Ethical banking

Benel D. Lagua

Benel D. Lagua

The environmental effects of the service sector industry have long been understated because of the intangibility of its product offerings. Banks, for one, have been erroneously viewed as a non-polluting industry because of the “non-emitting” nature of its business. In the financial markets, the focus has been on money and money systems and the objective has always been on profit maximization, with little concern for social and environmental costs.

Today, the impact of climate change and its disastrous consequence has rendered a reinvestigation of this view. The corporate world has seen the need for rectification strategies to ensure that decisions on investment and production take into account the vision of social, environmental and economic sustainability.

Banks have initially reacted to this issue by incorporating it into their Corporate Social Responsibility (CSR) programs. But that is not enough. There is imperative to integrate these concerns into internal operations, business processes, as well as product offerings.

On internal operations alone, many banks have direct effects worth reviewing. They use massive energy to power buildings, rely on computer systems and electrical devices to execute their operations, ask personnel to travel a lot to service their clients, and generate commercial wastes. But more importantly, bank’s lending and investment decisions are positioned at either upstream or downstream of the value chain. And their choices of what industries to support clearly have substantive implications on society and the environment.

This has led to standards like the Principles for Responsible Investment and the Equator Principles. These efforts mainly concern the creation of ethical investment funds and the introduction of lending policies with ecological criteria for the sake of risk reduction and reputation protection. New paradigms classified into “green banking” and “sustainable banking” have thus evolved. The context of green banking associates with how environmentally friendly the bank is, reducing carbon footprint from banking activities and demonstrating commitment to green and ethical policies. Green banking helps us to create effective and far-reaching market-based solutions to address a range of environmental problems, including climate change, reforestations, air quality issues and biodiversity loss, while at the same time identifying and securing opportunities that benefit customers.

Sustainable banking means providing banking services that enhance the sustainability of society, making it the leading principle for all its economic activities. It denotes banks that do not reduce the possibilities and choices for future generations, which involve balancing economic interests with the communities’ social specifications and minimizing environmental impacts, at the same time ensuring continuity of economic programs for the present generation. Decisions taken today should not compromise options for the future.

In the same breath as green banking and sustainable banking is the drive for policies addressing the common good and an ethical approach as captured in the term “ethical banking.” Literature refers to ethical banking as a decision by the banks to provide products and services to customers who take into consideration the environmental and social impact of their actions. Ethical banking operates with a clear set of values that respects and accepts all hierarchical levels. Their goal is to obtain financial and social gains by choosing ethical prospects on the basis of customer’s decisions and the degree of positive influence on society and environment. In contrast, traditional banks are subordinated to reaching quantitative objectives like profitability and pure financial gains.

Many writers conclude that ethical banking is based on three characteristics. The first is social profitability, which consists of the funding of economic activities with a social value, when ethical commitment permeates all aspects of a bank. The second concern is economic profitability, which is good management to guarantee economic sustainability and the continuous attention to social and environment program. Finally, a third variable is transparency and more exhaustive information with reference to where money has been channeled, which ensures integrity, responsibility and accountability.

The challenges of ethical banking are quite daunting and will require soul-searching for the concerned institution. It requires huge sacrifices in wealth creation as higher emphasis is placed on socio-environmental benefits rather than the economic gain through profit maximization.

In the Philippines today, the banking sector is characterized by high degrees of profitability and liquidity. But the depth and breadth to which the concept of green banking and sustainable financing has been embraced remains to be empirically observed. How many banks have embraced environmental and social dimensions in its core processes? The bigger challenge is to understand better what are the best practices and characteristics that will allow a bank to claim that it is, indeed, an ethical bank.

Benel D. Lagua is Executive Vice President and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.


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