What does ethical finance mean?

In recent years, there’s been a growing interest in ethical finance and banking, with more consumers looking at ways to align their finances with their values.

But what exactly does ethical finance mean? In this guide, we’ll explore the concept of ethical banking, including its definition, its principles, and how it can impact society.

We will also look at how banks and other financial institutions handle money, examples of ethical finance initiatives, and the driving forces behind the rise in ethical banking practices. 

What is ethical finance?

Ethical finance is an approach to banking that focuses on ethical and socially responsible practices. 

There is no set definition for what counts as ethical finance and what doesn’t. Generally, though, ethical finance is considered to mean delivering financial services without taking unfair advantage of people, animals or the environment. 

An ethical bank will consider the impact of the wider environment and society when delivering its operations. This may result in them using more sustainable investment strategies, supporting socially beneficial projects, and avoiding financing industries that deal with things like fossil fuels, tobacco, or weapons. 

Ethical banks and other financial institutions, such as credit unions, believe in being open and honest, taking responsibility for their actions, and wanting to make the world a better place for people, their communities and the environment. 

Customers who choose ethical banking can feel good knowing their money is being used to support practices that positively impact the world.

What do banks do with my money?

When you deposit money into a bank, it doesn’t store it away just for you. Instead, your bank will hold a portion of your money, called reserves, to have enough cash to give back to you whenever you want to withdraw some of it. 

The bank uses the remaining money to lend to others, invest, and operate their business. This system helps the bank serve all its customers and generate money to pay your interest.

Different banks do different things with the money you deposit. These include:

• Lending - Lending money to individuals and businesses in the form of loans, credit cards or overdrafts

• Interest payments - Paying interest to other people and businesses that have also made deposits or lent them money

• Investments - Investing in financial markets by buying stocks or bonds, with the aim of earning a profit 

• Banking services - Putting it towards the banking services they provide like cash withdrawals, overdrafts and credit cards

• Operations - Covering the salaries of bank employees, rent for branches, offices and utilities

What is an example of ethical finance?

An example of ethical finance would be when a bank or financial institution chooses to support environmentally friendly projects with their funds. For instance, an ethical finance institution might invest in renewable energy projects like solar or wind farms that help reduce carbon emissions and combat climate change. 

In addition to supporting positive projects, ethical financial institutions may avoid investments in industries that negatively impact society and the environment. For example, an ethical finance institution may choose not to invest in companies involved in weapons manufacturing or fossil fuel extraction, which can cause harm to people and the planet.

The goal of ethical finance is to use financial resources in a way that contributes to a better world. By making conscious choices about where they invest or lend money, ethical finance institutions seek to positively impact society and the environment.

What is driving the growth in ethical banking?

The growth in ethical banking follows the growth in demand for ethical products and services more generally. More people than ever say they are concerned about climate change, whilst social causes and cases of inequality are gaining traction quicker than ever through social media. 

Physical ethical products drove much of the initial growth, for example reusable coffee cups, electric cars and brands who donate part of their profits to charity. 

However, awareness has now moved beyond just what money is spent on, to the importance of where it is saved and invested. This is illustrated by the growing number of ethical investment funds being offered by traditional banking providers.

How can I find out how ethical my bank is?

It can be hard to work out how ethical your bank is as there is no universal rating system. However, there are a number of independent companies who provide ethical certifications. These include:

• B Corporation - This certification is awarded to companies committed to making positive social contributions. It has strict assessment criteria and is recognised globally. 

• Good with money - This company awards financial institutions with a ‘Good Egg’ mark for contributing positively towards society and the environment. 

You can also choose to do your own research by looking for information on your bank’s website. Look for any published policies related to ethical practices, such as responsible investments or whether or not they are engaging in sustainability initiatives. 

You can also check third-party rating organisations that assess financial institutions' ethical and sustainable practices, such as the ‘Good Shopping Guide’, which has an ethical comparison rating table. 

Remember that no bank is perfect, and the concept of ethics may vary for different people. If specific values are essential to you, it is worth spending some time finding out as much as you can about the bank you’re considering and if they meet these needs.

Are credit unions ethical?

Credit unions are considered more ethical than traditional banks because of their structure and mission. 

Credit unions are owned and controlled by their members. This means decisions are made in the best interests of the members rather than external shareholders.

They are also not-for-profit organisations. This helps them offer competitive interest rates on their products. Any profit they do make is returned to members as interest or dividend payments, or reinvested in their services to improve them and help them support more people. 

While credit unions are generally seen as more ethical, each credit union operates independently, and their practices may vary. If ethical considerations are important to you, research and compare credit unions to find one that aligns with your values and priorities.