From handling the money entrusted by the clients, lending out money to qualified borrowers and making financial transactions possible, a range of financial services are offered by banks. Yet does that mean that everyone gets access to these services? Not exactly. The aim of any bank is to prioritize its own profit.
Of course this implies that banks generally avoid taking up clients that hold the risk of costing them too much money. For instance, people with a dubious credit history, low income or too many pending loans are generally rejected owing to their high risk of default. Even ecologically friendly projects pose the same risk, making banks cautious of lending money to them.
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This leaves such individuals with lesser liberty of being able to borrow and save money, restricting their scope of enhancing their life. This is where the concept of Ethical Banking emerges. The concept upholds the argument that this practice reduces the individuals and communities to a cycle of poverty with no solutions being offered to them to be able to escape from this plight.
When we look at this from a broader perspective, this actually has a deeper meaning than we realise. With lower income communities and individuals being restricted in terms of development, this in turn could pose the threat of reduced national tax revenues while making them more reliant on government aid. For tackling this issue, policies solely focused on profit making would not be enough.
What is Ethical Banking?
Ethical Banking is all about the awareness of how the banking practices are impacting the environment and the society. While the financial institutions that follow ethical standards also require profits, like all financial institutions do, yet they work towards deriving these earnings without putting their principles at stake.
A lot of factors determine what is considered ethical in a financial institution. The main query that we focus on is who is the bank responsible towards?
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In the present era, the banks are now responsible towards the society and the community they are part of, contrary to the old era where the banks and other financial institutions were only responsible towards their shareholders and solely focused on maximizing profits.
A bank’s social responsibility can range from commitments towards gender equality, minority representation, commitments for supporting and investing in businesses and the causes which align with social causes and environmental sustainability
The integral question that ethical banking is based on is that do the actions and investments of financial institutions back the ethical standards that we wish to abide by?
What makes a bank ethical?
In today’s times, the ESG principles of a bank or a building society can encompass where the member’s money is invested, where it will decline to invest its money as well as how it pays its staff.
For instance, Triodos Bank supports the companies, institutions and projects that aid the people and environment and offer cultural value. The bank started out in 1980 and has backed many fair trade enterprises as well as renewable energy companies.
“We only finance companies that focus on people, the environment or culture.
- Triodos Website
Alongside steering clear of companies that are involved in particular sectors, Triodos also discloses the details of each organisation that it lends to, awarding people with the transparency to ensure that their bank’s lending policies are in synchronization with their own values.
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Ever since 1980, the bank’s sustainable financial products have allowed organisations as well as individuals to adopt their money in a way that helps the environment as well as the people.
Yet another example is that of the Co-Operative Bank which is immensely popular for its ethical stance. The bank emphasises on the policy of going beyond carbon neutral and on not sending any waste to landfill.
The bank also campaigns side by side with Amnesty International UK for tackling injustice, collaborates with Refuse for going against economic abuse and offers homeless young communities with and has partnered with Centrepoint to support young homeless people across the UK.
The bank’s efforts have been acknowledged by Independent experts like Sustainalytics, who have granted it the best ESG rating in June 2021, received by any UK high street bank.
Characteristics of Ethical Banks
There’s a lot that is encompassed under the ethical banking umbrella. Whether it is offering financing to help in affordable housing or to support the costs of ecologically friendly projects, Ethical Banking involves a number of aspects. But there are some underlying characteristics followed by nearly every bank that is abiding by ethical protocol :
Characteristics of Ethical Banks
1. Screening clients
For every bank, screening their clients is a top priority for determining whether or not they are financially stable. In case of ethical banking, this becomes even more crucial in order to ensure that the bank doesn’t join hands with any parties who could fail to follow ethical practices.
2. Getting involved in the community
Generally the banks abiding by ethical protocol prioritise interactions with local communities to promote a thriving and favorable environment locally.
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This protocol could incorporate things like setting up funding for sponsoring an ecologically friendly event or supporting projects for enhancing a community’s financial literacy.
3. Consistency of ethics
Ethical banking involves maintaining both the internal and external ethics and keeping them uniform. It's not just about the external ethical conduct, the same needs to be incorporated internally. For instance if a bank refuses to take up a client if they don't uphold diversity, the bank should accommodate a diverse staff itself as well.
4. Sustainable practices
Ethical Banking is about ensuring that banks instill environmentally friendly initiatives and standards wherever they can, while also extending their aid towards clients that abide by these standards.
Different Ethical Banks
We’ve listed some of the most well known Ethical Banks offering the most suitable ethical current and savings accounts.
Ethical banks for online current accounts
One of the banks leading the ranks when it comes to the ESG (Environmental, Social and Governance) criteria is Triodos, the online bank which is popular for financing platforms, projects and institutions which contribute cultural value and help out people as well as the environment.
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The bank doesn’t invest into areas like the military, coal power, arctic drilling, weapons, tar sands, fracking, mining, or fossil fuels.
The costs are divided and shared equally among the current account customers while the bank charges around £3 per month for a current account without simultaneously not permitting customers to go to extremes or charging any shrouded fees.
Starling is an app-based bank, which is operated only through the phone. The platform makes use of a carbon neutral internet hosting provider, which also implies that it has a more petite carbon footprint comparatively, because of its absence of physical branches. The bank does not have a monthly fee when it comes to its current account while offering an interest rate of around 0.05%.
Ethical banks for branch-based ethical current accounts
Nationwide, one of the biggest building societies worldwide and a huge cooperative financial institution is the best choice for the ones who prefer an acclaimed and leading brand having physical branches and a huge product range and for the ones who don’t mind direct and clear cut statements regarding environmental or ethical campaigning. The platform prioritises being accountable towards its customers as much as its shareholders.
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Co-operative Bank, as mentioned earlier, is another effective option that can be adopted in case of current accounts. Although the bank’s reputation fell into jeopardy owing to the “crystal methodist'' scandal in which its non-executive chairman Paul Flowers was involved, yet the bank upholds a clear cut an ethical screening policy which restrains it from offering banking services to certain sectors such as gambling, weapons manufacturing and also for tax avoidance policies.
Ethical savings accounts
For the ones who are on the lookout for an ethical savings account over a day-to-day current account, Charity Bank becomes an excellent option. Like its name implies, the bank is headed by charitable foundations and only makes use of its saver’s deposits for lending to charities and social enterprises, executing a social influence assessment for every loan that it makes. Charity Bank is fully transparent when it comes to the parties it lends to.
There’s still a long way to go in terms of coming to terms with the whole influence of everyday banking, whether it is current accounts, savings accounts, or investments. The banks which have a healthy and favourable influence on the environment commit towards offering a sustainable and healthy shared future to offer a helping hand towards the people.