A Beginner’s Guide to Ethical Banking

The five biggest banks control trillions of dollars of assets.

Today’s modern, savvy consumers are becoming increasingly aware of how their purchasing decisions create ripple effects in an increasingly globalized economy. You can see this in consumer habits across the board, from shoppers who want humanely raised meat to manufacturers who boast that their packaging is made from post-recycled material. 

The financial industry — specifically the banks and financial institutions with whom you do your day-to-day banking and investing — have not been left untouched by the push for ethical transparency and sustainable practices. Today, let’s explore the rise and growth of ethical banking: What it is, why it’s important, and how to choose an ethical bank.

What is Ethical Banking?

What constitutes “ethical” or “sustainable” varies from person to person. Likewise, what determines the ethical nature of a financial institution varies. 

Regardless of the final definition (and any third-party certifications a bank might have about its ethical practices), ethical banking boils down to a simple concept: Who is the bank responsible to?

In the older, more traditional model, banks and similar financial institutions were beholden solely to their shareholders. The bank’s main goal was to maximize profits for its shareholders, and it was, for the most part, responsible only to its shareholders.

This mindset and approach shift slightly for ethical banking. Not only is the bank responsible to its shareholders (who still want the bank to generate a good return on their money), but the bank is also accountable to the greater community and society in general.

This aspect of social responsibility may play out in various ways, such as commitments towards:

  • Gender equality
  • Representation of minorities
  • Environmentally conscious practices and regulations
  • Commitments to support and invest in businesses and causes that align with social causes or environmental sustainability 

If you were to boil it down to a single question, you as the consumer or investor would ask: “Does my financial institution’s actions and investments support the ethics and progress I want to see in the world?” That, in a nutshell, is what ethical banking is all about.

The Importance of Ethical Banking

Despite the common refrain about money being the root of certain social ills, it is not inherently unethical. Likewise, banking itself is not naturally devoid of ethics. 

In the first quarter of 2020, the average bank had assets worth $4 billion, but only Bank of America, Wells Fargo, and other top banks had trillions of dollars in assets each. With financial institutions holding this unprecedented amount of assets, consumers and investors want to know how those trillions of dollars are being put to use.

And in general, it doesn’t look good if you’re someone who wants your bank to use those assets to support ethical, sustainable political, business, and social practices.

Every single dollar you put into your bank’s ethical banking savings accounts, retirement accounts, or stock brokerage goes somewhere. And does that “somewhere” align with your ethics, morals, and values? In many cases, likely not. 

For example, one recent study found that while most investors want their investments to support socially and environmentally sustainable causes, most banks either didn’t provide ethical options or failed at meeting the ethical promises they made to consumers.

The trillions of dollars of assets that banks control are a powerful force. Whether that means the bank is a force for good or evil is up to you, your bank, and the internal and external regulations and rules the bank sets for itself.

Internal and External Banks Ethics 

When it comes to ethical banking, consumers and investors like you can review two sets of banking practices:

  • Internal Bank Ethics: How the bank conducts itself ethically within its own offices and structure.
  • External Bank Ethics: How a bank’s actions in the community affect the causes and issues that matter to you.

Ethical Banking Examples of Internal Ethics

  • Hiring practices and equal representation of minorities, such as women, racial minorities, and representation by those in the LGBTQ+ community.
  • Business operations, such as environmentally friendly office practices (e.g., use of solar power, recycling policies, commitment to reducing power usage, etc.)
  • Local community involvement, for example, if the bank donates to local food banks or supports issues like low-income housing.

Examples of External Ethics

  • Support of clean energy (e.g., hydro, solar, wind, etc.) versus support of oil, coal, etc.
  • Involvement in political and social causes, such as the tobacco industry, gun manufacturing, etc.
  • Secondary support of manufacturers, brands, etc., that may or may not support social issues (for example, some banks might not donate to the political campaign of a politician that the bank deems doesn’t fit their ethical framework)

Some consumers focus primarily on external ethics, such as how their retirement fund supports or doesn’t support the use of prison labor in America. Other consumers look at both external and internal ethical practices to determine what financial institutions they choose to use. And still, others might only care about one specific issue, such as how a bank donates to political causes (case in point: in 2014, American banks contributed nearly $30 million to various political campaigns).

List of Which Banks Are Ethical

Many banks have made a clear commitment to ethical financing and banking practices. This ethical banks list includes, but is hardly limited to, financial institutions like: 

  • Aspiration Bank
  • Beneficial State Bank
  • Amalgamated Bank
  • City First Bank
  • Mascoma Bank
  • Spring Bank
  • Sunrise Banks
  • And more

Clearly, the list is long. But not as long as more conventional banks that have not committed to environmentally and socially responsible practices, of course. But the list still provides many options for socially progressive consumers and investors who want to ensure their money is used by their bank to support ethical causes. 

This begs the question: How do you navigate your many options for ethical banking?

How to Choose an Ethical Bank?

Suppose you want to support ethical banking and ensure your money is going towards companies, politicians, and causes that align with how you see the world. In that case, there are a few key things to consider when reviewing ethical banking brands.

First off is third-party certifications. “Green washing,” which is when a corporation or bank uses socially progressive language to cover up its socially not-progressive actions, is an authentic problem for ethical consumers. Third-party certifications can help alleviate these concerns by vetting green banking and financial institutions against trusted norms. Example certifications that you may want to look for include banks that hold:

Next, you’ll want to ask a few key questions to see if your financial institution’s ethics align with your own political, social, and environmental world views:

  • Is the bank transparent? Can you see records, actions, and documentation proving or disproving its adherence to its ethical promises?
  • How does the bank tackle environmental issues, such as energy, pollution, etc.?
  • How are the bank’s internal regulations? Would you be comfortable working there or recommending it as a workplace to a loved one?
  • What’s the bank’s track record for doing what’s right? How does it treat the people or causes that you care about?

Specific Topics To Consider

  • Does the bank invest in companies that have ethical problems and concerns?
  • Does the bank support, directly or indirectly, the environment and the fight against climate change?
  • What is the bank’s track record on human rights, whether that’s third-world workers or prison wages in the USA?
  • Where does the bank stand on environmental issues, such as clean energy and fossil fuels?
  • How does the bank support or not support community concerns, such as health (e.g., homelessness, alcohol use, tobacco use, etc.) or politics?
  • Is the bank a useful member of society? Does it hire well, pay its taxes, and contribute to society or the community?
  • How does the bank support its own employees?

Aspiration: Sustainable Cash Management Services

Aspiration, a financial institution based in California, leads the way American financial institutions commit to ethical practices. While most of the big banks in the U.S. aren’t exactly paragons of sustainable action, Aspiration is leading the way by:

  • Being a socially responsible, environmentally conscious bank that offers a full range of financial services that the everyday investor and consumer needs (e.g., daily banking, savings, etc.)
  • Using its profits to support its local community directly: For instance, Aspiration plants a tree every time someone makes a purchase, and it donates a portion of all its proceeds to local charities devoted to boosting regional economic prosperity.
  • Promoting personal activism by offering the world’s first banking account that lets you track the impact of your spending on issues like the environment.

Everything that Aspiration does is rooted in sustainable, socially conscious, and ethical choices, from its internal banking practices to its external policies. If you’re interested in ethical banking, learn more about the cash management services Aspiration offers.

The Takeaway

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With banks controlling trillions of dollars in assets, where you put your savings and investments matters. How they use those assets has considerable impacts on our communities and the world at large. A growing number of consumers and investors are using their bank account choices to force banks to support important ethical causes. How would you like to see your assets used?

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