The Ins and Outs of Ethical Banking

There is no denying we currently live in a capitalist world, driven by consumerism and money. Our money and where we choose to store and spend it holds real power in this structure. If used wisely our money can be harnessed for good, leaving behind the industries that don't contribute to a greener, renewable future.It's just as important to consider where we keep and invest our money as it is where we spend it on a day to day basis. The term 'Ethical Banking' gets thrown around a lot but what does this actually mean and why should we care about what our bank is doing behind the scenes?

Let's be honest, if you're a young person, like me there is a high chance you're still with the bank your parents set up for you as a kid. In fact most people, including myself until recently, are! There is a reason the major banks develop school programs! And it's because they know, from having such a low drop out rate, that once you're in, you're almost always in for life. Thankfully as a society we are collectively becoming more and more aware of the power of our money and investments and with much more information readily available, things are starting to change.

In 2016 It was noted that millennials were four times as likely to switch banks than previous generations for various reasons, setting the ball in motion for a dramatic shift in how we view our financial industries.

How Does the Banking System Really Work?

There is a common myth that once you put your money into a bank account it just sits there until you choose to spend it. This is how it appears on the banking apps on your phone but really, your money is being utilised in all sorts of ways in the interim. So how does it all work?

Step one: You put your money into a bank account.

Step Two: The bank takes the money and invests into various companies, organisations or causes.

Step Three: The bank takes the profit from their investment and splits it between themselves and their shareholders; who have provided the base capital and therefore often have a big say in which issues the money will be invested into.

Step Four: A very small percentage of the interest earned on the investment is sent back to you; this percentage will depend on the type of account you are using and who you are banking with.

This means that ultimately, the money you earn is indirectly funding whichever investments your bank AND its shareholders deem most profitable at the time. As it stands banks are one of the biggest investors in detrimental Climate Change actions like deforestation, fracking and oil drilling as well as in human rights issues like the gun and tobacco industries and industries where child labour is a prolific problem.

How Do We Solve This?

In 2015, at the United Nations Climate Change Convention (COP21) the historic, Paris Climate Agreement was established to enforce climate action across 196 countries and ultimately slow down the impacts of climate change through various long-term strategies. This was the first legally binding international treaty to focus on counteracting climate change and has been monumental towards encouraging climate action. The Paris Climate Agreement set out three main goals; the first two focusing on climate mitigation and adaptation and the third focusing on finance, stating its intention; "to make all financial flows consistent with a pathway towards low-emissions, climate-resilient development." This recognises the impact financial institutions have on the environment particularly through their investments as well as the importance of them reaching net-zero and reducing their emissions by 50% by 2030. This also means that if a bank does invest in fossil fuels, any emissions produced by that project are the responsibility of the investor i.e the bank.

Although the Paris Agreement has been influential in putting pressure on smaller and newer banks to become more ethical. The bigger more established banks have made little to no effort to re-evaluate their investments, in fact many have actually expanded their partnerships within the fossil fuel industry since the agreement was signed. In a 2020 report from Rainforest Action Network alongside five other non-profits, it was documented that, "between them, 35 of the world's major banks – many of them household names – have provided $2.7 trillion ($3.8 Trillion AUD) to fossil fuel companies since 2015." The most important thing to note here, is that since the Paris Agreement and the subsequent G20 establishment of 'The Task Force for Climate Related Financial Disclosure', regardless of where their ethics align, banks are now under pressure to expose their climate related investments and therefore can now be held accountable - this enables everyday consumers to make informed choices when choosing who to bank with.

This is where our collective actions and voices are the most powerful, banks cannot survive without our money.

So What is 'Ethical Banking'?

Ethical or Sustainable banking refers to the lending of money to ethical causes i.e not for profit organisations supporting issues like social services and environmental conservation, renewable energy or sustainable agriculture projects. Typically there are tight restrictions around the types of business an ethical bank will support, there is an emphasis on 'positive screening'; where money is going toward actively positive social benefit projects rather than just cutting funding to 'bad' investments; such as the tobacco or gun industry, there is a focus on consistent external and internal ethics, i.e workers rights and a high level of transparency between the bank and the consumer. You may also hear the term 'ESG' being thrown around in regards to ethical investing; this refers to Environmental, Social and Governance and can be broken down into the three categories like so;

Environmental: Climate change, resource depletion, waste, pollution and deforestation.

Social: Human rights, equity, diversity, child labour and human rights.

Governmental: Corruption, executive pay, tax strategies, board diversity and structure.

In the last 5 years, 1 in 4 financial advisors have seen a boost in demand for ethical investing. This is great and means our voices are being heard. Before you consider switching banks, look into whether you can influence your bank from within - a lot of banks have slowly started to move toward funding green projects, using your voice to ask for them to make bigger and faster moves, can be a massive encouragement in influencing progress. But ultimately the strongest way to send a message to big banking companies who don't prioritise ethical investments is to simply switch banks and to do it loudly!

How To Switch Banks.

1. Do your research!

  • Find a bank that works for you on both an ethical and a financial level
  • Do a quick google search for any issues that the bank may have been called out for in the past few years and how they've dealt with them. i.e have they cut ties with an unethical company after being exposed?
  • Look for terms like 'Ethical Banking' and ESG Investments
  • Check their website for an 'Impact' or 'Sustainability' Report

2. Set up your new account

  • Make sure when you set up your new bank account you ask your new bank to contact your old bank for a transaction report. This is especially important if you are planning on applying for a loan in the future or need to provide financial proof for anything.

3. Break up with your old bank!

  • Transfer any funds across to your new account.
  • Make sure you keep your old account open for a few weeks in case of any pending transactions.
  • Finally close your accounts and cut up those cards! This is as easy as calling your bank and asking them to close your account. Make sure you tell them why you're leaving.
  • If you're up for an extra step - why not send an email to reinforce your reason for leaving. This will serve as a big encouragement for all banks to switch to more ethical investments to keep their customers happy! It could be something as simple as "I am leaving as I do not support your investment in fossil fuels"

Written by Chloë Beckley. Header Image from Unsplash.

* Disclaimer: 1 Million Women are not financial advisors and cannot provide individual financial advice. We recommend talking to a professional financial advisor if you have any questions or concerns regarding your finances or switching banks.