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Autumn Feature: Exploring Ethical and Sustainable Finance

by | Oct 25, 2021 | Ethical Shopping Blog

Introduction

The Good Shopping Guide has recently published its latest Banks & Building Societies Ethical Rating Table. The Ethical Index Ratings, which give companies a score out of 100, are based on our primary and secondary research into several ethical criteria, encompassing the Environment, Animals, and People. Our ethical comparison tables display the Ethical Index Ratings awarded to each company, following our assessment of their ethical and sustainable practices. The new research sheds light on the ethical concerns within the Finance sector and gives socially conscious consumers insight into which companies to choose when looking for sustainable financial options. The role of The Good Shopping Guide is becoming increasingly crucial, given the rise of consumer demand for ethical products and services. A 2021 survey by YouGov found that 32% of consumers are highly engaged with adopting a sustainable lifestyle, with 28% of consumers no longer purchasing from certain companies, due to environmental and ethical concerns.

The findings from our research into the banking sector reveal that the leading UK banks, such as HSBC, Citi, and Barclays, are falling short on ethical and sustainable practices. In contrast, our accredited companies Triodos Bank and Charity Bank are amongst the highest rated companies within the sector. In this article, we explore some of the ethical issues within the Finance sector and how these concerns are accounted for within our research.

 

Ethical Issues within the Banking Sector

Conventional banks are typically less concerned about the negative impact of their investments on the Environment, Animals, and People. For instance, the role major banks play in sponsoring harmful environmental projects is a prevalent issue within the Finance sector. Our researchers have examined reports from leading environmental organisations to determine which banks have been criticised for their role in exacerbating climate change. For instance, the ‘Banking on Climate Chaos’ report by Rainforest Action Network highlights how financial institutions have funded major fossil fuel projects across the globe, including fracked oil and gas, coal power, and tar sands. This is reflected in the Environmental Destruction category of our research – any company that receives a 0 (red cross) under this subsection has been involved in financing one or more projects that are detrimental to the environment. One example of this is HSBC, which was penalised for its financial contributions to several fossil fuel projects, such as the extraction of oil and gas in Vaca Muerta, Argentina, as well as its role in funding meat companies linked to Amazon deforestation. 

Another critical issue within the banking sector is the financing of major armaments manufacturers, including those involved in the production of nuclear weapons. Banks such as Barclays, Citi, Lloyds, and NatWest have been criticised by activist groups for providing billions of dollars in investment, loans, and credit to nuclear weapons companies. This includes some of the world’s leading defence manufacturers, such as Boeing, Aecom, and BAE Systems. Out of all the banks listed on our Banks & Building Societies Ethical Rating Table, Citi was found to be the largest contributor to nuclear arms dealers, supplying a staggering $17 billion from January 2017 to January 2019. The runners up were Barclays and Lloyds, who provided over $5 billion and $4 billion, respectively. It is extremely concerning to see the role our banks play in financing weapons of mass destruction, which is why all companies involved in this are marked down in our Other Irresponsible Lending criterion. Under this category, we assess companies on whether they have invested in an unethical company, project, or industry as a whole. This may also include financing oppressive military regimes or companies involved in deforestation, fossil fuel extraction, and tobacco production. For instance, Barclays was marked down in our research for financing harmful extractive projects linked with poor labour practices and human rights violations. If these issues concern you when selecting a bank, look for companies with a red cross against this category in our Banks & Building Societies Ethical Rating Table, so you know who to avoid.

 

What makes Ethical Banking different?

The ethical banking sector has been on the rise since the 1980s and aims to align economic profitability with respect for human rights and the environment. Ethical banks follow a different philosophy from traditional banks, focusing more on the social impact of their investments through financing companies and projects that contribute to positive social and environmental change, also known as Socially Responsible Investing. Socially Responsible Investing gives ethical banks a unique opportunity to finance sustainable innovation, such as funding renewable energy projects or investing in ethical, eco-friendly companies. According to a 2020 study on sustainable finance in Europe, ethical banking is growing at a much faster rate than conventional banking, due to the growing distrust amongst consumers about the unethical practices the most well-known banks are involved in. The increasing popularity of ethical banking is reflected in the rise of the sustainable investment market. In the five leading financial markets (Europe, United States, Japan, Canada, and Australia/New Zealand), sustainable investments have increased from $22.8 trillion in 2016 to $30.6 trillion in 2018 – a growth rate of 34% in only two years. The rise in consumer demand for ethical banking has had a significant impact on the entire finance sector, with many conventional banks now offering Socially Responsible Investment funds, as well as ethical pensions and ISAs. At The Good Shopping Guide, we believe that ethical banking is an important step in the transition towards a more sustainable future in the world of finance and are pleased to see its growing popularity amongst consumers. 

 

Our Updated Methodology

At The Good Shopping Guide, our research is constantly evolving to incorporate the most prominent global issues into our assessment of companies and brands. We believe it is crucial to pay close attention to international activity and ensure our research aligns with global policy. This year, we updated the methodology within our Ethical Money research to include Carbon Disclosure and Reduction Targets, which examines whether large companies are publicly disclosing their greenhouse gas emissions and setting targets to reduce their carbon footprint. To achieve a top rating (green tick) under this specific category, companies must also pledge to reduce their emissions in line with the 2015 Paris Agreement, which set a goal to limit global warming temperatures to well below 2 degrees Celsius and pursuing efforts to limit it to 1.5°C. Companies can achieve this either with a clear statement of support for the Paris Agreement or by signing up to the Science-Based Targets Initiative (SBTI), an international agreement that sets ambitious targets for corporate climate action.

 

Our Accredited Banks: Triodos Bank UK and Charity Bank

We are extremely proud to have awarded our independent Ethical Accreditation to two leading ethical banks: Triodos Bank UK and Charity Bank; both of which are making impressive achievements in the realm of sustainable finance.

Triodos, which recently attained an Ethical Company Award in September 2021, has been paving the way for ethical banking since its foundation in 1980. The company has a Responsible Investment Policy which rules out investment in nuclear energy, weapons, and unconventional oil and gas. Instead, Triodos invests in socially responsible activities and has so far contributed £8.2 billion in loans to projects benefiting both people and the planet. Triodos is also rated highly in the Environment category of our research, receiving a top rating for Carbon Disclosure and Reduction Targets, due to its ambitious climate targets and support for the 1.5 degrees Paris target. 

Furthermore, Charity Bank, which has consistently attained our Ethical Company Award since 2007, exclusively offers its financial resources to social purpose organisations tackling social and environmental issues. The company only gives out loans to charities, social enterprises, and organisations with a charitable focus. One notable example of Charity Bank’s clients include Mayfield Trust, a charity that supports people with learning disabilities; and Settle Hydro, a community-led hydroelectric project that aims to generate renewable energy for the National Grid.  As Charity Bank does not invest in for-profit organisations; it is not involved in controversial investments such as weapons or fossil fuels.

 

Conclusion

The Good Shopping Guide is pleased to see the progress that has been made in ethical and sustainable finance in recent years. Although some of the leading banks are still trailing behind in areas such as investing in fossil fuels and armaments, we hope to see them engage in more sustainable practices in the future. Triodos Bank UK and Charity Bank are prime examples of the positive influence banks can make on society, through contributing to sustainable and charitable projects, and we encourage other banks to follow suit. To see a full breakdown of how each bank scored, please see our latest Banks and Building Societies Ethical Rating Table.

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