What is Sustainability in the Banking Industry?

To answer the question “What Is Sustainable Banking?” we need to review the recent history where Alexander Hamilton was one of the founding fathers of the U.S. and served as the first treasury secretary of the newly formed nation. He was responsible for creating the U.S. banking system. According to Hamilton, banks must strive to “increase industry, multiply commodities, and help agriculture and manufacturers flourish”. Banks and financial institutions in the U.S. have admirably met these goals for over two centuries. Since the US is the model that other countries emulate, banking systems worldwide have adopted policies that helped agriculture and industry flourish.

Such single-minded, growth-oriented banking objectives have led some commerce and industry leaders to measure success solely by profits. Others believe that corporations must do well financially before they can do some social good. However, centuries of unrestrained growth have brought us to a juncture where it is imperative that companies must do well by doing good. Since banking has provided commercial development infrastructure, it naturally falls to banks to promote wholesome practices that benefit the community, not just the corporations. As concerns over climate change have become widespread, responsible resource utilization and sustainability have emerged as primary metrics for evaluating modern corporations. Sustainable banking is an essential factor in pushing corporate policies towards social responsibility and sustainability.

What is Sustainable Banking?

The word “sustainability” brings to mind the avoidance of plastic packaging, adopting recycling programs, and modifying consumption patterns to reduce the human footprint on the planet. Until recently, it has not been associated with banking. It was widely accepted that profiting through financial transactions is the guiding principle of banking systems worldwide. Sustainable banking involves a shift in thinking from how much money we can make no matter the social and environmental impacts to recognizing that social and environmental costs must be factored into the design of financial policies and products.

The shift toward sustainable banking affects all commerce and industry since money fuels the industrial complex. Three significant considerations that influence the movement towards sustainability in the banking sector are:

  • The environment,
  • Ethical values, and,
  • Community involvement

Consequently, it is common to consider the phrases “ethical banking” and “social banking” as interchangeable with “sustainable banking”. The hallmarks of sustainable banking are:

  • Transparency of policies and operations,
  • Support of community banks as well as big banks, and,
  • Implementation of banking policies that promote responsibility and sustainability in the production and distribution of goods and services.

Objectives of Sustainable Banking

Profit at all costs ceases to be the primary objective of sustainable banking. While a healthy bottom line continues to be a goal, other objectives that will encompass environmental and social criteria start being significant considerations in selecting investments and formulating policies. The objectives of sustainable banking include:

  • Quality of life considerations: These include investments that directly improve the standard of living. Investments in improving access to education, affordable housing, public transportation, and low-cost healthcare get priority over investments in financial instruments.
  • Promotion of clean energy: Actively pursue and promoted investments in alternative energy instead of investments in coal, gas, and oil. They will also invest in the development and popularization of vehicles utilizing electricity and natural gas. Concurrently, invest in technologies to lower the emissions and improve the mileage of gasoline-powered vehicles.
  • Financial inclusivity: Support responsible banking initiatives like microloans that help family-owned businesses and small businesses in economically disadvantaged communities. While returns on such initiatives are not as high as on investments in big business, the track record of Grameen Bank and similar institutions worldwide have demonstrated that microloans are indeed profitable investments.
  • Sustainable agriculture: Support green banking policies that encourage investments in pollution-free and toxin-free agriculture. Since the production, processing, and distribution of food are foundational to human society’s health and well-being, sustainable banking objectives must include sustainable agriculture.

The well-being of the community has to be front and center among the considerations of sustainable banking.

Sustainable Community Banking

Banks can no longer operate by the old paradigm of doing well before they will do some good. Sustainable community banking must develop affordable housing, promote home-based businesses and small businesses, and invest in sustainable food production and distribution. A bank’s operations need to be transparent and ethical to demonstrate its commitment to developing a sustainable society. To that end, banks can evaluate and adopt the B Corporation certification requirements. As per this report at independentbanker.org, there has been a growing trend among community banks to be B Corp certified to demonstrate their commitment to sustainable community banking.

Another initiative is the United Nations Environment Program Finance Initiative (UNEP FI) that lays down responsible banking principles. The guidelines set out by this initiative require participants to:

  • Measure the impact of their banking practice on the community and the world,
  • Identify targets for implementing policies that will bring about the most significant change, and,
  • Regularly publicize how well they are doing against the stated goals.

A great example of a bank that is doing good while doing well is Aspiration. Aspiration uses banking as a vehicle to build a sustainable community and a better world.

Aspiration: Sustainable Cash Management Services

Aspiration re-imagined their mission so radically that they do not even call themselves a bank. They aspire to be a financial partner to the community in building a better world. Like conventional banks, Aspiration offers cash management services and investment products, but they qualify their products and services as “sustainable and socially conscious”. Aspiration’s sustainability policies include:

  • Contributing 10% of profits to charity,
  • Entering into a Conscience Coalition partnership with businesses that have sustainable corporate policies,
  • Abstaining from investing in the exploration, extraction, processing, and distribution of all fossil fuels,
  • Allowing customers to pay account fees that they think is fair,
  • Charging customers only the cost of extra services,
  • Vetting charities to make it easy for their customers to contribute to the causes they care about. This gives the customers the confidence that their donations will be put to good use.

Aspiration’s customers get cashback for purchases from the Conscience Coalition partners. The cashback percentage ranges from three to ten.

The charitable causes that Aspiration engages with are:

  • Poverty alleviation,
  • Clean water,
  • Education,
  • Healthcare,
  • Human rights, and,
  • Environmental conservation.

Aspiration also provides microloans of up to $5000 to small businesses through its Aspiration Opportunity Fund.

With these policies, Aspiration rejects the Wall Street aphorism that “greed is always good” and embraced the sustainability principle that banks have to do good while doing well.

It is high time that businesses pivoted from their policies that emphasized profit generation to prioritizing sustainable practices that preserve the natural and human infrastructure that supports them and all commerce and industries. Banks have to lead the way in this transformation since they regulate the cash flow that enables business operations. The first step in this transformation is to realize that the old policies motivated by profits alone are short-term thinking results. Sustainability policies are born of long-term thinking. They do not hinder businesses but instead enable them to maintain healthy operations and profits well into the distant future.

A bank that adopts sustainable policies and practices helps its community grow and thrive, thus paving its own long-term growth and flourishing.

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