A Guide to Ethical Banking

6 Apr 2022

This article was written by Amy Nguyen, Founder of Sustainable & Social

At A Glance

As active citizens, the sustainability narrative is framed around purchasing with purpose. Spending on conscious clothing, dining at ethical eateries or participating in climate protests are obvious means we as individuals can create a positive impact on society and our planet.

But what happens to the money that we aren’t spending? Ethical banking considers how your unused funds are invested by financial institutions within the global economy. It places value on aligning your beliefs with an organisation that both upholds principles on preserving ecosystems, and is committed to achieving the United Nation’s 2030 Sustainable Development Goals.

For those of us who work outside the banking and financial services sectors, it may come as a sharp surprise that many banks are pumping money into fossil fuel industries, fracking or companies associated with rainforest destruction. This also applies to how your employer is managing their pension scheme.

Consider – when was the last time you switched bank? Many of us will have multiple accounts; daily expenditure versus small savings, cash ISA’s and rainy-day funds for the ‘better late than never gap year contingency plan’. According to a 2015 Gov UK survey, 75% of personal current account holders have never switched, with nearly 1 in 5 saying this was because of the hassle and potential risks!

Financial institutions constantly address themes of mitigating and managing risk. However, for many - their conduct and commitment towards sustainability issues prove they are inadequately addressing the greatest risk of all, the climate emergency.

This article weighs in on how your banking behaviour pays dividends to your conscience and will provide useful tools and a little nuance to enable you to circumvent the quagmire of ethical banking. 

 

Financial Friend or Foe?

How do we distinguish from the good, the bad and the ugly?

Firstly, building societies are naturally more ethical than traditional banks as they are member owned and a mutually operated financial institution, meaning that they are owned and run for the benefit of their members.  By virtue, they have strict regulations that limit the amount of money invested in certain industries. Profits of building societies are more often than not reinvested into regional or local businesses to create added value for customers over shareholders.  You can view the UK’s top ten building societies here. Dedicated organisations to environmental causes include the Ecology Building Society and UK Green Building Society.

There are a sprinkling of banks that take their role of business in society seriously.  Their operations reflect their ethical values through how they interact with the preservation of ecosystems, human rights and sustainable policies, these include:  

 

Charity Bank – the world’s first not for profit bank. Charity Bank only invests in social enterprises, charities or businesses that have a charitable mission. It doesn’t offer current accounts but provides personal savings or business loans. Their positive impact can be measured by the fact that during Q1 of 2018 they provided over £15.2 million to the social sector.

 

Triodos Bank – well versed in the premise of transparent banking, Triodos only lends to projects with cultural value or societal benefit to the world’s stakeholders. This means swapping weapons, gambling and tobacco industries for renewable energy, eco-development, education and healthcare. They charge a monthly fee of £3 for a current account.   

 

Co Op - the UK’s oldest ethical bank. They are the only UK high street bank that have explicitly published their ethical policy. Investments are diverted away from fossil fuel industries or those that test on animals. Recently, the Co Op’s ethical practices have come under scrutiny as they were acquired by a US hedge fund in 2017.

 

New Kids on the Block

The way we manage our money as citizens has been revolutionised over the last decade. As an increasingly cashless society, fintech start-ups are ubiquitous with daily spending and on their way to becoming banking giants. As well as simplifying currency exchange, transfers, transactions and online banking, these companies are more ethical options that offer climate friendly products.

 

Starling – began in 2014 as an entirely paperless bank, therefore instantly has a smaller carbon footprint than traditional competitors.  Starling provides business and current accounts that invest in security or high-quality liquid assets void of involvement in fossil fuels.

 

Monzo – are you even a millennial if you don’t have a coral coloured card? ‘Tired of the way traditional banks do business’, they have remodelled mobile monthly budgeting, transferring to friends as well as attractive exchange rates. As well as allowing account holders to have overdrafts, they have recently launched a community campaign and have collaborated with The Big Issue.

 

Atom – The UK’s first app-only bank that offers savings or mortgages. Atom emphasise trust, an element crucial to sustainability and ethics. They offer fixed rate saving products and disclose all research on their website. 

 

Revolut Their competitive advantage lies in foreign currency but this mobile banking company offers commission free stock trading options as well as Revolut Donations. This tangent enables users to easily donate to charitable causes that matter to them.

 

Profits over Planet?

Household British high street banks are culprits of questionable operations in oil and gas, fracking, tobacco and weapons. This includes but is not limited to; Barclays, NatWest, Lloyd’s, HSBC and Royal Bank. For example, Barclays is unbeknownst to many, the top European banker of fracking and coal. Since the signing of the Paris Agreement in 2015 (where 197 global parties agreed to curb warming at 1.5-2 degrees), it has funded over $85 billion into fossil fuels and over $30 billion into the expansion of nuclear weapons productions and arms.  Whilst this is just one case, other players are heavily involved in fracking and human rights abuses. You only have to look at the £1.2 billion fine HSBC received in 2012 from the US authorities in relation to laundering the money of drug cartels to question certain practices.   

 

For context on global warming and the climate emergency – albeit not all UK high street banks – 33 financial institutions contribute to fossil fuels industries. According to Bank Track, between 2016 – 2018 alone, European, American, Chinese, Canadian and Japanese banks have financed over $1.9 trillion to fossil fuels since the Paris Agreement.  The findings revealed that JP Morgan was the worst offender having invested over $196 billion between those two years. Take a look at the Banking on Climate Change report for the full scoop.

 

Advancements towards sustainable development within the finance industry are being welcomed by the likes of Larry Fink, CEO of Black Rock and Marc Carney, the departing Governor of the Bank of England. Climate change is increasingly recognised as a structured long-term crisis to investors and asset managers. This has prompted organisations to integrate impact investing, the issuing of green bonds, ESG (environmental social governance) criteria and negative screening into financial frameworks. Whilst this topic makes for an entirely separate article, recent evidence includes Blackrock’s pledge to increase its sustainable assets from $90 billion to $1 trillion within the next decade and Royal Bank’s commitment to phase out coal funding. For those interested, you can read more here

 

A note on governance – the remit of sustainability credentials encompasses solid corporate governance structures too. Measuring a banks’ ethics on investment behaviour alone does not suffice as we must look at their history of tax fraud and tax evasion. Levels of environmental disclosure, attitudes towards racial diversity and gender equality are all factors to be weighed in on.

 

Final Thoughts - Do Your Research

Ultimately, taking the leap to switch banks depends on your priorities, levels of trust and the lengths at which you will go to align your ethical values to your banking habits.

Diving into the research and investigating a company’s financial frameworks as well as sustainability metrics and targets enables us to make informed, rationalised decisions.

For those intrigued by this topic, head to the trusty hub that is Ethical Consumer . This is particularly insightful if you want to get clued up on the minefield that is ethical mortgages. 

Fuss free switching has been enabled by the UK Government’s Current Account Switch Service. Regardless of your overdraft status, this service ensures no charges will be incurred for switching to an alternative provider.

And finally, for the fully galvanised, Extinction Rebellion offers advice on how to act and make pledges, read more here.

 

For more on sustainable finance you can read Amy’s articles on socially responsible investing and ESG analysis here.