Have you ever thought about how banks make money? When we put our money into a bank, it’s easy to ignore what happens next. Instead, we think of our money as static, sitting in the bank until we decide we need it. But that isn’t how things work. One of the primary ways banks make money is by loaning out what you (and others) deposit and charging interest on those loans.
Your next question should be: who is my bank loaning my money to?
The reality is you probably don’t know where your money is going after you put it into the bank. And it may be going to fund things that don’t align with your personal values. This is what sustainable banking aims to combat. A sustainable bank is upfront about what they will (and won’t) invest in, allowing you to feel good about how your money is being used.
What Is Sustainability in Banking?
So, what are sustainable banking practices and how do they differ from traditional banking operations?
First, there needs to be an understanding that the top motivation for traditional, big banks is profit. Now, there’s nothing wrong with the pursuit of profit. However, in pursuing those high profits, traditional banks often turn a blind eye to the impact of their loan activities. This leads to investments in industries with a negative impact like fossil fuels and industrial agriculture.
As a result of this, companies housing their cash in big banks actually have much larger carbon footprints than traditional reporting would suggest. For example, The Carbon Bankroll found that in 2021, Google’s financial carbon footprint was 38x larger than the company’s total direct operational emissions because of their cash holdings.
Sustainable banking is different. A sustainable and ethical bank will also pursue profits, but in a way that considers the needs of the planet and the larger global community.
There are multiple tenets they follow to help them achieve this goal:
Do No Harm
Much like the standard doctor’s oath, this is a commitment sustainable banks make. In practice, it means they won’t use their money to invest in things that cause social or environmental risk. Examples of industries sustainable banks would avoid include:
- Fossil fuels
- Industrial farming
- Weapons manufacturing
Promote Social Equity
Looking to a bank to help address the problem of inequality in society may seem like a lofty goal, but there are multiple ways banks can help with this issue. First, it’s worth recognizing that climate change issues disproportionately affect lower-income communities. It’s important to divest from fossil fuels. Sustainable investing in green energy can prove to be a long-term good for these communities.
In the short term, sustainable banks can also commit to offering a financial service and a loan to underserved communities. This can help by providing opportunities for the people in these communities to start businesses or own homes—opportunities that may otherwise be unavailable through traditional banks.
Ensure Economic Justice
Slightly overlapping with social equity, this is a commitment to help close the racial wealth gap. This is done through investment in minority-owned businesses and communities. It’s also done through the bank striving for diversity in their leadership positions and paying a fair living wage to their workers.
Operate With Transparency
One problem with traditional banks is that they’re not upfront with how they use their money. This opaqueness erodes any trust we, as consumers, can feel in these banks. Sustainable banks commit to being transparent with their banking customers to rebuild that trust. Seeing how your money is being used means your bank is treating you with respect.
Why Is Sustainable Banking Important?
This may sound ideal, but does it really amount to anything? Skeptics may look at sustainable banking and think it’s nothing more than a way to appease guilty consciences. It’s an understandable feeling. Climate change and social equity are such large problems that they can often feel intractable, and it can be hard to see how sustainable banking practices will have any effect.
However, money matters. And the problems we face won’t get any better unless we start doing something about them.
Consider, for instance, the fossil fuel industry, which alone accounts for three-quarters of our carbon emissions and leads to problems including:
- Land degradation
- Water pollution
- Higher emissions
- Global warming and other air pollution
- Ocean acidification
These are major problems, but there are ways we can turn things around. In fact, according to the most recent IPCC report on climate action, we are making progress (even though there’s still more we can do). Consider the following facts:
- From 2010–2019 annual greenhouse gas emissions were at the highest in human history, but the good news is that the growth rate has slowed in recent years.
- The cost of solar and wind energies and batteries has decreased since 2010. Some of these decreases are up to 85%. This makes these technologies more accessible moving forward.
- With the right changes, we can still halve our emissions in all sectors by 2030. We can decrease greenhouse gas emissions by 40–70% by 2050.
While we can continue to make changes to promote sustainable development, they’ll require major investment. Estimated levels of investment thought to be necessary are between three and six times higher than current levels.
This is one reason why sustainable banking is so important. Not only is it important that people choose the best sustainable companies to invest in but also the best sustainable banks.
While major investments will still need to be made from the public sector, divesting from fossil fuels and investing in green projects is an important step to move forward. And, if this style of banking proves to have enough public support while still generating profits, it’ll be easier to convince government officials and businesses that green solutions are worth putting money into.
Is Sustainable Banking and Green Banking the Same?
If you start researching sustainable banking, one term you may see used interchangeably is green banking. Technically, these terms do not mean the same thing, though there is a great deal of overlap.
Green banking is one element of sustainable banking. To clarify, it may be easier to think of sustainable banking as having two branches:
- Sustainable finance – Sustainable finance is essentially what this guide has covered (for the most part). Sustainable finance refers to how a bank chooses to use its money in terms of loans and investments, as well as the financial services it offers.
- Green banking – Green banking refers more to how a bank conducts its business. This shows a commitment to lowering or eliminating the bank’s internal carbon footprint by ensuring its operations are as environmentally sound as possible.
While these terms represent different focuses, you shouldn’t be surprised if you see one substituted for another. Sustainable banking is still a relatively new concept in the world of banking so the terms around it are not always used in the most exact way. Therefore, you may see green banking used to represent sustainable banking, or sustainable finance, and vice versa.
How Can Banks Be Sustainable?
Becoming a sustainable bank doesn’t mean a bank can’t still be focused on profit and making money. It simply means that while pursuing those profits, there should also be a focus on the larger impact of the bank’s money.
One way to do this is by focusing on ESG sustainability criteria. This means ensuring that your sustainable investment strategies and practices take into account:
- Environment – This is where climate change and other environmental factors should be considered. This focuses on a business’s practices and how they impact the world as a whole. Investments in green energy and divesting from fossil fuels are environmentally focused decisions.
- Social – This factor puts more focus on the relationships a business has and that business’s overall values before a bank decides to invest or loan them money. The bank might ask of the business, do their values align with those of social equity? Do they hold business relationships that conflict with those stated values? Where do they invest their money? These considerations all speak to the larger impact the business is having on society.
- Governance – This explores how a business is run. Are they transparent with their shareholders? Does their board reflect diversity? Do any members have conflicts of interest? And, of course, are the business operations all legal and above board?
While taking these factors into account can help banks decide where to use their money, it can also help them to assess themselves. This way, they can ensure that they’re living up to their values and can show potential banking customers that their operations are sustainable in more than just name only.
Aspiration: Promoting the Principles of Sustainable Banking
Aspiration is not a bank. Rather, we’re a sustainable financial services company that uses sustainable banking principles to offer options for how you use your money.
Our Spend & Save accounts provide you with alternatives to the checking and savings accounts offered through large banks that may not share your values. With an eco friendly debit card account, you can monitor the impact of your spending on People and the Planet while earning up to 10% cashback when you make purchases at socially responsible businesses.
Creating a more sustainable world takes effort and at Aspiration, we think it’s a worthy goal. Not only do we provide financial services such as a green credit card but we also have a sustainable investment fund you can invest in. If you’re ready to join a community committed to sustainability, reach out to us today, and see how we can help you use your money for good.
How Stuff Works. How Banks Work. https://money.howstuffworks.com/personal-finance/banking/bank4.htm
Reuters. Exclusive: U.S. banks prepare to seize energy assets as shale boom goes bust. https://www.reuters.com/article/us-usa-banks-energy-assets-exclusive/exclusive-u-s-banks-prepare-to-seize-energy-assets-as-shale-boom-goes-bust-idUSKCN21R3JI
Mongabay. Brazilian and international banks financing global deforestation: Reports. https://news.mongabay.com/2020/11/brazilian-and-international-banks-financing-global-deforestation-reports/
Banktrack. The do’s and don’ts of Sustainable Banking. https://www.banktrack.org/download/the_dos_and_donts_of_sustainable_banking/061129_the_dos_and_donts_of_sustainable_banking_bt_manual.pdf
Department of Economic and Social Affairs. Climate Change and Social Inequality. https://www.un.org/esa/desa/papers/2017/wp152_2017.pdf
Environment Journal. Why environmental transparency in finance matters. https://environmentjournal.online/articles/why-environmental-transparency-in-banking-matters/
National Resources Defense Council. Fossil Fuels: The Dirty Facts. https://www.nrdc.org/stories/fossil-fuels-dirty-facts
IPCC. IPCC PRESS RELEASE. https://www.ipcc.ch/report/ar6/wg3/resources/press/press-release
Investopedia. Environmental, Social, and Governance (ESG) Criteria. https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
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