You sign the back of a check, take a photo of it, and electronically deposit it to an investment account or checking account using your bank’s mobile app—out of sight, out of mind.
If you complete most of your transactions with a credit or debit card, you probably don’t lay eyes on your cash very often. But it’s important to recognize that while you’re not using your money, your bank is using it to fund loans and investments, which garner a positive financial return (a profit) or a negative one (a loss).
So, where do banks invest your money to make these profits? In this article, we’ll investigate how banks invest your money, breaking down three major trajectories for your deposited funds. Then, we’ll help you regain control over where your money goes with a few tips for finding a sustainable financial services provider that invests in climate-positive initiatives.
Where Is Your Money Going?
So, where do banks invest their money exactly? If you’re a customer at one of the country’s many big banks, your deposited funds likely end up in one of three places:
- Traditional loans and investments (derivatives, government securities, mutual fund, and more)
- Environmentally unfriendly initiatives
- Campaign contributions
Let’s explore each one in more detail.
#1 Traditional Loans and Investments
Banks can provide traditional loans and investments to businesses, individuals, and projects because they have significant access to cash—the money their clients deposit daily.
A commercial or savings bank uses the money you are saving to perform three major lending functions:
- Mortgages, auto loans, and lines of credit for individual consumers
- Loans and lines of credit for businesses
- Individual and business credit card services
If you take out any of the loans above, you’ll repay the bank in interest at a specified rate. This motivates the savings or commercial bank to lend to you—they’ll make a profit when you repay the loan with interest.
But, banks also use a portion of the return on their investment to repay clients from whom they borrowed—with interest. Bank customers receive (albeit small) interest payments on funds in their savings account as a reward for supplying the bank with capital.
#2 Environmentally Unfriendly Initiatives
While lending isn’t insidious, banks can use the money you are saving to invest in projects or companies that aren’t as environmentally responsible as you are. Let’s explore a few examples:
- Wells Fargo loaned $120 million to the primary developers of the Dakota Access Pipeline, a construction project that endangered water sources and farmland. Sixteen other banks also contributed toward the $2.5 billion total.
- Citibank, HSBC, and Chase have donated billions of dollars to fund crude oil extraction in the Western Amazon, accelerating climate change and displacing indigenous peoples.
- Barclays invested over $5 billion in new coal and fossil fuel extraction projects in 2021 alone.
Why do banks invest in environmentally irresponsible projects despite the risks that climate change poses to individuals and the financial sector? The simple—yet troubling—answer? They’re profitable.
Banks operate to make a profit, and if they predict that an investment will provide a significant return, they may invest regardless of the ethical implications.
#3 Campaign Contributions
Commercial banks like Bank of America, Quicken Loans, Chase, and Wells Fargo contribute to politicians and the third-party organizations that support them. Why?
- Tax shielding – While contributions to political candidates and parties are not tax-deductible, donations to nonprofit organizations are. To prevent high tax rates, banks contribute to nonprofits that support candidates.
- Policy influence – The US Congress has legislative authority over interstate commerce, giving them the power to regulate big banks. Banks, in turn, contribute to candidates in hopes that they’ll pen legislation benefiting major for-profit financial institutions.
While banks generally donate to candidates on both sides of the aisle, they’ve donated more to conservative candidates and causes than liberal ones every year since 1992. Even though most Americans favor climate-conscious policies, Republicans in Congress remain opposed to taking serious steps toward meaningful legislative protections.
How to Find Climate-Friendly Financial Services Providers
Big banks don’t always share our values or goals, which can be tough to swallow as a long-time customer. Luckily, you have alternative banking options for managing your money, and climate innovators are bringing new climate fintech solutions to the market daily.
In your search for a green bank or financial institution, look for two significant elements before opening an bank account:
- B-corp certification – Businesses are awarded a B-Corp certification after demonstrating that their organizational structure and operations benefit shareholders, company employees, and the community. B-corp certifications aren’t given lightly, and businesses emblazoned with the B-corp logo operate under an independently verified code of ethics.
- Built-in carbon offsetting – Truly green financial service providers facilitate consumer carbon offsetting without hassle. For instance, an ethical bank or financial institution may purchase carbon credits for consumers each time they make a purchase with an eco-friendly debit card.
Aspiration: Putting Your Money Where Our Mouth Is
The current financial sector offers good news and bad news. The bad news is that big banks often use your money to invest in initiatives or companies that may not embody your personal values.
The good news is that you can permanently regain control of your wallet.
Aspiration isn’t like other banks—in fact, we’re not a bank at all. But we are empowering consumers to manage their money with the climate in mind. By investing account holders’ hard-earned money into vetted, actionable climate initiatives, we help consumers offset some of their carbon output just by securely storing their money. And, for every purchase made with our green credit card, we plant a tree (or two, if you round up your purchase to the next dollar).
For innovators, climate activists, ethical investors, and everyone in between, Aspiration makes it easier than ever to consciously navigate the financial sector.
Forbes. What Is a Bank and How Does It Work? https://www.forbes.com/advisor/banking/how-do-banks-work/
Wells Fargo. Wells Fargo’s Involvement in Funding the Dakota Access Pipeline. https://stories.wf.com/wells-fargos-involvement-funding-dakota-access-pipeline/
Amazon Watch. Report: The Five Biggest Financiers of New Amazon Oil Boom. https://amazonwatch.org/news/2020/0312-report-the-five-biggest-financiers-of-new-amazon-oil-boom
The Guardian. Barclays has financed $5.6bn in new fossil fuel projects since January. https://www.theguardian.com/business/2021/nov/02/barclays-has-financed-56bn-in-new-fossil-fuel-projects-since-january-cop26
United States Senate. The Interstate Commerce Act is Passed. https://www.senate.gov/artandhistory/history/minute/Interstate_Commerce_Act_Is_Passed.htm
Open Secrets. Commercial Banks. https://www.opensecrets.org/industries/indus.php?ind=F03
Brookings. Republicans in Congress are out of step with the American public on climate. https://www.brookings.edu/blog/planetpolicy/2021/05/10/republicans-in-congress-are-out-of-step-with-the-american-public-on-climate/
Forbes. Why Be a B-Corp? https://www.forbes.com/sites/katejacksonk/2020/02/18/why-be-a-b-corp/?sh=9d997886ea17