I found a paper from the Journal of Business Ethics highlighting two types of bank business models including conventional banks and social/ethical banks. The former have merely modified their practices to comply with regulations while the latter anticipate additional changes by adopting a more social/ethical financial attitude. The social/ethical bank behavior entails a general attitude of transparency and accountability which manifests in other concrete actions. They publish all approved loans, explaining details about the project, the name of recipients and the amount of money granted. The social/ethical banks primary objective is not just to maximize shareholder value. They usually refrain from carrying out substantial investment banking operations in the financial market. Consequently, social/ethical banks avoid investing in complex financial instruments that promise high profits but also imply greater risk. They consider the logic responsible for international crises, social inequalities, ecological problems etc. Furthermore, social/ethical banks can occasionally hold financial products until maturity to cover potential liquidity needs, but unlike their counterparts, their participation in the stock market is generally insignificant and confined to long-term and non-speculative operations. Therefore, their focus is savings collection and credit distribution. Social/ethical banks encourage a saving-borrowing solidarity to provide loans at reduced interest rates for projects which are worthy in terms of triple bottom line. The depositors specify the type of project they want to support and propose some sort of interest offset mechanism allowing them to give up a portion of their interest. Pertinent to environmental economics, social/ethical banks are non-hesitant to fund and accept lower levels of financial collateral for worthy, sustainable projects which often generate narrow profit margins. Examples include social and ecological housing, organic farming, renewable energies, social business, green technology, endeavors of small and medium-size companies, etc. Closer monitoring ensures the funds are utilized for the purpose they were created. Although the strategy entails higher initial costs, it is balanced as the risks associated with the projects decrease gradually over time. Finally, social/ethical banks restrict their activities to a local level. A benefit of doing so is increasing knowledge of the region. Operating locally also enables these banks to strengthen the link between their economics and value-driven missions by honing in on community involvement.
The paper’s study identified the following social/ethical banks: ASN Bank, Culture Bank, Banca ethica, BAS, Charity Bank, Eastern Bank, Ekobanken, GLS, Merkur, Rabobank, Umwelt and WIR. ASN’s 2017 Sustainability Report highlights examples of its products and services associated with social/ethical banking as a PDF attached below. I was particularly amazed by ASN’s dialogue with the pharmaceutical industry. The purpose of the dialogue was to identify ways the sustainable, responsible policy that many pharmaceutical companies have in place does not lead to responsible practice. The goal of the dialogues is to tackle the misconduct and monitor individual companies through scorecards. The focus was their payments to healthcare professionals and the remuneration of their sales staff. They also discussed a variety of topics, such as product safety. Separately, Robeco joined some conversations as an investor. On another note, ASN has an offering providing customers with the opportunity to open a savings account with ASN Bank without necessarily having an ASN current account, and that they can withdraw money from their deposits free of charge if they use it to make their home more sustainable. Moreover, ASN bank is located in a sustainably renovated office building. Its energy is in part provided by the solar energy system installed on the roof. The building also has a thermal storage system. The office building has a greywater sanitary system, and the company restaurant uses sustainable products. The company’s report includes a detailed impact report of ASN’s office. I recommend reading the report to see other examples of ASN’s products and services revealing their involvement in terms of the environmental element of the triple threat bottom line. The sections about divesting and biodiversity are intriguing.
https://www-jstor-org.du.idm.oclc.org/stable/24703497?Search%3Dyes%26resultItemClick%3Dtrue%26searchText%3Dethical%2520banking%26searchUri%3D%252Faction%252FdoBasicSearch%253FQuery%253Dethical%252Bbanking%26ab_segments%3D0%252Fbasic_SYC-5187%252Fcontrol%26refreqid%3Dfastly-default%253A5263aff0cd89c42df4fc827bdbc2ab38=&seq=1#metadata_info_tab_contents
Comment by Professor Thomas:
This is very interesting. You write “social/ethical banks avoid investing in complex financial instruments that promise high profits but also imply greater risk. They consider the logic responsible for international crises, social inequalities, ecological problems etc.” So their judgment is that behaviors that tolerate higher risk, business plans that seek to exploit higher risk are less sustainable. This makes sense because the people that take on such plans typically “lay off” the risk via insurance and reinsurance and diversification and short-term plans leading to the planned buy-out… none of which contribute to caution and long term stewardship. …so a paradox arises when large risks are taken for sustainability purposes. We can envision such risks with chancy geoengineering projects to combat climate change or untested programs to alter consumer behavior. A question: Do the social/ethical banks deal with these types of risky projects?
Comment by Cary Evans:
To answer your question, I think it would depend on the how the bank wants to brand themselves. Perhaps the project has more benefits than risks and would help the bank to stand out among the others. The bank could do a cost benefits analysis on a risky project to see how economical it would be, but the project would also need to be valued for their social and ethical efficacy as well. But this is harder to do. If a project does work and proves to be highly effective and ethical, it could make for a better business outcome for the bank.
My Comment:
Professor Thomas and Cary,
Phenomenal question considering social/ethical banks are focused on staying true to their value of supporting the environment. It makes sense to consider whether even the riskiest types of projects would stand in their way. Still, my answer to the question is social/ethical banks do not deal with investing in risky endeavors such as chancy geoengineering projects to combat climate change or untested programs to alter consumer behavior.
The definition of social/ethical banks reveals they do not take risks. Social/ethical banks are non-hesitant to fund and accept lower levels of financial collateral for worthy, sustainable projects which often generate narrow profit margins with minimal uncertainty. Essentially, social/ethical banks are electing to discount their own future by offering reduced interest rates now. Moreover, they refrain from carrying out substantial investment banking operations in the financial market, make decisions to not prioritize maximizing shareholder value, and their participation in the stock market is generally confined to non-speculative operations. Their investment into small, low-risk environmentally sustainable projects is a strategy to minimize their own long-term risk.
I found a research report (Links to an external site.) about Indonesian banks and the palm oil sector. According to the authors, palm oil companies who have refused to adopt sustainable practices increase their costs and constrain their growth. The banks financing the palm oil sector experience a transference of risk as the value of collateral decreases. The authors illustrated investing in certain sustainable development projects is a way for banks to minimize risk.
The authors emphasize Indonesian banks need to understand how defining a sustainability vision must entail how the environmental development fits into their overall strategies. I agree a cost-benefit analysis would be beneficial and non-profit triple bottom line elements are difficult to measure. However, particularly in the midst of an era when banks pioneering investment in sustainable projects can be naively perceived as not economical, the purpose of social/ethical banks is to facilitate the transition to healthier practices by exemplifying a truly holistic triple bottom line including profit. The social/ethical banks do complete evaluations, which take all elements of the triple bottom line into account, before lending. Social/ethical banks go through great measures to identify risks including government data and reports by specialized service providers. Insofar as banks are willing to pay for their staff to conduct research, I do not see economic risk being negated to achieve environmental development. That being said, the social/ethical bank definition of efficiency cannot involve a project which brings high potential for financial loss.
Considering social/ethical banks consistently conduct practices which strengthen their brand, they do not need to make drastic sacrifices to compensate for otherwise unethical behavior. Since social/ethical banks are transparent in reporting the projects they take part in, they need to be even more careful about engaging in risky endeavors because their financial logic can be closely evaluated by other prospective clients, as well as other investors. Social/ethical banks establish their brand by building local relationships through collaboration on financially logical, positively impactful projects. Operating locally enables the social/ethical banks to thoroughly understand the region’s economics so they are intensely controlling the possibility of a financial loss.