Ethics in Banking: What it Means, Who Holds to It

Ethics in Banking

Photo by Austin Distel on Unsplash

Isn’t it odd that the big banks we trust our money with are always in the news for one scandal or another?

In 2020, we found out that Wells Fargo had paid $3 billion in settlements for creating 3.5 million fake accounts to meet sales growth targets. Just a year earlier, journalists revealed that Bank of America had given $380 million in loans to private prisons that were detaining migrant children in deplorable conditions.

And to top it all off, a group of environmental organizations discovered that America’s top banks – Wells Fargo, Bank of America, Citi Group, and JPMorgan Chase included – had invested a combined $210 billion in the fossil fuel industry since the Paris Agreement was signed in 2016. 

It simply goes to show how much these banks care about ethics, which it seems, is practically zero. 

But before you lose hope, know that there are ethical banks out there that care about your money. Our neobank, Aspiration, is one of these banks. Since our foundation, we’ve put our customers and their conscience first. 

In this article, we explore what ethics means for banking, and how you can find the best ethical bank that’s aligned with your values. 

History of ethics in banking 

Ethical problems in finance go a long way back. A quick glance at the history of banking shows us that people have been grappling with high interest rates and financial scandals since the days of Plato and Aristotle.

Most ethical problems in history arose from the issue of usury. Usury is the practice of lending money at illegally high rates, equivalent to today’s predatory loans

Usury was first recorded in the Old Testament by the Prophet Ezekiel, who considered it one of the most “abominable things”, alongside rape and murder. Greek philosophers then expanded on the immorality of usury, but it wasn’t until the height of the Roman Empire when we see compound interest rates on loans become illegal by law.

In the years hence, the idea that usury is unethical has influenced many other chapters of our modern financial system. Its prevalence in holy texts and ancient laws made the concept so powerful that until the early 1900s, banks in America kept interest rates on personal and business loans at around 6%.

This is unfortunately no longer the case. Most loans charge interest rates that can go up to 36%, while special loans such as payday loans charge an average annual interest rate of 391%

And while usury, in the form of loan-sharking, is illegal in many American states today, there is a slew of other ethical problems plaguing the banking industry. Big banks are complicit in harmful activities ranging from human rights abuses to environmental destruction.

It’s never been more important to hold big banks accountable to ethical principles.

What are the ethical principles banks must abide by? 

For banks to be considered ethical, they have to commit to a culture of responsibility

Banks must pay attention to environmental, social, and governance (ESG) factors and integrate them into their everyday operations. They need to identify the impacts of their decisions before putting them in practice.

Here are the 3 most important ethical principles that the best banks abide by.

Take responsibility for the community

Banks must take responsibility for the communities they serve.

A bank’s customers and shareholders are its most immediate community members. These individuals trust the bank to manage their money. Their deposits serve as a lifeline for all banks, who loan them out with interest rates and fees on top.

Banks must not pursue short-term, high-profit lending practices like the subprime loans they gave out in the years leading up to the 2008 Great Recession. These financing strategies bankrupted millions of Americans, including their own employees, customers, and shareholders.

Commit to client screening

Banks must also not work with clients who harm human and animal lives, and the environment.

These include clients who are involved in fossil fuels, Big Agriculture, weapons manufacturing, tobacco, private prisons, and logging. Though companies with links to these industries may be highly profitable, they cannot be considered financially sound because of their unethical business associations. 

Instead, banks need to work with companies and organizations that are trying to make our world more livable, such as clean energy companies and sustainable clothing brands.

Be transparent

Most important of all, banks must commit to transparency.

They must disclose their investment practices, lending policies, and the businesses they’re loaning to. Transparency is the only way we can know if banks are following ethical principles.

After all, it’s our deposits that banks use to create loans and make money off fees and interest rates. Therefore, they need to be answerable to their customers and the general public. 

Why is ethical banking important for the environment?

Ethical banking is important for the environment because it’s one of the main sources of funding for low-carbon projects.

Money that’s deposited in ethical banks gets loaned or donated to clean energy projects, reforestation initiatives, and community climate resilience programs. If this money had been deposited in a traditional bank account, it would’ve likely gone to a fossil fuel company.

We need ethical banks to help preserve our natural ecosystems and finance the clean energy infrastructure that will help us transition to a low-carbon economy. We also need them because they are safe and reliable places to store our money – money that we want to divest from environmentally damaging industries and their financiers.

The hope is that the more ethical banks become, the less likely they will be to fund harmful industries. Many large banks like JPMorgan Chase and Bank of America have instituted policies showing their commitment to divest from the coal industry. But whether they keep their promises has yet to be seen.

The most ethical banks on climate change 

Ethical banks are integral to the fight against climate change. Some provide savings accounts that help you buy carbon offsets while others give loans for low-carbon home improvements.

These are three ethical banks that are changing the conversation around climate change.

Aspiration

Aspiration is an ethical neobank that has been providing climate-friendly financial products and services since 2013. They take social responsibility seriously and do not invest in fossil fuels, weapons, or private prisons.

Through their Plant Your Change program, customers can opt in to plant trees with every transaction they make. The system rounds up every transaction to the nearest dollar and plants a tree with the spare change.

They also offer a high-yield savings account that allows you to buy carbon offsets automatically for every gallon of gas you purchase. 

Amalgamated Bank 

Amalgamated Bank is one of America’s oldest ethical banks. In 2019, they became the first U.S. bank to endorse and sign the UN Principles for Responsible Banking.

Just like Aspiration, they do not invest any money in fossil fuels. They’ve instead committed $700 million in impact lending to clean energy companies and sustainable food organizations.

Amalgamated uses their customers’ deposits to only give out loans to sustainable organizations, progressive causes, and social justice movements.

Clean Energy Credit Union

Based out of Colorado, Clean Energy Credit Union offers loans for clean energy products and installations. Their goal is to get as many people as possible to join the clean energy movement.

They offer affordable loans with low rates and friendly terms, made possible through a cooperative business model. They also provide savings and checking accounts, as well as IRAs, for anyone who is interested in investing in clean energy.

Whether you’re looking to install a solar electric power system for your home or switch your car to an electric vehicle, Clean Energy Credit Union is a bank that’s worth checking out.

The most ethical banks on financial compliance

People trust banks that uphold high ethical standards. 

Banks that follow financial regulations, provide fair treatment to their staff and stand against fraudulent behavior enjoy strong relationships with their customers. Financial compliance, a hallmark of ethical banks, is what we need to prevent another financial crisis.

Here are three ethical banks known for their strong financial compliance.

Triodos Bank

Triodos Bank is one of the most transparent banks in the world. They publish annual reports of who they lend to, and what the borrowers do with their money. They also have a robust and independent compliance department that monitors fraudulent behavior.

In 2018, Triodos upgraded their risk control systems with the help of regulators to comply with anti-money laundering and counter terrorist financing laws. 

They do not invest in any destructive industries. Most of their loans go to sustainable businesses and organizations that support environmental conservation, cultural preservation, and community development.

Sunrise Bank

Sunrise Banks is a Minnesota-based ethical bank that’s popular for its innovative fintech solutions. Their compliance and regulatory team ensures that the bank follows all mandated compliance requirements, and even helps partnering businesses set ethical business policies.

In January 2021, Sunrise Banks appointed a new Chief Compliance Officer who will oversee improvements in its compliance policies.

Beneficial State Bank

Based in California, Beneficial State Bank is a leading ethical bank with strong ties to the nonprofit community. Their mission-driven culture trickles down to all aspects of their organization, from the fair living wages they pay their staff to the careful selection of businesses they invest in. 

They value transparency and go the extra mile to be accountable to their customers. They have a rigorous auditing process involving auditors from federal, state, and county agencies, as well as industry-based impact evaluators. 

It’s Beneficial State Bank’s mission to provide financial products and loans that serve as alternatives to other lending institutions’ predatory practices.

For the most ethical banking, try Aspiration

Aspiration is an ethical neobank focused on turning every transaction into positive action for the planet. As a B Corp certified bank, we have no investments in harmful fossil fuels or exploitative businesses.

Instead, we invest in community development and sustainable businesses. Through our Dimes Worth of Difference initiative, we donate ten cents of every dollar we earn to micro-loans that help struggling Americans start businesses. We also offer a unique cashback program via our Conscience Coalition network, which gives up to 10% Cash Back when customers shop with our sustainable business partners.

Try Aspiration today and make a difference with your money.

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