Green economy  |  Successes  |  30.06.2011

Ethical Banking

Ethical banks are those which take into account the social and environmental impacts of their loans. Banks play a crucial role in the real economy and are in a very strong position to influence corporate behaviour. Unlike traditional banks, which only consider their bottom line, ethical banks add an extra set of criteria when deciding whether or not to make a loan or what interest rates they are prepared to offer. This can have far-reaching effects: increasing the cost of borrowing for companies which undertake socially or environmentally damaging behaviour, and providing much needed funds to organisations which have positive societal or environmental impact.

There are no agreed standards or codes for ethical banks. Some operate much in the same way as other high street banks except that they refuse loans to businesses which compromise their ethical policies. Others take a more discerning approach, and only lend to businesses or charities which are making demonstrably positive impacts on society or the environment.  Transparency is a central principle for many ethical banks; customers can see exactly who their money is being lent to. Ethical banks make money, but their ethical focus means they often operate with narrower profit margins, or make less profit.  However, by being more discerning with their lending activities ethical banks have one crucial advantage over many of their competitors: they are exposed to far less risk.

By lending only to businesses which operate in the real economy, ethical banks were not exposed to the stunning collapse in value of toxic financial instruments. Ethical banks have proved very secure for depositors, and many have been able to grow more quickly during a period of global financial crisis. Adopting ethical banking principles more widely would lead to a more sustainable financial sector, but could also encourage sustainability in the real economy. This could be done by offering reduced interest rates to companies with the most positive environmental and social impacts, and charging increased rates of interest to those companies which have external environmental and societal costs.

However, many ethical banks are up and running, and are already making a tangible difference.  By moving your current account or savings to an ethical bank you can be sure about exactly what effects your money is having on society when it is not in your pocket.  Many ethical banks offer competitive rates of return, and switching bank accounts could prove to be one of the simplest ways of reducing your carbon footprint.

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creative commons flickr.com Ley Reynolds