The Economic Realms: Ethical Banking

Tuesday, 8 January 2013

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. 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, and shares some approaches with Islamic 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.^{Jeucken 2002} 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.^{Harvey 1995} 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. ^{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^[1] or lower interest rate loans for low emission cars.^[2]

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 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^{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, 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

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.^{[citation needed]}

List of ethical banks

Europe

Denmark

Germany

GLS bank
EthikBank (serves also Austria)
Umweltbank

Spain

United Kingdom

Charity Bank
Co-operative Bank
Reliance Bank
Shared Interest, based in the United Kingdom, investing throughout the developing and developed world
Unity Trust Bank
Ecology Building Society

Other European countries

Cultura Bank, Norway
MagNet Community Bank, Hungary (Hungarian wiki-article)
JAK members bank, Sweden, interest-free bank
Ekobanken, Sweden
Crédit coopératif and NEF, France
Alternative Bank Schweiz, Switzerland
Banca Etica, Italy
ASN Bank, the Netherlands

Based in various countries

Triodos Bank, The Netherlands (also based in the UK, Belgium, Germany and Spain)

North America

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.

Canada

Citizens Bank

Oceania

New Zealand

Prometheus

The Co-Operative Bank

Alliances

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, ShoreBank in the US, and Triodos Bank in the Netherlands.^[4] It is currently made up of twenty one of the world’s leading sustainable banks, from Asia, Africa, Latin America to North America and Europe.^[5]

References

^ Citizens bank
^ (ex. of low emission car initiative put forth by Citizens Bank)
^ Steiner, Rudolf (1999). Towards social renewal: rethinking the basis of society. London: Rudolf Steiner Press. pp. 8 and Chap. 3.
^ http://www.microcapital.org/microcapital-story-global-alliance-for-banking-on-values-launched-in-the-netherlands-eleven-banks-join-to-form-the-alliance/
^ http://www.gabv.org/AboutUs/

^ 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.

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
Ethicalconsumer.org Ethical banking guide (UK)

1 comment:

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The Economic Realms