Description
Financial institutions -including banks of all sorts, credit agencies, private equity firms, pension funds, insurance companies, and the like- have long been considered by most people to have no other object in view than the creation of wealth.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 1
“Ethical Issues facing the Banking Industry.”
Financial institutions -including banks of all sorts, credit agencies, private equity
firms, pension funds, insurance companies, and the like- have long been
considered by most people to have no other object in view than the creation of
wealth. The performance of financial institutions is therefore measured solely on
the basis of their capacity to maximize financial assets, that is, it has been
measured with evaluation factors that review only their monetary bottom-line
results. How much return do they get on their investment decisions? How much
are they able to maximize the assets in their custody? How much profit can they
derive from the loans and credits they subscribe, from the bonds they float, from
the equity they successfully issue on the financial markets? Banks are judged by
their ability to develop financial instruments such as complex derivatives and
sophisticated credit schemes that help connect the money of investors with the
companies in need of those financial resources in the best possible way. In
pursuing these ends, banks, and financial institutions in general, have long
defended the confidentiality of the information pertinent to their business, be it
data about their clients, the sources and the destinations of the economic
resources they handle, their credit-giving policies and procedures, and many
more aspects of the banking profession that tend to be little transparent and not
very communicative about their way of doing business.
Financial institutions have become very complex and sophisticated in the way
they operate. The products and services they offer tend to be more and more
complicated. The ways they invest resources, the way they design, promote, and
implement credit facilities, all become less evident year after year, and the speed
at which they evolve is ever accelerating. This complexity and sophistication of
the industry is in part a response to the shifting and ever-growing needs of the
banks’ clients. Companies in need of financing, and of financial services, tend to
have more and more complex businesses with complex needs and requirements
of capital. Globalization also plays an important role. Banks’ customers often do
not have a localized headquarters but they operate virtually everywhere in the
world. Today, it could be argued, it is more difficult for banks to know in detail
where these customers operate and what exactly they do and how they run their
businesses. Moreover, clients change, merge, get acquired, move in and out of
businesses and markets much more rapidly than in the past. It is not only banks
that change so quickly, but their clients, and their clients’ needs also move and
evolve at a higher speed.
Unfortunately, governments, regulators, and other institutions simply cannot cope
with this rate of evolution in a satisfactory manner. Banks are moving too quickly
for the reaction-time of governments and other organizations. As a consequence,
many important issues are being overlooked by the institutions charged with
directing our societies toward the common good.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 2
Were one to give only a superficial consideration to the financial institutions and
the implications of their actions in the world, one could erroneously conclude that
money is just another commodity being traded. There is a danger that money will
be treated as just another product that makes things possible, as a simple means
to accomplish an end. However, such an approach bears the risk of becoming a
highly inhumane approach when we look it in detail. Money is not just another
commodity being handled. Money, both in the form of credit and in the form of
investments, makes a huge impact on the world. Money is a means, not an end;
but, it is a powerful means to do things and therefore evil use of money can
indeed create a considerably negative impact on our world.
Where money comes from, and the destination it might have (that is, the sources
from which it proceeds and the places where it ends up being used), should not
be treated as “just another business transaction”. Money, in all of its forms, has
implications and consequences. The things we do with money, and the things we
allow to be done with money, are not irrelevant from a moral and an ethical
perspective. Money implies actions, money allows things to happen, money
promotes and enacts changes. Money is a very important, if not the most
important fuel for the happenings in the world. Money helps, money builds,
money buys, money creates and acquires, but money can also destroy, pollute,
kill, and support evil. Money should not be considered simply in terms of the
percentage points being generated as a return on an investment over a period of
time. Given that banks are the official intermediaries of money, we need to look
at how they handle money and what they do with it
1
. By facilitating money to
others, financial institutions enact and empower them to do things with it. What
clients end up doing with the money they get from a bank, then, is then not
irrelevant from an ethical viewpoint. This is all the more obvious when we
consider that the money banks handle, is indeed to a large extent, investors’
money, not their own.
To handle money as a commodity with no ethical implications and impact is to
overlook critical moral issues, issues that could in fact be financed, and thus,
enacted, promoted, and effectively created, by the investors’ money. In the end,
whose money is the banks’ money? Who in fact owns the money that financial
institutions are investing and lending? In the end, it is the money of individual
investors. It is the money of pension funds, constituted in turn by the savings, the
taxes, the retirement plans of single individuals like you reading this paper.
Given the fact that money can be used in a wrong way -and it frequently does get
used in such a way- and considering that money is eventually funded to a very
large extent by individual investors, we should ask: is it still morally acceptable
that financial institutions invest and lend money indiscriminately, watching only
the bottom-line? Should bank secrecy and confidentiality never be held to answer
1
Cf. James, J. Lynch, “Banking and Finance; Managing the Moral Dimension”, Gressgam Books, USA, 2007.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 3
for the moral and ethical implications that money can have in our world?
2
Is it
acceptable that governments and regulators lag behind financial institutions’
questionable way of doing businesses because “the markets can’t wait”? Can we
rightly ignore where our money is being used, what it is financing, where it is
being invested, as long as it generates a good return in percentage terms? Can
banks really justify their arms-length approach to their investments and financing
consequences and impacts on our world as far as they generate more money?
How banks use money is not irrelevant from a moral and ethical perspective.
Crime, pollution, corruption, violation of human rights, threats to human life,
totalitarian regimes, and all sorts of wrong-doing need and use money every
year. Financial institutions play a key role in the supply and movement of money.
In this essay we intend to draw your attention to the key role the banking industry
plays in that supply chain of money. Moreover, we will call your attention to the
fact that it is your money, which can play a key role in that supply chain and that
is not morally or ethically avoidable anymore to investigate and to actively
question how banks are using that supply chain to channel your money, with
financial practices that can be fueling wrong doing across the world. Let us clarify
that, whenever investors’ money is channeled to evil-investments by financial
institutions, it is the bank who is guilty of this wrong-doing and not the individual
investor, unless of course, the individual investor were aware of the wrong-doing
(and if he were just as easily able to invest his money elsewhere, and if he were
a significant enough investor to influence the company or fund in question). What
we attempt here is to call the investors’ attention to the importance of the
potential damage that their money could do when invested in the wrong
destinations.
What are our main concerns?
We have several concerns regarding financial institutions and how they use
money. Banks can channel economic resources in different ways that make
money result in some form of evil-doing. The two main ways in which banks can
do this are (a) by lending money to others, that is, by issuing credit facilities to
their clients, these being customers corporations, governments, individuals, etc.,
and (b) by actively and directly investing money, that is, owning shares, be it in
the name of others or for themselves, in companies, projects, or countries, that
conduct different forms of wrong-doing. Owning shares of companies that could
be conducting wrong-doing is, of course, not exclusive to financial institutions;
however, the large sums of funds that banks have available to invest make these
investments particularly relevant when we analyze ethical issues facing banks.
When banks lend money to others, the bank may not be doing wrong by itself; it
is these other entities which might be engaged in wrong-doing. However, this
does not excuse banks from their moral responsibility. Money enables and
2
Cf. Miller, Vandome, “Confidentiality: Ethics, bank secrecy, and the Data Protection Act of 1998…”, Alphascript
Publishing, USA, 2008.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 4
promotes actions, and in this sense, banks lending money to evil-doers are
facilitating their activities. It is not valid to argue that a bank is only in the
business of financing and lending and that therefore they carry no ethical
responsibility in the wrong-doing. Banks effectively enact, enable, and promote
the realization of actions with their lending of financial resources. In the lines
below we will discuss how banks and financial institutions have been known to
effectively fuel wrong-doing through the issuance of credit facilities to clients in
questionable businesses, and through other actions that range from actively
holding shares of companies with questionable practices, to speculation and
other questionable matters.
1.- Usurious practices.
Banking is a business concerned with protecting and growing people’s money.
As such, one of its principal purposes is to generate wealth, in the form of
financial returns for its shareholders. As in any industry, it is understandable and
acceptable that banks try their best to maximize their investments and therefore,
it is logical that banks charge interest rates on the loans and financing activities
they offer to their clients. However, banks that charge excessive interest rates,
abusive commissions, or ultra-profitable credit charges that go beyond
reasonable standards for taking an extra benefit from a specific situation in
detriment to their customers, are guilty of usury. Usury may be defined as
demanding significantly more money back from customers than is just and fair.
Financial institutions consistently engaged in usury are accordingly a subject of
our concern. While we do not necessarily endorse bureaucratic regulations which
may be excessively burdensome and counter-productive, we do expect banks to
act morally with respect to lending practices within their organizations which are
potentially usurious. We are concerned that banks are frequently charging
excessive rates and imposing unfair advantages for themselves upon customers.
We thus expect banks to take care to implement policies that prevent wrong-
doing in the form of usury and similar sorts of abusive practices.
Financial institutions are also guilty of some forms of usury when they encourage
their customers, especially individuals, to go into excessive debt by taking
irresponsible credit at too high interest rates. Some credit customers, specially
those located in low-credit penetration communities are frequently being
subjected to excessive marketing and pressure to drive them into credit at
advantageous interest rates that go beyond what is customary in the industry.
2.- Speculative banking.
The assets a bank lends and invest should be handled responsibly, even
moreover so, when we consider that the bank is investing and lending money
that belongs to other people, i.e., the individual and institutional investors whose
money they manage. Engaging in excessively speculative investments and
irresponsible credit lending practices is morally unacceptable, and in many
cases, not even good business. We believe bankers and financial professionals
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 5
should take a responsible approach in all investment and lending operations with
its customers’ money. Even in the case of high-risk, high-return type of clients, a
bank is the ultimate entity making the investment decisions for the investors, and
practices of speculatively investing heavily in too-risky securities just for the sake
of short-term returns should be considered cautiously, especially given the
massive loss of wealth that we have witnessed during the current financial crisis.
The point is that there is always an ethical component involved in these too-risky
investments that is being ignored. This crisis has made evident that investing in
financial securities of questionable value (such as derivatives without the
adequate collateral, sub-prime mortgages, irresponsible adjustable-rate-
mortgages, and other investments that do not undergo the serious due-diligence
required) have frequently resulted in clients’ wealth destruction.
The situation of over-speculative, over-risky banking gets especially complicated
from a moral perspective when we consider that clients seldom receive the
necessary, detailed information to let them know what kind of investments their
bankers are undertaking with their money. Another aspect of concern regarding
speculative banking, which has also been evidenced in this crisis, is the fact that
many financial institutions have been involved in speculative investments
resulting in enormous losses for their customers while their executives continue
to receive compensation packages and bonuses in the millions of dollars. While
we understand that the banking profession has traditionally generated a lot of
wealth for its executives, their excessive bonuses become an ethical concern
when their clients’ wealth has been destroyed precisely because of these forms
of speculative investment practices.
3.- Financing arms manufacturing and trade.
Many banks are actively financing the military industry around the world. While
we recognize the moral acceptability of a country taking care to defend its
population, and thus investing in arms and weapons, we are concerned with
excesses and human rights violations involved in this activity. We are specifically
referring to indiscriminately destructive, overly-damaging weapons and their
manufacturers and distributors. These usually fall in the category of so-called
“cluster munitions”
which are highly-destructive weapons which not only destroy
an enemy’s military target, but quite frequently kill thousands of innocent civilian
victims.
Why are cluster munitions so harmful? Cluster-munitions are designed to destroy
large areas, thus their use often results in the destruction of civilian settlements,
killing innocent people
3
. On top of this, cluster-munitions weapons cause damage
after the military attack as they contain many explosive components that did not
act at the moment of the attack but remain active there, and explode afterwards.
A potential mine field is created wherever cluster-munitions have been used and
their destructive potential can last for years hidden under the ground. This
3
Cf. Borrie, John & Prokosh, Eric, “Unnaceptable Harm”, U.N. Institute for Disarmament Research, USA, 2006.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 6
information has been corroborated several times by different organizations
around the world, and yet regulation does not actively prevent the manufacturing
of these weapons, and of course, regulation doesn’t prevent fncial itutions
frotivm
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 7
a company be present in a country with a repressive regime, but that its business
there is somehow complicit in propping up or perpetuating the repressive regime.
5.- Financing of companies with little or no commitment to social
responsibility.
The banking industry usually grants credit facilities to companies, and helps in
raising capital in the financial markets, to companies operating with no socially-
responsible agendas, or with little commitment to one. We are referring, amongst
others, to companies operating in third-world countries that allow child-labor,
overwhelming pollution of the environment, black economies, and so forth. We
have observed companies that have little respect for their workers and which
have consistently violated labor laws (mainly in developing countries) having no
problem securing credits from well-known banks
6
. So far, banks have not been
interested in questioning clients about their human-rights or social-impact
agendas. Banks tend to look at the risk-return ratio of their investment as the sole
basis for granting the credit.
Some banks are financing companies, for instance in the infrastructure industry,
that operate in a highly utilitarian way in some countries. Some infrastructure
developers, for example, that build water dams around the world have been
accused of impacting the communities in which they operate by forcing the
displacement of people from their home communities to build the dams wherever
it is more economically convenient for them to build them, regardless of the
social impact this might have. Moreover, these companies have been accused of
manipulating potable water sources in poor countries by linking itself to corrupt
governments like the Burma Junta or the regime in Sudan. Banks lending money
to companies like these facilitate their operations, and thus, often their wrong-
doing. Making money available to companies operating in this manner fuels their
wrong-doing. Funds channeled to these types of companies can easily end up in
the hands of those totalitarian regimes. These funds are not only the bank’s
money, but more importantly, the individual investor’s money.
6.- Ecological Impact.
We should expect banks to start looking more in detail at the potential ecological
damage that their clients could be generating when receiving financing from
them. Companies known to be involved in activities that result in substantial
environmental damage through the extraction of fossil fuels for instance;
companies polluting the seas through the release of toxic chemicals; companies
that manufacture products which persist in the environment and are linked to
health concerns; and any other company damaging the world should not receive
financing so easily as they do today from banks and financial institutions. While
we recognize that avoidance of all possible environmental damage is often very
expensive and hard to achieve, we believe that the efforts should be at least
6
Banks, Sarah, “Ethics and Values in Social Work”, 3
rd
edition, Jo Campling Editor, pp. 35-39.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 8
seriously pursued. We expect companies to actively search for a balance
between their activities, their production processes, their use of natural and
human resources and the respect for the environment.
The same goes for companies involved in unsustainable harvest of natural
resources, including fishing, timber, and other natural resources should also be
severely questioned by banks when asked for financing. Moreover, banks,
pension funds and in general, every investor, should be very cautious when it
comes to buying or holding securities (be it bonds, shares, etc.) in all these kinds
of companies. By investing in these environmentally unfriendly companies,
financial institutions give them access to important sums of capital, which in turn,
results in larger environmental damage.
The same rationale goes for companies involved in aggressive, unnecessary
animal testing of cosmetics and household products or ingredients. We recognize
testing is an important step of many manufacturing processes; it is abusive,
unnecessary, excessive, testing which we want to avoid. Intensive farming
methods, blood sports, trade in the furs of endangered species, and other animal
unfriendly businesses are also of our concern when they make use of animals for
unnecessarily violent and superficial entertainment activities.
7.- Financing, donations, and sponsorships contrary to the good of the
family.
As financial institutions handle huge amounts of capital, the impact of their
donations and sponsorships can be substantial and the money they channel
through donations can have important impact on society. In this respect, we are
particularly concerned with banks giving active support to organizations that
advocate against the institution of family and against family-values. As we are
convinced that the family is the basis for any healthy society, we are interested in
seeing banks staying away from initiatives that somehow can affect the integrity
of family or attack family values in any way. These activities could include
granting financial support to causes that actively promote activism against family
values. While we acknowledge that there are other points of view regarding the
value of families and their role in society, we prefer to keep our investments, and
recommendations for our clients’ investments away from companies promoting
non-family friendly causes and activism. We prefer not to generate our wealth
from investing in companies that opt for financing, promoting, and supporting
entities and organizations that do not share our view on family and family values
as the cornerstones of society, peace and harmony.
8.- Involvement in social enterprise.
The banking industry plays a key role in the development of the markets in which
it operates. By lending and raising money, a bank can effectively help develop a
community, but further than that, a bank is expected to get actively involved in
supporting the development of that community in which it operates. More and
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 9
more banks and financial institutions are praised when they support
organizations such as cooperatives or credit unions, or get involved in financing
of community initiatives. Given the fact that a bank benefits directly from the
economic resources of a community, we would be concerned when a bank
openly neglects to help those communities in which it conducts business.
Is a better banking industry possible?
The answer is absolutely YES. Better, ethically-responsible, respectful banking
and financing industries are not only possible, but also highly desirable, and they
are already starting to emerge. Some banks, mainly small institutions in
developed countries have realized the importance of being ethical beyond their
internal Code of Values, that is, beyond paper and beyond what is strictly within
its operations. Individual investors will play a key role in putting pressure on
banks and regulators to let them know that banking practices cannot go on as
independent of ethics any longer. The relevance of what banks do with the
people’s resources is material.
A number of organizations around the world are starting to pay attention to how
money is being used and to the moral implications it has
7
. Some important
institutional investors are becoming much more concerned with the handling of
their investments. Institutions like the Government Pension Fund of Norway, the
so called, “Folketrygdfondet”
8
, the world’s largest single holder of equity
securities, has been implementing strict ethical criteria to handle their
investments. Some bank-industry watch-dogs like Bank Secrets Organization or
Netwerk Vlaanderen of Belgium
9
, have started to lobby regulators to implement
stronger policies for the banking industry. Other banks like the Cooperative Bank
of the UK, ASN Bank of the Netherlands, and the Eko-Bank of Sweeden have
started to gain market share and respect in the financial community, as more and
more customers prefer to bank with them due to their commitment with high
ethical standards that go beyond “certifications”. Customers are recognizing that
investing their money with an ethical institution does not mean sacrificing
financial performance and yet, their values can be congruent with their bank’s
operating principles.
Eiris Research of Ireland has been advising individual and institutional investors
to make them conscious of the moral relevance of taking care where their money
is been invested
10
. Some banks like Triodos Bank
11
of the UK are starting to offer
their clients alternative ways to invest their money considering the ethical and the
financial impact of their investments. Some government agencies like the UK
7
www.oecd.org/dataoecd/37/30/234875.pdf and www.asria.org - viewed December 2009.
8
www.ftf.no/english/html - viewed in December 2009.
9
www.netwerkvlaanderen.be - viewed in December 2009.
10
www.eiris.org and www.eurosif.org - viewed in December 2009.
11
www.triodos.co.uk - viewed in January 2010.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 10
Treasury have started to work on designing better regulation for the banking
industry. The world is changing and investors both individual and institutional are
starting to pay attention to the ethical implications of their money. A world where
investments and loans are made on the pure basis of financial return is not any
more acceptable and we at Fidelis International Institute are here to make our
contribution.
January, 2010.
Ricardo Sánchez Serrano, Chris Oleson, Mike Augros, Maciej Bazela and
Marcelo Benítez.
doc_530308148.pdf
Financial institutions -including banks of all sorts, credit agencies, private equity firms, pension funds, insurance companies, and the like- have long been considered by most people to have no other object in view than the creation of wealth.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 1
“Ethical Issues facing the Banking Industry.”
Financial institutions -including banks of all sorts, credit agencies, private equity
firms, pension funds, insurance companies, and the like- have long been
considered by most people to have no other object in view than the creation of
wealth. The performance of financial institutions is therefore measured solely on
the basis of their capacity to maximize financial assets, that is, it has been
measured with evaluation factors that review only their monetary bottom-line
results. How much return do they get on their investment decisions? How much
are they able to maximize the assets in their custody? How much profit can they
derive from the loans and credits they subscribe, from the bonds they float, from
the equity they successfully issue on the financial markets? Banks are judged by
their ability to develop financial instruments such as complex derivatives and
sophisticated credit schemes that help connect the money of investors with the
companies in need of those financial resources in the best possible way. In
pursuing these ends, banks, and financial institutions in general, have long
defended the confidentiality of the information pertinent to their business, be it
data about their clients, the sources and the destinations of the economic
resources they handle, their credit-giving policies and procedures, and many
more aspects of the banking profession that tend to be little transparent and not
very communicative about their way of doing business.
Financial institutions have become very complex and sophisticated in the way
they operate. The products and services they offer tend to be more and more
complicated. The ways they invest resources, the way they design, promote, and
implement credit facilities, all become less evident year after year, and the speed
at which they evolve is ever accelerating. This complexity and sophistication of
the industry is in part a response to the shifting and ever-growing needs of the
banks’ clients. Companies in need of financing, and of financial services, tend to
have more and more complex businesses with complex needs and requirements
of capital. Globalization also plays an important role. Banks’ customers often do
not have a localized headquarters but they operate virtually everywhere in the
world. Today, it could be argued, it is more difficult for banks to know in detail
where these customers operate and what exactly they do and how they run their
businesses. Moreover, clients change, merge, get acquired, move in and out of
businesses and markets much more rapidly than in the past. It is not only banks
that change so quickly, but their clients, and their clients’ needs also move and
evolve at a higher speed.
Unfortunately, governments, regulators, and other institutions simply cannot cope
with this rate of evolution in a satisfactory manner. Banks are moving too quickly
for the reaction-time of governments and other organizations. As a consequence,
many important issues are being overlooked by the institutions charged with
directing our societies toward the common good.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 2
Were one to give only a superficial consideration to the financial institutions and
the implications of their actions in the world, one could erroneously conclude that
money is just another commodity being traded. There is a danger that money will
be treated as just another product that makes things possible, as a simple means
to accomplish an end. However, such an approach bears the risk of becoming a
highly inhumane approach when we look it in detail. Money is not just another
commodity being handled. Money, both in the form of credit and in the form of
investments, makes a huge impact on the world. Money is a means, not an end;
but, it is a powerful means to do things and therefore evil use of money can
indeed create a considerably negative impact on our world.
Where money comes from, and the destination it might have (that is, the sources
from which it proceeds and the places where it ends up being used), should not
be treated as “just another business transaction”. Money, in all of its forms, has
implications and consequences. The things we do with money, and the things we
allow to be done with money, are not irrelevant from a moral and an ethical
perspective. Money implies actions, money allows things to happen, money
promotes and enacts changes. Money is a very important, if not the most
important fuel for the happenings in the world. Money helps, money builds,
money buys, money creates and acquires, but money can also destroy, pollute,
kill, and support evil. Money should not be considered simply in terms of the
percentage points being generated as a return on an investment over a period of
time. Given that banks are the official intermediaries of money, we need to look
at how they handle money and what they do with it
1
. By facilitating money to
others, financial institutions enact and empower them to do things with it. What
clients end up doing with the money they get from a bank, then, is then not
irrelevant from an ethical viewpoint. This is all the more obvious when we
consider that the money banks handle, is indeed to a large extent, investors’
money, not their own.
To handle money as a commodity with no ethical implications and impact is to
overlook critical moral issues, issues that could in fact be financed, and thus,
enacted, promoted, and effectively created, by the investors’ money. In the end,
whose money is the banks’ money? Who in fact owns the money that financial
institutions are investing and lending? In the end, it is the money of individual
investors. It is the money of pension funds, constituted in turn by the savings, the
taxes, the retirement plans of single individuals like you reading this paper.
Given the fact that money can be used in a wrong way -and it frequently does get
used in such a way- and considering that money is eventually funded to a very
large extent by individual investors, we should ask: is it still morally acceptable
that financial institutions invest and lend money indiscriminately, watching only
the bottom-line? Should bank secrecy and confidentiality never be held to answer
1
Cf. James, J. Lynch, “Banking and Finance; Managing the Moral Dimension”, Gressgam Books, USA, 2007.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 3
for the moral and ethical implications that money can have in our world?
2
Is it
acceptable that governments and regulators lag behind financial institutions’
questionable way of doing businesses because “the markets can’t wait”? Can we
rightly ignore where our money is being used, what it is financing, where it is
being invested, as long as it generates a good return in percentage terms? Can
banks really justify their arms-length approach to their investments and financing
consequences and impacts on our world as far as they generate more money?
How banks use money is not irrelevant from a moral and ethical perspective.
Crime, pollution, corruption, violation of human rights, threats to human life,
totalitarian regimes, and all sorts of wrong-doing need and use money every
year. Financial institutions play a key role in the supply and movement of money.
In this essay we intend to draw your attention to the key role the banking industry
plays in that supply chain of money. Moreover, we will call your attention to the
fact that it is your money, which can play a key role in that supply chain and that
is not morally or ethically avoidable anymore to investigate and to actively
question how banks are using that supply chain to channel your money, with
financial practices that can be fueling wrong doing across the world. Let us clarify
that, whenever investors’ money is channeled to evil-investments by financial
institutions, it is the bank who is guilty of this wrong-doing and not the individual
investor, unless of course, the individual investor were aware of the wrong-doing
(and if he were just as easily able to invest his money elsewhere, and if he were
a significant enough investor to influence the company or fund in question). What
we attempt here is to call the investors’ attention to the importance of the
potential damage that their money could do when invested in the wrong
destinations.
What are our main concerns?
We have several concerns regarding financial institutions and how they use
money. Banks can channel economic resources in different ways that make
money result in some form of evil-doing. The two main ways in which banks can
do this are (a) by lending money to others, that is, by issuing credit facilities to
their clients, these being customers corporations, governments, individuals, etc.,
and (b) by actively and directly investing money, that is, owning shares, be it in
the name of others or for themselves, in companies, projects, or countries, that
conduct different forms of wrong-doing. Owning shares of companies that could
be conducting wrong-doing is, of course, not exclusive to financial institutions;
however, the large sums of funds that banks have available to invest make these
investments particularly relevant when we analyze ethical issues facing banks.
When banks lend money to others, the bank may not be doing wrong by itself; it
is these other entities which might be engaged in wrong-doing. However, this
does not excuse banks from their moral responsibility. Money enables and
2
Cf. Miller, Vandome, “Confidentiality: Ethics, bank secrecy, and the Data Protection Act of 1998…”, Alphascript
Publishing, USA, 2008.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 4
promotes actions, and in this sense, banks lending money to evil-doers are
facilitating their activities. It is not valid to argue that a bank is only in the
business of financing and lending and that therefore they carry no ethical
responsibility in the wrong-doing. Banks effectively enact, enable, and promote
the realization of actions with their lending of financial resources. In the lines
below we will discuss how banks and financial institutions have been known to
effectively fuel wrong-doing through the issuance of credit facilities to clients in
questionable businesses, and through other actions that range from actively
holding shares of companies with questionable practices, to speculation and
other questionable matters.
1.- Usurious practices.
Banking is a business concerned with protecting and growing people’s money.
As such, one of its principal purposes is to generate wealth, in the form of
financial returns for its shareholders. As in any industry, it is understandable and
acceptable that banks try their best to maximize their investments and therefore,
it is logical that banks charge interest rates on the loans and financing activities
they offer to their clients. However, banks that charge excessive interest rates,
abusive commissions, or ultra-profitable credit charges that go beyond
reasonable standards for taking an extra benefit from a specific situation in
detriment to their customers, are guilty of usury. Usury may be defined as
demanding significantly more money back from customers than is just and fair.
Financial institutions consistently engaged in usury are accordingly a subject of
our concern. While we do not necessarily endorse bureaucratic regulations which
may be excessively burdensome and counter-productive, we do expect banks to
act morally with respect to lending practices within their organizations which are
potentially usurious. We are concerned that banks are frequently charging
excessive rates and imposing unfair advantages for themselves upon customers.
We thus expect banks to take care to implement policies that prevent wrong-
doing in the form of usury and similar sorts of abusive practices.
Financial institutions are also guilty of some forms of usury when they encourage
their customers, especially individuals, to go into excessive debt by taking
irresponsible credit at too high interest rates. Some credit customers, specially
those located in low-credit penetration communities are frequently being
subjected to excessive marketing and pressure to drive them into credit at
advantageous interest rates that go beyond what is customary in the industry.
2.- Speculative banking.
The assets a bank lends and invest should be handled responsibly, even
moreover so, when we consider that the bank is investing and lending money
that belongs to other people, i.e., the individual and institutional investors whose
money they manage. Engaging in excessively speculative investments and
irresponsible credit lending practices is morally unacceptable, and in many
cases, not even good business. We believe bankers and financial professionals
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 5
should take a responsible approach in all investment and lending operations with
its customers’ money. Even in the case of high-risk, high-return type of clients, a
bank is the ultimate entity making the investment decisions for the investors, and
practices of speculatively investing heavily in too-risky securities just for the sake
of short-term returns should be considered cautiously, especially given the
massive loss of wealth that we have witnessed during the current financial crisis.
The point is that there is always an ethical component involved in these too-risky
investments that is being ignored. This crisis has made evident that investing in
financial securities of questionable value (such as derivatives without the
adequate collateral, sub-prime mortgages, irresponsible adjustable-rate-
mortgages, and other investments that do not undergo the serious due-diligence
required) have frequently resulted in clients’ wealth destruction.
The situation of over-speculative, over-risky banking gets especially complicated
from a moral perspective when we consider that clients seldom receive the
necessary, detailed information to let them know what kind of investments their
bankers are undertaking with their money. Another aspect of concern regarding
speculative banking, which has also been evidenced in this crisis, is the fact that
many financial institutions have been involved in speculative investments
resulting in enormous losses for their customers while their executives continue
to receive compensation packages and bonuses in the millions of dollars. While
we understand that the banking profession has traditionally generated a lot of
wealth for its executives, their excessive bonuses become an ethical concern
when their clients’ wealth has been destroyed precisely because of these forms
of speculative investment practices.
3.- Financing arms manufacturing and trade.
Many banks are actively financing the military industry around the world. While
we recognize the moral acceptability of a country taking care to defend its
population, and thus investing in arms and weapons, we are concerned with
excesses and human rights violations involved in this activity. We are specifically
referring to indiscriminately destructive, overly-damaging weapons and their
manufacturers and distributors. These usually fall in the category of so-called
“cluster munitions”
which are highly-destructive weapons which not only destroy
an enemy’s military target, but quite frequently kill thousands of innocent civilian
victims.
Why are cluster munitions so harmful? Cluster-munitions are designed to destroy
large areas, thus their use often results in the destruction of civilian settlements,
killing innocent people
3
. On top of this, cluster-munitions weapons cause damage
after the military attack as they contain many explosive components that did not
act at the moment of the attack but remain active there, and explode afterwards.
A potential mine field is created wherever cluster-munitions have been used and
their destructive potential can last for years hidden under the ground. This
3
Cf. Borrie, John & Prokosh, Eric, “Unnaceptable Harm”, U.N. Institute for Disarmament Research, USA, 2006.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 6
information has been corroborated several times by different organizations
around the world, and yet regulation does not actively prevent the manufacturing
of these weapons, and of course, regulation doesn’t prevent fncial itutions
frotivm
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 7
a company be present in a country with a repressive regime, but that its business
there is somehow complicit in propping up or perpetuating the repressive regime.
5.- Financing of companies with little or no commitment to social
responsibility.
The banking industry usually grants credit facilities to companies, and helps in
raising capital in the financial markets, to companies operating with no socially-
responsible agendas, or with little commitment to one. We are referring, amongst
others, to companies operating in third-world countries that allow child-labor,
overwhelming pollution of the environment, black economies, and so forth. We
have observed companies that have little respect for their workers and which
have consistently violated labor laws (mainly in developing countries) having no
problem securing credits from well-known banks
6
. So far, banks have not been
interested in questioning clients about their human-rights or social-impact
agendas. Banks tend to look at the risk-return ratio of their investment as the sole
basis for granting the credit.
Some banks are financing companies, for instance in the infrastructure industry,
that operate in a highly utilitarian way in some countries. Some infrastructure
developers, for example, that build water dams around the world have been
accused of impacting the communities in which they operate by forcing the
displacement of people from their home communities to build the dams wherever
it is more economically convenient for them to build them, regardless of the
social impact this might have. Moreover, these companies have been accused of
manipulating potable water sources in poor countries by linking itself to corrupt
governments like the Burma Junta or the regime in Sudan. Banks lending money
to companies like these facilitate their operations, and thus, often their wrong-
doing. Making money available to companies operating in this manner fuels their
wrong-doing. Funds channeled to these types of companies can easily end up in
the hands of those totalitarian regimes. These funds are not only the bank’s
money, but more importantly, the individual investor’s money.
6.- Ecological Impact.
We should expect banks to start looking more in detail at the potential ecological
damage that their clients could be generating when receiving financing from
them. Companies known to be involved in activities that result in substantial
environmental damage through the extraction of fossil fuels for instance;
companies polluting the seas through the release of toxic chemicals; companies
that manufacture products which persist in the environment and are linked to
health concerns; and any other company damaging the world should not receive
financing so easily as they do today from banks and financial institutions. While
we recognize that avoidance of all possible environmental damage is often very
expensive and hard to achieve, we believe that the efforts should be at least
6
Banks, Sarah, “Ethics and Values in Social Work”, 3
rd
edition, Jo Campling Editor, pp. 35-39.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 8
seriously pursued. We expect companies to actively search for a balance
between their activities, their production processes, their use of natural and
human resources and the respect for the environment.
The same goes for companies involved in unsustainable harvest of natural
resources, including fishing, timber, and other natural resources should also be
severely questioned by banks when asked for financing. Moreover, banks,
pension funds and in general, every investor, should be very cautious when it
comes to buying or holding securities (be it bonds, shares, etc.) in all these kinds
of companies. By investing in these environmentally unfriendly companies,
financial institutions give them access to important sums of capital, which in turn,
results in larger environmental damage.
The same rationale goes for companies involved in aggressive, unnecessary
animal testing of cosmetics and household products or ingredients. We recognize
testing is an important step of many manufacturing processes; it is abusive,
unnecessary, excessive, testing which we want to avoid. Intensive farming
methods, blood sports, trade in the furs of endangered species, and other animal
unfriendly businesses are also of our concern when they make use of animals for
unnecessarily violent and superficial entertainment activities.
7.- Financing, donations, and sponsorships contrary to the good of the
family.
As financial institutions handle huge amounts of capital, the impact of their
donations and sponsorships can be substantial and the money they channel
through donations can have important impact on society. In this respect, we are
particularly concerned with banks giving active support to organizations that
advocate against the institution of family and against family-values. As we are
convinced that the family is the basis for any healthy society, we are interested in
seeing banks staying away from initiatives that somehow can affect the integrity
of family or attack family values in any way. These activities could include
granting financial support to causes that actively promote activism against family
values. While we acknowledge that there are other points of view regarding the
value of families and their role in society, we prefer to keep our investments, and
recommendations for our clients’ investments away from companies promoting
non-family friendly causes and activism. We prefer not to generate our wealth
from investing in companies that opt for financing, promoting, and supporting
entities and organizations that do not share our view on family and family values
as the cornerstones of society, peace and harmony.
8.- Involvement in social enterprise.
The banking industry plays a key role in the development of the markets in which
it operates. By lending and raising money, a bank can effectively help develop a
community, but further than that, a bank is expected to get actively involved in
supporting the development of that community in which it operates. More and
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 9
more banks and financial institutions are praised when they support
organizations such as cooperatives or credit unions, or get involved in financing
of community initiatives. Given the fact that a bank benefits directly from the
economic resources of a community, we would be concerned when a bank
openly neglects to help those communities in which it conducts business.
Is a better banking industry possible?
The answer is absolutely YES. Better, ethically-responsible, respectful banking
and financing industries are not only possible, but also highly desirable, and they
are already starting to emerge. Some banks, mainly small institutions in
developed countries have realized the importance of being ethical beyond their
internal Code of Values, that is, beyond paper and beyond what is strictly within
its operations. Individual investors will play a key role in putting pressure on
banks and regulators to let them know that banking practices cannot go on as
independent of ethics any longer. The relevance of what banks do with the
people’s resources is material.
A number of organizations around the world are starting to pay attention to how
money is being used and to the moral implications it has
7
. Some important
institutional investors are becoming much more concerned with the handling of
their investments. Institutions like the Government Pension Fund of Norway, the
so called, “Folketrygdfondet”
8
, the world’s largest single holder of equity
securities, has been implementing strict ethical criteria to handle their
investments. Some bank-industry watch-dogs like Bank Secrets Organization or
Netwerk Vlaanderen of Belgium
9
, have started to lobby regulators to implement
stronger policies for the banking industry. Other banks like the Cooperative Bank
of the UK, ASN Bank of the Netherlands, and the Eko-Bank of Sweeden have
started to gain market share and respect in the financial community, as more and
more customers prefer to bank with them due to their commitment with high
ethical standards that go beyond “certifications”. Customers are recognizing that
investing their money with an ethical institution does not mean sacrificing
financial performance and yet, their values can be congruent with their bank’s
operating principles.
Eiris Research of Ireland has been advising individual and institutional investors
to make them conscious of the moral relevance of taking care where their money
is been invested
10
. Some banks like Triodos Bank
11
of the UK are starting to offer
their clients alternative ways to invest their money considering the ethical and the
financial impact of their investments. Some government agencies like the UK
7
www.oecd.org/dataoecd/37/30/234875.pdf and www.asria.org - viewed December 2009.
8
www.ftf.no/english/html - viewed in December 2009.
9
www.netwerkvlaanderen.be - viewed in December 2009.
10
www.eiris.org and www.eurosif.org - viewed in December 2009.
11
www.triodos.co.uk - viewed in January 2010.
FIDELIS International Institute - Research Note
Copyright 2010 © Fidelis International, Inc. 10
Treasury have started to work on designing better regulation for the banking
industry. The world is changing and investors both individual and institutional are
starting to pay attention to the ethical implications of their money. A world where
investments and loans are made on the pure basis of financial return is not any
more acceptable and we at Fidelis International Institute are here to make our
contribution.
January, 2010.
Ricardo Sánchez Serrano, Chris Oleson, Mike Augros, Maciej Bazela and
Marcelo Benítez.
doc_530308148.pdf