Ethical & Socially Responsible Banking Explained + 5 Expert Tips
Outside of your direct spending decisions—what gym you belong to, what products you buy—it can feel like you have no control over broader financial institutions and structures that you are part of. Big banking can feel so out there and outside our control. This is where socially responsible and ethical banking comes into play.
What is ethical or socially responsible banking?
There's no exact science to what's considered ethical banking. "This is in part due to the fact that there's always going to be disagreement for what is considered ethical behavior in these industries," says Brian Berkey, Ph.D., assistant professor in the Department of Business Ethics and Legal Studies at the University of Pennsylvania. "Some fields have special codes of conduct that specify what is right and wrong. Doctors and lawyers have them, for example. But banking doesn't have anything like that. It's up to all of us to think through the standards that these companies should abide by." What makes this even more confusing of a term is that the specifics of what's "ethical" can be dependent on what you consider ethical. For example, sustainability may be your big focus, so you want to find a bank that stands by those same principles; others, however, may prioritize diversity.
So while we've noted this term lives somewhat in a gray area, a broad-stroke explanation of ethical banking is that it's the practice of utilizing banks that operate with a standard of practice that is not just profit-driven. This can mean lots of variables ranging from how a company treats its employees to how it makes investments. Of course, any company should be judged on how it treats those who work there, but the latter point—investments—comes pretty heavily into play with banking.
You likely already know this, but when you set up an account with a bank, they can use your money when they give out loans to other companies or people. Once you give your money to a bank through a savings or checking account, you have no control over where that money goes. Typical banks only evaluate loans based on what is going to give them a return on their investment; socially responsible banks look at other factors as well, including exactly how the money is being used and how it might affect the environment or broader community.
Say you want to bank ethically—what can you do?
While we'd love to be able to give you hard-and-fast rules, the better approach is to set up a framework of guidelines and considerations—and then you make the best choice depending on what's available to you in your area.
"Honestly, there's not one thing a consumer can do to change how the system operates in a bigger sense, but you can look into points of difference in the way these companies operate—and make decisions about where to put your money on ethical grounds," says Berkey. Sometimes, you just have to make good with what's available to you:
1. Find places that value transparency over fine print.
A good indicator that a bank has higher standards of practice is how transparent they are with their customers. "When you set up an account, how open are they about the conditions: Are there any surprises that come up? Are there hidden fees? Are there things in the fine print that people are not made aware of when they enter a certain kind of arrangement?" says Berkey. (You might see this come up in the news from time to time; predatory mortgages might come to mind.) "It's important for banks to be upfront with people, even if that means they lose some business or end up with terms that aren't as favorable as they could get away with if they were just a little more deceptive upfront."
2. Apply your typical value judgment, and see if the bank holds up.
For many of us, we try to frequent companies that align with our beliefs, be it a local organic grocery store or an environmentally friendly retailer—and avoid companies that don't. We know that we have purchasing power, and we try to wield it for change. But for some reason, this mindset rarely makes it to financial services. "Are they treating their employees decently? Are they making efforts to eliminate their carbon footprint? Do they give to charitable efforts and not just for good PR? It's not as if these general values are just not applicable to banking," says Berkey.
"A lot of companies now market themselves as environmentally friendly or things like that, but that doesn't exist in the same way in the financial field. These big banks don't market themselves as operating a certain way, so it's harder to tell upfront," says Berkey. Be prepared to do some digging.
3. Can you find out where its investments are—and if so, do they align with your standards?
This is harder to look into, but keep an eye out for the type of investments your bank is making. This usually requires keeping up to date with the news or following along with watchdog sites. For example, this report looked at how the finance industry was affecting climate change through investments. (Spoiler: It's not great.)
4. Has it been vetted by a third party?
There are a few third parties that highlight companies that operate from a more ethical standpoint—by whatever definition said party sets. They usually have a strict vetting process, and many have specific seals or certifications. A few to check out:
- Certified B Corporation: They look for companies from any industry that make efforts to create a more sustainable and inclusive economy. Check out the directory here to see if there's a bank near you.
- Ethisphere Institute: Each year they announce their list of the "World's Most Ethical Companies." US Bank, Fifth-Third Bank, and Old National Bank made the 2019 list.
- Global Alliance for Banking on Values: This is a network of progressive-value banks; find the list here.
5. You can consider splitting up your finances.
The main reason it can be challenging to switch banks boils down to practicality: There just aren't a ton of options, the options out there tend to be localized in larger metropolitan areas, and, honestly, many of us just need to use a bank that has widely available branches and ATMs. "One thing that's probably an option for a lot of people is to keep a portion of their money, like a savings account, in a better bank, even if it doesn't have local branches. Then you can keep a checking account with a more widely available bank so you have branches and ATMs to go to," says Berkey. "Especially with online banking, this is an option—for people to divide where they keep their money."
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