Over the last 15 years or so, there has been a quiet, but steadily growing movement to divest from the so called “vice” investments (sometimes called ‘sin’ investments). Originally, the term vice investments referred to equity investments in companies selling alcohol, tobacco, and weapons, and it included gambling establishments. Over the past decade, the definition of vice investments has expanded to include conventional industries in the mining, power generation, and petrochemical processing sectors. Why so? It is because the critics believe that these industries, given the manner in which they operate, are just as harmful for individuals as they contribute to climate change and global pollution. Proponents of this movement believe that tapering investment channels that funnel capital into vice industries, will force them to behave more responsibly and take proactive measures to address fallout in the ESG space.
The exact origins of the movement to diversify away from vice investments is unclear, but the student bodies of large American universities are among the most active groups in campaigning against using University endowments to buy into vice stocks and their campaign efforts have been broadly successful. The number of American universities pledging to diversify away from vice investments has only grown over time.
While activist groups and special interest movements have had some success in channeling a higher fraction of institutional funds into clean investments, one can argue that the same cannot be replicated at the grassroots or at an individual level. After all, the average individual does not have a large financial portfolio to achieve a net-zero carbon footprint by continuously rebalancing asset allocations. Can the average individual, with the means at her disposal, bank more sustainably than before? The answer to that is a cautious, but promising- Yes.
The desire to be more ESG friendly is not just permeating the public conscious at large but also the Big Finance. This has led to mushrooming of new types of financial institutions and investment management firms across the banking landscape. Most of them are small or medium sized businesses, which attract a fiercely loyal customer base who believe in investing their values.
Here are seven indicators that your bank is ESG friendly and cares about sustainability:
- Engage in Transparent Charitable Clean Investments: traditionally banking and charity have been perceived to be on opposite sides of the virtue scale. However, with the likes of Bank Australia, which has committed to providing up to 4% of after-tax profits as grants for clean energy projects, this perception is changing. In addition, the bank has a stated policy of not investing in vice industries. Another FinTech company, Aspiration, which positions itself as a banking alternative, provides generous cashbacks and rebates to customers who engage in environmentally conscious spending.
- Builds Green, Serves Green: banks investing in sustainable workspace and prioritizing environmentally conscious operations also indicate that they care for the planet. Take for instance, the Global Alliance for Banking Values (GABV), a network of financial institutions, which have come together to provide services in a more transparent, sustainable way. GABV encourages and requires its members to invest in environment-friendly physical infrastructure. A good example of this is the headquarters of Beneficial State Bank located in the Bullitt Center, Seattle Financial Hub. In terms of financial offerings, Amalgamated Bank, is offering 100% fossil fuel free portfolios as an investment option.
- Encourages employees to Volunteer on the bank’s dime: the best socially conscious employers recognize and respect that their employees may care about some issues more than the others, and that their employees would want to help make a change in the manner they see fit. Sunrise Banks, is one such institution that offers up to 40 hours paid time off for employees volunteering in socially responsible causes.
- Prioritizes socially responsible lending: banks that prioritize socially responsible lending generally prioritize lending to B-Corps. A B-Corporation is a business enterprise which takes a triple bottom-line view to business outcomes: people, planet and profits. That is, the results of their business activities go beyond just the profits and comprise metrics with respect to community support and environmental sustainability. Therefore, if your bank’s asset book has a long list of B-Corporations, it probably indicates socially responsible lending.
- Is community owned than investor owned: serving the underserved is one of the requirements for a company wanting to be ranked high on the ESG scale. Take for instance OneUnited Bank, which operates with the stated purpose of closing the racial wealth gap in the United States. The bank’s patrons and clientele are mostly marginalized groups and people of color. OneUnited not only offers the traditional banking products and services, but also serves people with low literacy and people undergoing rehabilitation. Mascoma Bank is another example in this space. Mascoma operates with a stated policy of putting communities ahead of investors and more than half of the Bank’s top management are women.
- Has a track record of sustainable GreenTech investments: investing in Green technologies and ecologically sensitive projects requires expertise. Not all banks can boast of having the in-house expertise in this area. Nevertheless, having this expertise would accelerate the process of investing in new ESG-based projects or Green technologies. Triodos Bank, based in the UK, is one of the select banks that has a steady track record of successful GreenTech investments. Apart from investments in renewable energy, Triodos has invested in organic farming projects, urban green space projects, environmental technology, and ecological conservation projects.
- Continuously works to lower carbon footprint: Many top performing companies strive continuously to lower their ecological and carbon footprints, and new age banks are no exception. The UK’s Starling Bank has aligned itself to be net-zero by 2030. As means to achieve that, it uses recycled plastics for credit / debit cards, buys thousands of carbon credits every month, and incentivizes tree planting every year. Starlink Bank has also been successful in attracting millennial and GenZ customers.
Prof. Abhijith S
Assistant Professor – Analytics & Data Science