5 Considerations to Bear in Mind
Going Forth
When browsing through the existing alternatives to traditional banks, their discourses and operations, several attention points and reflections came to mind. While I celebrate the diversity of options available out there, I find it healthy to always keep a critical eye to their proposals as well as to what extent they are acting differently from what they criticise. Furthermore, it seems fit to point out where these actors share synergies and yet at the same time how they could help and learn from each other a lot more than they currently do. In this debate, there is certainly room for provocation and exercising our imagination. What follows then are five considerations, or discussion topics, to help us move forward in the journey of investing and banking on our values and to keep the conversation alive.
1. The Focus on Greater Returns
One of the most widely accepted and reproduced claims related to socially responsible investing is ‘doing well by doing good’. The expression is used by players in the sector and academics to reverse an old, negative and commonly held belief that investing responsibly means sacrificing returns. To debunk this stigma, countless publications have focused on proving how SRI investors are yielding competitive returns compared to traditional investing — both from the standpoint of professional and retail investors. Based on research carried out for this dissertation, the fintech world is acting accordingly. Websites emphasise historical returns, followed by graphs showing interest rates on P2P lending or crowdfunding performing much better than the ones offered by savings accounts, CDs or even Treasury bonds.
From the perspective of attracting more capital to areas which are often overlooked such as financial inclusion, education or environmental conservation, the argument of ‘doing well by doing good’ is incredibly important and the data backing it, persuasive. The strategy speaks the language of traditional investors whilst addressing urgent social and ecological problems, which in itself is remarkable and utterly needed. However, when looking at the big picture, we could challenge the reason why such emphasis is given to this argument and what is behind it. In other words, does supporting socially responsible projects have to be sold as a profitable business deal?
A number of authors including Bernard Lietaer, Charles Eisenstein and Kate Raworth defend that this focus on higher returns is still connected to an economy whose ultimate goal is unlimited growth and that profits on the idea of money as a scarce resource. Furthermore, research by the Common Cause Foundation suggests that the strategy of emphasising financial returns might be misguided if the greater intention is to bring about a positive transformation of the current system. In this sense, by appealing to investors with the financial argument, we are reinforcing extrinsic values such as wealth, social status or public image instead of encouraging intrinsic values like social justice, equality or unity with nature. Inviting us to stretch our minds even further, Eisenstein (2011:2) proposes that if we are working towards an economy that “restores to wholeness our fractured communities, relationships, cultures, ecosystems, and planet”, we should lend money at zero interest. Although he believes ethical investments are a movement in the right direction, offering high-interest rates is like “robbing Peter to pay Paul”. That said, if the goal is to really contribute to the overall good, we should not ask for a return on our investments. Interestingly, the practice of charging interest was once prohibited by all three major religions, Judaism, Christianism and Islam.
Far from simply judging as wrong the discourses and practices of the alternatives to traditional banking mentioned in the previous articles, the idea here is to keep questioning what the ultimate reality we are trying to bring about is. Needless to say, investing with no expectations of returns is not something everyone could start doing overnight. Not only is it connected to one’s level of wealth and income, but it is also cultural and linked to the macroeconomic situation of individual countries. In the case of countries where inflation rates are high, namely most of the developing nations, it is nearly impossible to find adopters of the idea of not yielding returns. Millionaires might gift money in the form of philanthropy, but when it comes to investing in businesses, small or large, the idea of earning more than was first invested is deeply rooted in our economic narrative and culture and thus, incredibly hard to dismantle.
One good approach towards getting involved with socially responsible, sustainable or ethical investing is not to dismiss but look beyond financial returns. Based on my personal experience of working with crowdfunding and backing dozens of projects, including a community-share-offer of an organic farm in the UK, there is something special about supporting a project aligned to my values that brings greater social and emotional returns. Put simply, it brings a deep sense of connection to a community (defined by place or common interest), purpose to my investment, and the joy of seeing the impact it can generate. Moreover, when lending money or buying a share of a local bakery, for example, we become part of something much bigger than ourselves and which is creating true value — not to mention good food — to our communities. Michael Shuman writes extensively about the felt benefits of nurturing local economies and adds that people find these social returns so fulfilling that, in some cases, even a “tiny extra risk” is worth taking.
2. Ownership and Governance
The financial sector has been historically entrenched in a culture of shareholder primacy, where banks and other institutions hold the maximisation of shareholders’ returns as their main obligation and goal. In this dynamic, while employees comprise the working force, decision making and strategies are the responsibilities of those who traditionally hardly ever visit the business. The countermovement of cooperative banks and credit unions, however, reverse this logic by putting members in control and agreeing that serving customers’ needs should be the primary goal of financial institutions. Moreover, values-based banks also advocate for transitioning from a logic of maximising shareholder profits to a logic of maximising stakeholder value. In this sense, although the Global Alliance for Banking on Values does not require its members to be customer-owned, through close relationship and monitoring of the banks in the network, it guarantees that shareholders are compliant with the focus on people and planet first, and seeing profit as a result of good work.
Although being one of the owners of a credit union or cooperative bank has many advantages including having a say in the organisation’s decisions and resting assured your money is being used by initiatives aligned to your values, it might not be for everybody. Some people might not necessarily be interested in engaging with the organisation’s activities and decision-making but still wish to have a clear understanding of how they work and where they invest. More than a matter of ownership, it is a matter of trust and transparency. Especially after the financial crisis in 2008, banks have become one of the least trusted organisations, alongside governments. They are seen with incredible suspicion by both customers and businesses, who most times stick to them due to convenience or lack of alternative options.
In this context, many fintechs spotted the opportunity and embraced the mission of making banking more transparent, accessible and trustworthy, offering products and services tailored to customers’ needs. Not only are they disrupting the market, but they are doing so by unapologetically encouraging depositors to transfer their accounts from their old banks. Even though this proposal has been widely accepted especially by young people who are searching for solutions combining convenience and a good value proposition, I find it is often helpful to be a little suspicious of bold promises.
When examined closely, most digital platforms and mobile banks are start-up companies. As such, they are normally leveraged by rounds of fundraising amongst Venture Capital firms and other institutional investors, who acquire shares of the company[1]. Given the high risk of the investment, the start-up is expected to grow rapidly and exponentially in order to generate large profit margins and eventually pay back its investors — which means again reinforcing the culture of shareholder primacy. Moreover, faced with the threat of fast-emerging start-ups whose innovation-pace is hard to beat, some big banks are actually outsourcing their research and development efforts in order to ultimately acquire the most promising fintechs. This poses a critical issue regarding ownership and governance. Best practice encourages entrepreneurs to keep over 50% of shares or hold majority vote in the company’s decisions in order to preserve their autonomy. However, legal statuses which lock-in the mission in the company charter, such as Benefit Corporation[2], are still a substantial minority. In this sense, despite their initial purpose to promote a more transparent, just and conscious approach to banking, the majority of start-ups remain susceptible to shifts in their conduct under the influence of future owners and executives.
3. Local versus Global
The financialization of the economy, as we have seen, is a result of globalisation, deregulation, and the pursuit of economies of scale. In this context, money became increasingly virtual and, ultimately, an instrument of speculation. As a result, the trading of derivatives and currencies, which currently represent a substantial part of the financial sector, is completely detached from the realities of ordinary people, not to mention their direct influence in widening the inequality gap, making the richest even richer. In an attempt to bring capital back to the real economy, the movement known as localism emphasises, among other things, the benefits from moving our money from Wall Street to Main Street and was echoed by campaigns such as Move Your Money[3]. Beyond credit unions and local banks, local investing can also be done through diverse schemes including community networks of businesses and investors, state-owned banks, direct public offerings within a given state, local revolving loan funds, and through emerging local stock markets.
While strategies of building resilient local economies have been extremely successful, there is no way of denying that our world is increasingly global. More and more people move between countries and, thanks to technological advancements, are able to work remotely from anywhere in the world. Although it is clear that the focus on strengthening local communities not only yields financial but also social and emotional returns, we cannot expect that everyone will set roots in a particular place. This is something which has spoken to me quite often throughout this research. Without holding intentions of returning home in the immediate future, I question when and where will I start to engage with a local community. Nevertheless, as transitory individuals, we should not think we need to wait until we settle down and buy a house to start investing according to our values. Members of the Global Alliance for Banking on Values, for instance, do not necessarily need to be local, as we saw is the case of Triodos Bank. Similarly, digital platforms offering crowdfunding and P2P lending opportunities might have no borders, but they can still nurture real, local economies as well as give more meaning to our investments. As a matter of fact, “Kickstarter is now a certified B Corp and many smaller platforms have specialised in social impact projects” (Good Tech Lab, 2019:137).
It is also impossible to deny that our world has become increasingly digital. In the words of E.F. Schumacher (2011): “man cannot live without science and technology any more than he can live against nature”. However, what we can and must do is to demand the development of technology with a human face, making clear the ends which it is meant to serve. In other words, the fight we need to pick is demanding trustworthy, transparent and human-scale financial institutions that hold people’s and planet’s needs at their very core. The internet has a huge role to play in this push for transparency, after all, it makes it possible for people with similar values, interests and dissatisfactions to connect and design new solutions. The popularity of digital banks whose mission is to democratise financial management, for instance, has been a great platform for financial education to reach more people, inviting them to get reacquainted with their money. By using simpler and more relatable vocabulary, these players are turning the subject of (personal) finance into something much more accessible, approachable and acceptable to talk about, helping to break the taboo.
Elaborating on this example, I see plenty of room for localism to learn from global digital platforms and vice-versa. One of the issues that came to my attention during this research was that Credit Unions and small community banks are lagging behind in terms of the technological support they offer (online banking and mobile apps), and how this has influenced people’s decisions towards choosing a different player in the market. This underlines the need to make ethical banking and investing as easy and convenient as traditional ones. Schwartz (n.d.) as cited by Shuman (2012:64) illustrates:
“I am an avid recycler of trash but I only became one when they brought the service to my curb because it became easy to do the right thing. We need to do the same thing with our financial investments”.
In a related manner, fintechs also have a lot to learn from Credit Unions, Cooperative and Values-based banks, especially with regard to nurturing the real economy by putting the needs of the communities they serve before profit.
4. Doing Less Bad versus Doing Good
There are different degrees to which each of the existing alternatives we saw earlier promotes better practices than traditional banking. Screening out harmful industries seems to be the starting point for all categories of SRI, but that is nowhere near enough given the climate emergency. In spite of apparently coherent discourses, our times call for a deeper assessment of the options available in order to distinguish who is doing good from who is just doing less bad. In the case of traditional banks which now also offer SRI options, it is important to notice that their capital allocation to sustainable funds remains very small compared to their total assets under management. This could be easily interpreted as using a speech of “doing our fair share” to cover the actual practice of “taking our fair share” (Raworth, 2017:216).
Pressured by international authorities and the civil society, these financial institutions are being forced to start rethinking how they operate. However, they tend to recur to incremental changes rather structural ones, promoting “token but well-publicized sustainability initiatives to divert attention from environmentally damaging core businesses they have no intention of changing” (Austin, 2019) — namely, greenwashing. In this sense, the same Barclays which attempted to rebrand itself as the ‘World’s First Ethical Bank’ has been the top European banker of fossil fuels since 2016 (BankTrack). Similarly, HSBC, which was awarded ‘Best Bank’ by an ethical business survey, was later found guilty of money laundering, not to mention it invested USD 18.8 billion in companies active across the fossil fuel life cycle, in 2019 alone.
On the one hand, the entrance of new digital players has clearly offered retail investors more alternatives to the big banks. On the other hand, it has also contributed to the incidence of greenwashing along with higher risks of scams and fraud. In the case of crowdfunding and P2P lending, for instance, it is hard to find a platform that has no records of defaults on loans or projects that were successfully funded but not delivered. More worryingly, many fintechs attesting to promote massive financial inclusion are actually charging abusive interest rates for borrowers, getting people more into debt than helping them out.
Although it is nearly impossible to eradicate such practices completely, forms of mitigating the risks of greenwashing and fraud are under course. Examples include the creation of alliances and networks, international agreements and metrics systems. The United Nations has been one of the leaders in this context, first creating the Principles of Responsible Investing (PRI) in 2005, and most recently, the Principles of Responsible Banking (PRBs), launched in November 2018, in partnership with 30 financial institutions. Working in a complementary way, different measuring tools have been designed to assess, monitor and accelerate the compliance of the private sector with society’s needs and sustainability challenges. The most popular ones include the Global Impact Investors Network’s Impact Reporting and Investment Standards (GIIN IRIS+), the Global Reporting Initiative (GRI), the B Corp’s Impact Assessment, the Economy for the Common Good Matrix, and the GABV Scorecard.
There is no doubt great advancements have been made in terms of guaranteeing more capital is being used to benefit people and planet before profit. However, a growing number of practitioners and academics are now sharing the concern of it not being enough. In their latest annual report, Triodos Bank Executive Board highlighted this worry: “There are powerful examples of positive change that will be necessary if we’re to transition to a sustainable, new economy. But too little has been done, too slowly to meet the scale of the challenge. We are now at a stage where that simply has to change” (Triodos Bank, 2018:15). In line with previous considerations presented in this paper regarding the focus on greater returns and ownership structures, they explain:
“In much of the world we have returned to a shareholder-driven model far too quickly. It is our firm conviction that it is simply not possible to do the right thing as a bank — financing the real economy in a responsible way — and deliver double-digit returns. These profits have once again become the norm. In the immediate aftermath of the financial crisis many banks advocated ‘fair returns’, not the excessive returns that had in many ways driven the decisions that lead to the crisis itself. But those voices have faded. We need to hear them again and they need to result in fundamental changes in our banks”.
Taking a step further, Duncan Austin, former member of a sustainable investment firm, recently published an essay introducing a new term, ‘Greenwishing’, to explain why sustainability in business is not working. Using his words: “greenwish is a sort of greenwash gone meta, fuelled mainly by good intentions but characterized by a tendency to let a thin layer of sustainable advances distract attention from the unsustainability of most of the economy”. He also alludes to the shareholder value maximisation (SVM) dilemma:
“While businesses are now alert to sustainable innovation paths that are profitable, environmental and social metrics that dutifully flag unprofitable challenges cannot escape their second-class status. They are metrics investors may consider, but, unlike profit numbers, rarely lose sleep over. Pitting values with prices against values without prices is not proving a fair fight. SVM trumps SRI. It is greenwish to pretend otherwise”.
What we can draw from this debate is that as well-intentioned as they can be, investors and businessmen in their majority are not yet looking at the big picture or challenging their business models accordingly. Although their discourses might suggest so, their practices still give away that they are not walking the talk. According to Kate Raworth, it is time for them to once and for all move away from the question of “how much financial value can we extract from this?” and focus instead on inquiring “how many diverse benefits can we layer into this?”. Maybe then, we will start designing real regenerative enterprises, which do good rather than just doing less bad.
5. Pipeline versus Forest
Evidently, there is much more to choosing an alternative bank and making the move than might appear at first glance. Although we live in a culture that expects perfect solutions, this is the type of situation where there is no silver bullet. In other words, there is no one option that checks all the boxes and magically make our money do good, solving the world’s most pressing problems. On the contrary, what we have today is a diversity of imperfect players. As messy as it may seem, it is this variety that makes room for innovation to happen and that accommodates our own innate human diversity. As systems thinker Donella Meadows (2008:181) puts it: “Let’s face it, the universe is messy. It’s nonlinear, turbulent, and dynamic”. Finance is no different.
By no means dismissing the importance of analysing each of the showcased alternatives individually, perhaps it is also relevant to zoom out and look at the bigger picture for a moment. While each of these actors are playing an important role in transforming the banking system as we know it, making sure that money is put in service of people and planet is comprised but not confined to these financial institutions. From a systemic perspective, transforming finance is a mission that also involves many other institutions, after all, no agent of our economic system works in isolation. Along the lines of what Austin defended, it is time for the ecologically aware investors to stop believing that they alone could change the state of the world. In this sense, several other approaches to making money serve us, and not the opposite, are working alongside the transformation in the banking sector. In an attempt to avoid overlooking too many of these parallel discussions, I find it important to acknowledge at least three of them: the role of regulations, the question of who should create money, and the importance of complementary currencies.
Examples proving that the involvement of regulators and governments is crucial for the type of advancements we are currently in need of are manifold. According to Shuman, outdated securities laws in the U.S. are one of the main barriers to investment in small-scale sustainable enterprises and thus new regulations are urgently needed. In France, employers with more than fifty workers are obliged by law to offer their staff an optional solidarity savings fund. The development of Germany’s clean-energy economy results from a combination of public efforts: in addition to its state-owned development bank, KfW, being a main provider of loans and subsidies for investment in energy efficiency, the country’s Renewable Energies Act (2000) has also spurred investment in renewable energy technologies. Moreover, since 2001, German pension funds have had to report the compliance of investments in savings plans to ESG indicators. Expanding on these examples, as governments start to require companies to report their balance sheets based on ESG performance, they could then tax industries according to their scores or reward the more sustainable ones by giving them better lending conditions. One step further would be to also oblige governments to report their investments and spending following ESG criteria. This would promote much more transparency and accountability for retail investors, for example, when deciding on whether or not to buy government bonds.
Changing the rules of finance also involves challenging who holds the power of creating money. The topic is under debate in many countries with different movements advocating for monetary reforms which include returning to central banks the authority to create money. According to Positive Money, the creation of a committee accountable to the government and sheltered from vested interests is key to ensuring the right amount of money is created. As a result, the role of providing money would be separated from the role of providing credit, ultimately preventing credit bubbles, decreasing personal and government debt, and securing a more stable economy.
Thirdly and finally, the discussion around complementary currencies gets increasingly important and everyday more topical as we observe that basic social needs such as access to food, water, and electricity remain unmet for a large part of the global population. Drawing on authors like Bernard Lietaer, financial economists like Tony Greenham and many case studies, Kate Raworth (2017:236) is categorical: “Finance that is in service to life goes beyond redesigning investment to redesigning currency”. Alluding to the ideas I presented in this previous article, if we understand money as a social relationship, a universe of possibilities involving matching unmet needs with spare resources opens up. Following this logic, countless experiments using complementary currencies in communities all around the world have thrived, proving in some cases to “actually help Central Banks in their task of stabilizing the national economy in terms of employment and in smoothing the swings in the business cycle” (Lietaer, 2013 cited in Häusler, 2016:25). In this sense, moving away from a monetary monoculture (‘Fiat’ currencies) and building instead a polyculture of currencies (community currencies, time-based currencies, reward currencies, cryptocurrencies) could certainly help us not only to empower communities, but also tackle ecological issues — without getting distracted by profit maximisation, speculation or inflation rates.
Going back to Meadows (2008:181), “there’s something about the human mind that is attracted to straight lines and not curves, to uniformity and not diversity”. As such, one of the most iconic models ever drawn of our economy was based on a system of pipes, illustrated in this article. However, when we look to all the different movements, initiatives and institutions constituting our economy — all connected, dynamic and interdependent — we see that this system is much more complex than a pipeline. In fact, drawing on Ken Webster, it resembles a forest, full of so many actors, so many players under so many influences. From this perspective, each of the experiments presented and discussed here is contributing to the shaping of a new, diverse financial ecosystem. An ecosystem with flows of materials, flows of energy, and flows of information — money being one type. As citizen-investors we too are actors in the economy. We play our roles working within the flows, participating in them, and influencing them. Although it might not be visible from the big picture, if we finally zoom back in, we can see that each of our choices and actions help shape the financial ecosystem to some extent. And so, be it by transferring our savings to ethical banks, starting a cooperative bank or entering continuous, virtuous cycles of P2P lending, we are making our contribution to the birth of a new economy. I invite us to be conscious of that.
[1] New mechanisms are entering the market, but this is still the standard deal (Fram, 2017).
[2] A legal tool that protects a company’s mission through capital raises and leadership changes, and creates more flexibility when evaluating potential sale and liquidity options (Benefit Corporation, n.d.).
[3] Campaign led by Arianna Huffington and Suze Orman encouraging Americans “to take their cash out of big banks and put it into local banks in the name of community revitalization” (Shuman, 2012:74).
References used for this article are in this post, divided by topic.
