June/July 2013: Ethical Banking

Rowanne Westhenry finds the banking sector has served the Third Sector well over the years, but there are challenges ahead

The banking and third sectors have had an interesting narrative in recent years. The sector-led ‘Better Banking campaign’ aimed to create government legislation to ensure greater transparency amongst banks, including measuring levels and areas of investment. While many others have highlighted how the banking sector has served the Third Sector well over the years: the reality of the sector needing good, solid finance to maintain its work.

In this, latter way, charities have found banks and banking operations to be solid and dependable, and true to the principle of trust, while banks have adapted their offerings to service the sector with tailored banking solutions, supported by dedicated managers. Support teams, in conjunction with the Charity Finance Group, have been impressive in helping the sector grow and plan, in a way it would not have been able to do without such offerings.

This has included everything from financial support and advice for smaller local charities at grass roots level, to high profile international organisations, both via direct investment and through offering charitable products through retail banking. All charities need a deposit or current account to hold cash for the day-to-day running of the organisation.

There are around 20 banks offering accounts for charities, so the offering is deep, diverse and well managed. Though whilst the current level of support for charities provided by the big banks is welcomed, since the banking crisis there has been growing concern surrounding the ethics of the current system, and it is in this climate that ethical finance has really found its feet.

Ethical finance
A survey which investigated attitudes towards ethical finance in Great Britain found that 38 per cent of the public are interested in green or ethical financial products, and that 90 per cent of those interested would be likely to switch to a different provider if it offered green or ethical investment products. In this manner, ethical banks and investment funds have emerged as a viable alternative to the standard financial model.

Also of interest is a EIRIS survey which found that 84 per cent of respondents believed that charities should be transparent about their investment portfolios. While 59 per cent of larger charities have a Socially Responsible Investment (SRI) policy, rigorously ensuring that your charity’s finances are invested in a socially responsible way will help to avoid contradicting your mission and values. A further 78 per cent of survey respondents stated that they would think worse of a charity if they discovered it had funds invested in activities contrary to its specific work and values.

With many of the major financial institutions investing in tar sands, arms dealing and deforestation, the knowledge that your charity’s funds are being invested to bring about positive societal change will minimise the risk of damaging stakeholder relations in the future. A 2008 EIRIS survey revealed that 52 per cent of respondents would be ‘unwilling’ to donate to a charity whose investments contradicted their mission, with a further 31 percent stating that they would be ‘less likely’ to donate. Steps have been taken to improve the ethical value of investments by the big banks, but there is a danger that they do not yet reach far enough to protect charities from the very real risk of reputational damage.

Positive change
However, as banks are forced to become more transparent about their investment portfolios, charities whose fund managers act as active shareholders in corporations with questionable ethical standards are able to act as agents of positive change.

Research by Triodos has suggested that the majority of people believe that banks should be doing more to have a positive impact on society, and the public and financial profiles of leading UK charities could be key to forcing these changes.

Using shareholder influence and financial leverage could enable charities to improve environmental, social and corporate governance (ESG) compliance standards across several industries, even furthering the aims of the charity by doing so. With more and more consumers taking an active interest in where the banks are investing their money, financial institutions that actively support charities and social enterprises will have a key advantage over their less ethical rivals.

As well as improving the public perception of the banks, ethical investment focuses on the long-term future of the real economy, rather than delivering inflated, short-term profits.

As well as this focus on sustainable, long-term growth, research has suggested that higher ESG compliance standards and an ethical approach to investments does not negatively impact on the fiscal performance of those investments.

Instead, the European Centre for Corporate Engagement have found that “Even though they do not present irrefutable evidence that SRI investments generate higher returns than ‘normal’ investments, most studies have found that they do not result in worse performance either, while, at the same time, they might actually decrease risk exposure.”

This is further supported by research commissioned by the UNEP FI, which found ‘robust evidence that ESG issues affect shareholder value in both the short and long term.’ When Iceland’s banks collapsed in 2009, 48 UK charities lost a combined total of £86.6 million.

Choosing to bank with an ethical institution minimises the risk of such losses. As well as decreased exposure to the risks which brought about the recent banking crisis, ethical banks offer charities an opportunity to affect a positive change to society. At the present time, only a small fraction of the profits generated by the big banks is invested in social and charitable enterprises.

Lloyds TSB won the 2012 Moneyfacts award for the best charity account and in 2010, global banking giant HSBC donated 0.56 percent of its pre-tax profits to charity, compared to the four per cent that the Co-Operative donated in the same year. That said, the leading banks charitable giving add up to significant sums: Lloyds Banking Group gives £85million; HSBC £69million; Barclays £63.5million; and the Royal Bank of Scotland £63 million. What is stark within these numbers is the wide range of sophisticated arrangements that are behind these figures, and benefit a number of charities.

This is evident in the winning of the Lloyds Scholars Corporate Social Responsibility Project of the Year Award at the Charity Times Awards last year and Personal Finance Education Group/HSBC winning the Corporate National Partnership of the Year with a Financial Institution. So, in this way, the contribution to the sector from major banks is multi-layered. Moreover, ethical banks avoid this shortfall as their shareholders are charities or social enterprises.

Financial boost
The Third Sector holds £18 billion of cash deposits in UK banks, giving big charities the opportunity to leverage change within the financial services industry. Caron Bradshaw, CEO, Charity Finance Group, says: “We would like to see banking move from a passive arrangement to one where charities are regularly ensuring they are getting the best service.”

The 45 Common Investment Funds in the UK contain £8.2 billion in pooled assets from organisations across the Third Sector. When you consider that in June 2012 the recorded total invested in green or ethical funds was £11.2 billion, the potential for the mutual growth of the two sectors is clear.

With this comes new challenges; which has seen Charity Bank give up its charitable status to meet new banking rules as a result of the recent economic crisis. It will still lend only to charities and social enterprises as it does now and retain its name.

The economic austerity measures that are coming into force in the UK have placed an enormous strain on the Third Sector, as people who previously received government support turn to charities to fill the void. As the UK holds the G8 presidency for 2013, Prime Minister David Cameron has arranged a summit of the G8 leaders to tackle the issues of social impact investment, with the aim of catalysing the movement and increasing its efficiency on a global scale.

This would create an incentive for banks to release more funding for third sector projects in deprived areas, and with 33 per cent of the population feeling indifferent or negative towards their bank, public pressure could force the banks to behave differently and possibly more ethically. This is a future challenge some banks would do well to embrace.

Rowanne Westhenry is a freelance journalist

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