What is ethical banking?
Ethical banking is a system that embraces both environmentally friendly and socially conscious practices. The banks, lenders or financial institutions operate on values that drive environmental and social change and responsibility. They try to avoid investing in companies or industries that harm the environment and people or are actively involved in activities that do good for the people and environment, like investing in renewable energy, affordable housing projects, etc.
Ethical banks in Australia
In Australia, it is widely accepted that a bank is ethical if it does not invest in fossil fuels. However, there are no standard criteria in place to gauge whether a bank is ethical. Besides having investments that are fossil fuel free, a bank is considered ethical if:
- Its operations are carbon neutral.
- There are no conflicts between shareholders and customer interests.
- It has a commitment to customers and adopts responsible banking practices.
However, there are other areas that can be assessed to see if the bank is ethical or not.
| Area | Positive Behaviours | Negative Behaviours |
|---|---|---|
| Environment | Support renewable energy Issue bonds for green projects Discounts on interest rates for green home loans / green loan products | Deforestation Fossil fuels Coal mining Palm oil plantations |
| Social | Community donations Customer satisfaction Support for customers in financial hardship | Weapons Gambling Human rights abuses Tobacco Predatory lending Animal cruelty |
| Corporate Governance | Good corporate culture | Scandals, Corruption |
What products do ethical banks offer?
The guiding principle for ethical banks is to maintain sustainable investment and lending approach. They are careful about where they invest their money. Most of these banks offer green products to their customers like:
- Green car loans at reduced interest rates.
- Green term deposits, where the bank will make contributions towards wind and solar energy, etc.
- Green home loans for building or buying energy-efficient properties.
- Limited period of interest-free days on credit cards, and donating a portion of annual fees to communities.
- Reduced rates on personal loans, especially if you’re installing solar panels or buying an eco-friendly vehicle.
- Green investment opportunities.
Are there any ethical home loan options?
Yes, while the options are limited, there are banks and lenders that provide ethical home loans. These loans are usually offered by financial institutions that are not owned by shareholders and are usually customer-owned banks. They share a larger portion of their profits to charitable causes and do not invest in fossil fuel. The options available depend on:
- Your situation
- What the bank or lender has in offer
- Which lender you’re choosing.
Even if the banks do not meet the criteria to be considered an ethical lender, they do have solid Corporate Social Responsibility (CSR) policies that donate and support communities and environmental causes.
Is my bank ethical?
If you’re wondering if your current bank is ethical or considering making a switch towards an ethical lender, here are some tips:
- Identify what values are most important to you and know which area you prioritise to know which lender to choose. Do you put a higher value on banks that offer green products, or those that invest in renewable energy?
- Check their websites or contact them to know where these banks are currently investing. Ethical banks are transparent about where they invest your money.
- They pay their taxes on time and do not engage in tax evasion.
- The bank or lender should have guidelines and policies in place to help make ethical business decisions.
- Their banking and investment practices are aimed towards having a positive impact on the world. These include supporting climate solutions, social justices, etc.
Limitations of ethical banks
However, whether a bank is ethical or not is a grey area, and there are some limitations of these banks as well:
- The bank might be offering green products, but still participate in activities that have a negative impact like labour rights violations, investing in fracking, etc.
- A bank can be considered ethical through negative screening only. This means that they do not invest in industries like fossil fuels, animal cruelty, etc. that cause harm to the environment or society, but make no effort towards offering green products.
- Not all the banks are gauged on the same Environment, Social and Governance (ESG) screening as others. A bank might still be considered ethical if it contributes to renewable energy, but neglects other aspects of its operations like contributing to energy efficiency.
- There are only a handful of banks and lenders that fund projects in communities or projects that help the environment.
Are you looking to make an ethical banking choice for your home loans?
Our mortgage brokers are here to help. They will carefully consider your requirements and provide you with ethical home loan options. Call us on 1300 889 743 or fill in our free assessment form.