The world is dependent on global finance working towards a fairer financial system for people, the environment and culture with a focus on sustainability, climate change and social justice. This July at The Fintech Times we are putting the spotlight on ethical finance/ethical banking, including environmentally and socially-conscious practices.
One of the most significant things an individual can do is to control how their money is spent by banks and pension funds. They can seek out financial institutions that invest in companies making a positive contribution towards a more sustainable and inclusive future economy?
So, are banks on board with ethical investment streams? And what do investment funds think about ethical banking?
Leaf Global Fintech
Many banks are on board and others are becoming more involved because they can no longer ignore ethical banking, given new demands from customers, employees, investors, and government regulators, says Tori Samples, the co-founder and CTO of Leaf Global Fintech.
She says: “Not only are customers demanding to work with banks that have ethical banking programmes, but employees are also choosing to work for banks that incorporate a larger social responsibility mission.
“Ethical banking fits into the broader Principles of Responsible Investing (PRI) that were designed by the UN and have now been adopted by over 3,000 signatories managing $103.4trillion in assets.
“This shift is in line with the broader growth of the impact investing community (that Leaf is part of) in which investors seek social and environmental impact alongside investment returns. We are expecting more capital to continue to flow towards these types of funds.”
Dr Narisa Chauvidul-Aw, the CEO & founder of KogoPAY Group, says: “We’re seeing a growing trend including even a few hedge funds moving into ethical finance territory, not to mention banks trying to prove they will invest ethically (or in many cases, refuse to invest egregiously unethically).
“Investors are increasingly looking to invest in companies that can show a strong ethical practice or governance, hence we are seeing an increase in external ethical certifications like the rise of B Corp certification.
“In addition, investors are also more interested in corporations that do not just focus on commercial gain, but are using profits to make an impact on society. ”
For Charles Radclyffe, CEO of ESG ratings agency EthicsGrade, the challenge in defining ‘ethical investments’ is that ethics is a quality that differs between people.
“There is, by definition, no fully right or fully wrong answer,” he says. “While the law is a set of norms that we’ve all agreed upon by living in a democratic country, therefore we can all be sure (well, 99.9 per cent sure) that all banks make ‘legal’ investments, or face stiff penalties if not; but as for ethical investments – well who judges this is a question of what your perspective is.
“Take your favourite electric vehicle company for example. Whether extending a line of credit to them is ‘ethical’ or not is a function of whether you value clean air in rich places like Tilbury over water quality in places like Tibet. That’s quite aside from the other factors such as the allegations of child labour in places like Kisangani (Congo) in the extraction of the minerals that go to make the batteries. Some people will say that Tesla is a force for good because of their investment in Lithium-based cars, others will argue that Toyota is more ethical because of their focus on hydrogen.
“Until rules get enshrined in law, they are the domain of ethics. No right or wrong, just lots of grey – and so banks need to be sure that they understand where the grey is from all their stakeholders so that they don’t get accused of being a ‘watermelon’: an organisation that looks green, but is only on the very thin surface.
For Radclyffe, the investment management industry has a particular challenge on its hands as not only do the asset management firms need to shape up their own operations, but they need to understand the sustainability requirements of their customers, and ensure these requirements are accurately matched against their investment portfolios.
“Sounds easy, but is hard to do – especially in a world where the data which investment firms rely on tends to orientate towards one-size-fits-all perspectives on ESG from the big market data companies.
“What do they think? Well, in the market brochure they’ll be talking up their green creds and giving sincere commitments to change, but privately they’ll be running around like headless chickens trying to make sense of it all like everyone else. It’s an industry that’s even less well adapted to change than the banks who they transact with, and of course (owing to the nature of what investment fund managers do) – the banks they own. It’s a tough gig.”
David Lais, co-founder and CPO of Ecolytiq, which leverages publicly available and payments data to enable sustainable banking, is less sure about whether banks on board.
He says: “Well, no. And maybe. Banks are watching the price of ESG mainly driven by the climate discussion. They clearly see the demand and are looking for options to enter this market.
“But ESG is far from perfect, and it can only be seen as a starting point. The good news is, it is becoming more obvious that banks need to act and therefore the market is slowly moving.”