Home / ESG / Can banks… be good? Why ethical investors don’t automatically shun the big financials

The banks may not be perfect, but their collective role in facilitating a developed ecosystem, combined with the leverage they have through lending and capital allocation, means they often fall within Australian Ethical's "investible universe".

“Bank bashing is a national sport, and with good reason,” says Australian Ethical in a recent insights article, before adding that the largest financials sector entities in our country can also “do good”.

The question of whether banks can act in the right manner is an important one for investors – especially those that come replete with institutional mandate and a core belief that investing should be done through a fundamentally ethical lens. The kind of ethical screening process Australian Ethical applies is a robust one, as it actively seeks out companies that “positively impact the planet, people and animals”, as well as ones that “restricts investments that cause harm”.

What of the banks, then? What of large institutions that are in the headlines, more often than not, for egregious profit-making and varying degrees of malpractice?

“The banks do deserve criticism on many fronts, including for far-too-frequent incidents of irresponsible lending, unconscionable fees, poor financial advice and transaction reporting failures,” Australian Ethical notes. “Banks have also lent money to high-emissions companies and projects that contribute to climate change.”

But those transgressions, while forefront in the consciousness due to media, don’t offer the full context of the role that banks play in a functional developed ecosystem. As long as they’re responsible and well-regulated, the group notes, banks are largely additive in our financial services landscape. Part of that positive impact can also involve using scale to fund projects that make the world a better place.

“They enable people to open businesses and buy homes, helping them to get ahead in their lives. They provide financing for innovations that can help society at large. And when it comes to climate change, bank lending can be a critical lever in the transition to more sustainable energy.”

Australia’s path to net-zero by 2050 requires increasing low-carbon investment from $900 billion in 2020 to $5 trillion per year by 2030 according to the International Monetary Fund, which requires the banks’ collective influence.

“Small banks simply can’t do this alone,” the group points out. “We need big banks to facilitate the massive shifts of capital necessary to combat climate change by funding large-scale renewables projects. In addition, banks can also exercise their leverage by only providing new loans to companies that have a credible, science-based energy transition plan in place.”

Assessing the banks is problematic, which is why Australian Ethical has a defined process for the function that involves a climate scorecard assessing lending to the fossil fuel sector, renewable energy producers and technologies that reduce energy storage or store carbon. In each of these cases, the group looks at current lending, historical trends and lending targets.

Meeting benchmark targets also carries significant weight. ANZ is out, for example, because it doesn’t meet lending criteria for the Paris Agreement. After not being in the Australian Ethical “investible universe” for 15 years, the country’s biggest bank is now back in due to its taking a leading role in relation to climate change and lending practices.

“When comparing Australian Big Four banks to their global peers, the three that Australian Ethical is now able to invest in are among the world leaders in putting in place policies that restrict the support they offer to expansionary fossil fuel projects.”