriented
banks.
Potential for banks to create 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. Banks have
extensive and efficient credit approval systems, which gives
them a comparative advantage in knowledge (regarding sector-
specific information, legislation and market developments).
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.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. 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.
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. 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; credit cards that benefit
charities[1] 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)
 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."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. 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 ethics policies because it would require that the bank
interfere with the activities of its clients and/or screen its
potential clients. External ethics can be seen as much more
important than internal ethics because the potential that the
bank has internally to cause huge societal or environmental
damage is minimal whereas many companies that banks fund
have great potential to cause widespread damage. Internal
ethics, such as switching to energy efficient light bulbs, are
relatively insignificant if the bank is, for example,
simultaneously funding the unsustainable harvest of natural
resources.
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, 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." 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
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). Based on this formula one could argue
that the whole practice of lending is not ethical, as it treats
people 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.
Bank regulations and the free market
See also: Wall Street reform
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". 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. One way people could
influence civil society would be to act as economic regulators
by choosing to do business with banks that do not finance
corporations such as the aforementioned.
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 Threefold Social
Order.)
Ayn Rand suggested that all the evils, abuses, and iniquities,
popularly ascribed to businessmen and to capitalism, were not
caused by an unregulated economy or by a free market, but by
government intervention into the economy.
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.