Should a Banking Code of Ethics Include Sustainability?

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A bank’s code of ethics provides employees with guidance on how to conduct business ethically and legally. Several banks instituted a code of ethics in their organizations following the global financial crisis, which caused massive erosion of public trust in the banking sector, to help bankers build responsible decision-making habits.

Today, many banks’ codes of ethics contain sections on sustainability to create a culture of environmental concern among their staff. 

With the impending risks of climate change, banks hope that helping staff become more eco-conscious will lead them to make better investments in low-carbon technologies and sustainable businesses that can weather the impacts of climate change.

In this article, we investigate whether a banking code of ethics should include sustainability and what benefits doing so could bring. 

Key takeaways:

  • A banking code of ethics is introduced to bank employees to help them learn how to always make the right decisions within ethical boundaries. It usually includes sections on maintaining corporate integrity, customer confidentiality, and professionalism.
  • Adding sustainability to a bank’s code of ethics can help bank executives and employees alike become more attuned to climate risks and social equity issues.
  • Banks practice sustainability by limiting their investments in fossil fuels and other destructive industries, disclosing their carbon emissions, and installing mechanisms that help them track climate risks. 

What is the purpose of a banking code of ethics? 

A bank’s code of ethics helps the institution’s employees, officers, and executives know how to conduct business in an honest, accountable, and legal manner. Usually developed by a bank’s leadership team, this code lays out the guidelines for ethical behavior within the company, including the types of actions that could result in warnings and possibly even termination from the company.  

Each bank’s code of ethics is unique as activities, divisions, and cultures differ from bank to bank. In 2005, the Federal Deposit Insurance Commission released guidance on how to develop an effective internal ethics policy titled “Corporate Codes of Conduct – Guidance on Implementing An Effective Ethics Program, which has been used by banks to develop their codes of conduct.

The FDIC document includes a list of recommended fair and ethical actions for bank personnel to follow. The document also provides advice on how compliance training for staff should be conducted. 

In addition, a banking code of ethics ensures that bank personnel understands the current banking laws as well as the consequences for the individual and the company as a whole if the law was to be broken. These guidelines are designed to deter bank employees from violating financial regulations and other types of wrongdoing. 

What does a banking code of ethics include?

Most banking codes of ethics cover areas related to corporate integrity, professional competence, confidentiality, professional behavior, and objectivity. A bank’s code of ethics will usually start with the bank’s mission and values, followed by guidance on how staff should approach problems responsibly. Some banks may also include an employee code of conduct and an overview of business ethics in their code. 

A bank’s code of ethics often provides information on how bank staff can avoid conflicts of interest at work. Many banks prohibit staff from accepting gifts and favors. Staff is also not allowed to conduct self-dealings with clients. Besides employee behavior, a banking code of ethics outlines ways for staff to respect customer confidentiality. Staff is trained on data protection methods and safe record transfer practices. 

Some banking codes of ethics may also contain sections on promoting equality at work. Others may have instructions on reducing the firm’s environmental impact. 

Compliance with a banking code of ethics is usually overseen by the Board of Directors or Trustees. Their main responsibility is to ensure that the code of ethics helps employees at all levels of the bank act with integrity in their day-to-day work

Why is it important for banks to have a code of ethics?

The global financial crisis showed the public that the financial industry, despite financial regulations and laws, had engaged in a wide array of unethical practices for years. Bankers were profiting from unfair lending and the manipulation of risky assets while most of us were kept in the dark. The impact of the global financial crisis led to renewed calls for a better and expanded adoption of a code of ethics within banks

The consensus was that regulations and laws did little to deter unethical behavior. Another way to strengthen the financial system by means other than regulation had to be found. After some debate, politicians and bank executives agreed that a positive, ethical culture among bankers to always do the right thing could be the solution. 

This culture became enshrined in the banking code of ethics, which has since been adopted by almost all banks. Codes of ethics contain guidelines and values that help create more individual accountability among bank staff. The belief is that by making “values-based behavior” (and not profit-focused, corporate values) the norm, bankers will develop good virtuous habits over time.

It’s hoped that with these habits, bank employees will become self-motivated to always make the right ethical decisions, creating a consistent, professional culture within banks. Policymakers believe that a code of ethics will deter bankers from breaking ethical boundaries and restore the public’s trust in them over time. 

Should a banking code of ethics include sustainability?

A banking code of ethics does more than just deter bank employees from violating financial regulations and laws – it encourages them to limit the amount of harm that their actions could have on the environment and human lives. For this reason, banks have begun including sections on environmental and social sustainability in their code of ethics.

The increased interest in sustainability has been accelerated by public investigations into the financial industry’s involvement in the fossil fuel industry. Research by various nonprofits discovered that major banks in America were lending trillions of dollars to fracking businesses and fossil fuel companies, in addition to investments in tobacco companies and weapons manufacturers. 

These investments harm the environment and reduce our society’s ability to tackle climate change. As Mark Carney, former Governor of the Bank of England, argues, the financial industry’s investments in fossil fuels will likely increase extreme weather events and cause a backlash against oil companies, leading to stricter government regulations that could reduce the value of fossil fuel corporations. 

Eventually, banks that continue to fuel the climate crisis “will go bankrupt without question”, Mr. Carney asserts. As the impacts of climate change become visible around the world, socially conscious investors may choose to divest from fossil fuels, looking instead for firms that place sustainability at the core of their business models.

Banks that realize these societal shifts understand that their code of ethics should include sustainability so that a culture of environmental concern sets in among its staff. More importantly, adding sustainability to its code of ethics helps a bank communicate to its shareholders and customers that it cares about operating sustainably into the future and is aligned with its values

Why is sustainability important for banks? 

Integrating sustainability into their operations helps banks and their associated businesses transition to a sustainable economy. In a sustainable economy, businesses provide services and products with as little cost to the environment and human livelihoods as possible. Healthy ecosystems are preserved and socially conscious companies are rewarded. 

If a sustainable economy can be achieved, our society can become largely protected from the impacts of climate change. Businesses, including banks, will be better able to operate with little risk of losing assets to extreme weather events. Natural resources, such as trees and fish stocks, can replenish without the need for much human intervention.

Creating a sustainable economy does require a shift in business logic. Instead of the exploitative, profit-driven business model that most banks have gotten used to, building a sustainable economy calls for them to use raw materials, energy, and talent that cause no harm to the environment and society. 

These inputs may cost more than regular materials, but they help banks create a positive influence in society and finance socially responsible businesses such as renewable energy companies. 

How do banks practice sustainability? 

Banks mainly implement sustainability policies using three methods: by installing mechanisms that limit their climate impact, by making their operations more transparent, and by divesting from socially and environmentally destructive industries.

They install mechanisms that assess and reduce climate impacts

Since the signing of the Paris Agreement in 2015, several private sector banks have included environmental, social, and governance (ESG) criteria in their investment strategies. Using ESG criteria requires banks to finance companies and initiatives that are helping the planet transition to a low-carbon, sustainable future. 

Banks have also begun installing carbon emission tracking mechanisms to better understand the environmental impacts of their investment and loan portfolios. These systems examine all aspects of the business, from a bank’s supply chain to the energy consumption of its offices.

They make their operations more transparent

Banks may also seek to make their operations more accountable and transparent by publishing reports on their sustainability progress. They may disclose the types of businesses they have invested in as well as the amount of money financed. 

When banks hold themselves accountable to sustainability criteria, they send a message to their employees and customers that they care about the impact they have on society and the environment

They don’t fund fossil fuels and other destructive industries

The most ethical and sustainable banks refuse to invest in fossil fuels, fracking, logging, and industrial agriculture, among other destructive industries. They don’t redeploy any of their customers’ deposits into loans for these industries. Instead, they use their money to support renewable energy projects and nonprofits working in environmental conservation. 

Some ethical banks also focus on providing financial services and credit to economically distressed communities to help foster economic growth in them. 

Find an ethical banking platform that meets your needs 

If ethical banking is what you’re looking for, it might be time for you to try Aspiration. Aspiration is a B Corp certified online financial platform that helps customers bank sustainably using our unique green banking products. 

With our Spend and Save account, customers can earn up to 1.00% APY on their deposits with almost no banking fees to pay. And through our Redwood mutual fund, customers can buy stocks in socially responsible companies that adhere to high environmental, social, and governance (ESG) standards. 

We don’t invest any money in fossil fuels because we want all of our customers’ deposits to have no links to the environmentally destructive oil industry. Instead, we donate a percentage of our earnings to environmental conservation projects to help reduce the impacts of climate change.

Why not try Aspiration today to help make our future more sustainable?

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