Ethical banking: where and how to bank green

by Rachel Alembakis March 31, 2020

As more and more people look to align their financial decisions and products with their personal ethics, banks are responding with products and services that meet that demand.

As regulators, government and consumers grapple with the impacts of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, people are reconsidering their choices in banking.

“What’s really pleasing is that the concept of responsible/ethical investment is moving into the banking sector, and more and more banks are positioning themselves to respond to that demand from consumers who want to make sure that where they put their money is aligned with their own values,” says Simon O’Connor, chief executive officer of the Responsible Investment Association of Australasia (RIAA). RIAA operates a third-party certification standard for investment and banking products seeking to be certified as responsible based on organisational process and how the products are designed and sold.

“We’re seeing lots of specialised products to match the needs and values of the Australian people in the banking sector,” O’Connor says. “I think it’s really important that people do look under the bonnet of any ethical banking product to make sure it’s delivering on the commitments.”

Ethical banking

Several banks such as Bank Australia, Teachers Mutual Bank and Community Sector Banking are all predicated on an explicitly ethical mission statement and have developed products in line with those business strategies.

“What people need to realise is that banking serves the function of increasing the prosperity of people and the communities in which they operate,” says Andrew Cairns, CEO of Community Sector Banking. “Banks, by their own design, are the most efficient and effective means of being able to distribute capital throughout society; that is, how do people who have more money than they need for their standard of living and wellbeing interact with people who need more money to improve their prosperity and wellbeing?

“Our customers have told us that climate change is the number one concern for them for many years, so we’ve taken many steps to be in line with that.”

“We balance being commercially operated with social responsibility. We believe that it’s critical that you concentrate on the value generation for the customer, because the more successful customers you have, that will create the best environment for a prosperous and successful community. And if you have a prosperous and successful community, it is self-empowered, self-determining, inclusive and equitable, and that is the best place for a bank to operate.”

Community Sector Banking is a bank jointly owned by Community 21 and Bendigo and Adelaide Bank. It was established more than a decade ago by 20 not-for-profits. It serves the not-for-profit business sector, and its Social Investment Deposit Account has been certified as a responsible banking product by RIAA.

At Bank Australia, its strategy of banking with values is grounded in its structure as a mutual bank, and the business is run in alignment with its customers’ values, says Fiona Nixon, head of strategy and communications, Bank Australia.

“Our customers have told us that climate change is the number-one concern for them for many years, so we’ve taken many steps to be in line with that,” she says. “We’ve always had a commitment not to invest in the fossil fuel industry. Over the last couple of years, we’ve done a lot of work to find out what the other issues are, and develop a policy around where we land and where we don’t land.”

That discussion with customers recently led Bank Australia to refuse to invest in the live animal export industry or intensive farming practices where animals aren’t able to display natural behaviours, Nixon says.

In practice, this means that Bank Australia evaluates their lending practices to the commercial sector.

“The biggest part of our asset book is lending to individual people,” Nixon says. “That part is relatively easy. Our lending to the commercial sector — we have quite a thorough process around assessing each commercial application coming in to make sure that businesses aren’t in the industries we don’t want to invest in. That’s why we say we don’t lend to those industries.”

Bank Australia has evaluated where it puts money in shorter-term lending vehicles, known as liquidity.

“The liquidity side of things is a bit more of a work in process,” Nixon says. “We moved a large part of our liquidity into sustainable bonds and other vehicles where we can be much more confident as to where the money is going.”

Teachers’ Mutual Bank also has a similar commitment to ethical banking, and has a list of negative screens, or sectors to which it does not lend, where the primary purpose of the entity or business is alcohol, armaments, correctional facilities, cryptocurrency, deforestation or gross environmental degradation, gambling, military activities, political activities, pornography, slavery, tobacco or uranium, the bank says.

“For people who do really want to think about aligning banking with their values, they need to think about where they want their money invested.”

“We do believe that banking can be ethical, and it’s grounded in how you treat your members and being open and transparent,” says Brad Hedgman, deputy CEO of Teachers Mutual Bank. “That clearly came out of the Royal Commission — banks have to do not only the right thing, but what your members and customers think are the right thing. We’ve expanded our brand into key working groups, so for us it’s about understanding what their expectation are. Our customers have strong expectations around community, climate change and other topics. We can align everything we do with those expectations.”

Further, Teachers Mutual Bank has a commitment to invest more than 3 per cent of profit every year in community investment, and in the last financial year it was 6.8 per cent, the bank says.

Positive actions

In addition to defining activities that banks won’t engage in, the banks interviewed also talk about positive actions that they carry out, particularly in the area of affordable housing, which is aligned with activities such as mortgage lending.

“We definitely have positive screens as well,” Nixon says. “As part of the positive screens, we’re looking for more activities to do — investing in community housing and housing for people with disabilities is an area of interest for us that we’ve been able to pioneer ways of investing into the space. We’re also doing a lot more on community renewable energy and environmental upgrades.”

Teachers Mutual has funded academic studies into affordable housing, Hedgman says.

“One of the big things for us is a study into housing affordability for the key worker segment,” he says. “What we do, which is specifically aligned to our members (because we’ve been covering firefighters [and] nurses), we can focus specifically on our key worker. We’ve worked with the University of NSW on this issue, and that study was used as a basis for lobbying to government around housing affordability.”

For Community Sector Banking, which provides services for not-for-profits and profit-for-purpose organisations, that means providing products and services focused on supporting the transition from a destructive economy to a regenerating economy, Cairns says.

“We are ensuring we have the right products and services to meet the current and growing needs of the sector. But as a dynamic, it’s about ensuring that we’re an actor in changing, if you like, the system from one where we look at the moment at a destructive economy into a regenerating economy,” Cairns says. “So people look at welfare as a cost, but we see welfare as an investment in an inclusive and equitable Australia. Our current means for supporting charitable organisations, the rising cost of healthcare, elements where you look at our role as a leader in the communities in which we operate, we see all that as a means for us to change the debate.

“Whether that is by our own action; whether that’s by influencing others; whether that’s by creating new ecosystems; whether that’s measuring real output; whether it’s ensuring that people understand the UN Sustainable Development Goals and our role in providing that; whether it’s helping the for-purpose market develop in Australia, which looks at a social economy, one based on the economic fundamentals as well as the social outcomes — it’s all critical for us as a business.”

Clear communication

All three banks speak about the importance of having clear communication with customers, both to make sure customers are informed and to ensure customer views are clear to them.

“We use a whole range of channels to reach people,” says Nixon of Bank Australia. “We do quite a bit of formal surveying of customers, particularly when we’re figuring out that hierarchy of important issues. We have a fortnightly communication to customers, and we’re delighted to find that emails are opened by more than 40 per cent of customers. We do try and keep that communication relevant to our customers, both on helping them understand money matters and the impact that they’re having by banking with us.

“We’ve also done a lot more work with the advertising strategy — bold simple messages that try to communicate clearly what we’re about.”

Demonstrating that communication and consistency is key to receiving certification by RIAA, O’Connor says.

“We need to see evidence that the organisation overseeing has a commitment to responsible and ethical banking practices,” he says. “We need to be convinced that the bank has a commitment to that. It doesn’t mean that every product has to be an ethical and green product, but it can’t be a bank that has no other commitments with one product on the side. We need to see consistency.”

However, these banks believe that they’re in the early stages of communicating more broadly with the market, and that their choice in banking products can influence money flows in ways similar to ethical investing.

“For people who do really want to think about aligning the banking with their values, they need to think about where they want their money invested,” says Nixon of Bank Australia. “The money doesn’t sit there in their accounts waiting for them. We lend to other industries in the meantime. We don’t think that a lot of Australians have connected the dots that the money in their bank account does stuff, and do they agree with what that money is doing while they’re waiting to get it out again.”

Moral sense

Hedgman of Teachers Mutual also thinks that general complaints about the state of banking haven’t yet translated into moves towards banks that more specifically identify as ethical banks.

“People are happy to complain about their banks, but they don’t move,” he says. “The younger generation with more of a moral sense and a community concern will vote with their concern by going to other banks.”

While RIAA does list ethical banking products on their Responsible Returns website, and have certified products as responsible, O’Connor notes from consumer research conducted on investment products that 69 per cent of millennials will consider making ethical or responsible investments in the next one to five years. Millennials are the most likely to consider changing superannuation providers or other investments to another provider if their current fund has engaged in activities not consistent with their values: 88 per cent, compared with Gen X at 77 per cent and Baby Boomers at 68 per cent.

Bank Australia is getting more questions from customers and non-customers alike about their operations.

“Even three years ago it was divestment from fossil fuels, a single issue, whereas now people are asking questions about a bigger range of issues, and going to how does the bank operate, what sort of standards do you have in place,” Nixon says. “They’re asking about the way that companies do business and whether they are in business for profit maximisation, or are they using business to have a positive impact. I think there is a growing consciousness about that generally, and therefore the questions that we are getting are much more holistic.”

Rachel Alembakis is a communications specialist with expertise in financial journalism, with extensive general experience in research, writing and reporting. Contact Rachel at rachel.alembakis@thesustainabilityreport.com.au.