Ethical banking

What is ethical banking?

There’s not one standard definition of ethical banking. An ethical bank will typically follow a set of principles or goals that govern how it interacts with clients, other businesses, employees and the world in general.

For some banks these principles involve doing no harm, while others will be seeking to make a positive impact.

It’s up to each bank to decide what their ethical principles are.

Ethical banks are popular with consumers who are concerned about how their money is used by banks and other banking services.

High-street banks and financial service providers are also increasingly aware of the importance of reputation. Many want to distance themselves from what they see as questionable investments or show themselves as making a positive contribution to society, culture or the environment.

Ethical banking is also described as responsible banking, values-based banking or purpose-driven banking – profit isn’t the sole goal.

What makes a bank ethical?

Ethical banks will typically set out the principles that they operate under. They tend to be transparent about who they lend money to and where they invest so that customers, investors, the workforce and anyone else can see that they’re following their principles.

For some banks being ethical might mean not investing in munitions, tobacco or gambling, for example, while for others it may require a positive contribution.

Signs that a bank may be trying to behave ethically include:

• Transparency about their goals, how they behave and what they invest in.

• Commitments to the environment and sustainability, including how they operate the business.

• Avoiding certain industries – such as arms dealing, tobacco or gambling.

• Proactively investing in particular sectors or industries, the local community or the third sector (which includes voluntary organisations).

• Paying employees at least the living wage.

Some banks were founded on their ethics, while others introduced ethical and sustainable practices later on. Some publish details of businesses they lend to, others have promised to cut ties with organisations that make money from harmful industries.

Are ethical and sustainable banking the same?

Generally speaking, ‘ethical’ refers to human rights causes, whereas sustainable refers to environmental ones.

However, an ethical bank is typically concerned with both social and environmental impacts. You might also see some ethical banks referred to as green banks, eco-banks or sustainable banks.

So, for example, a green or sustainable bank may invest in environmental causes and practices such as:

• Offering credit for businesses to make energy-efficient upgrades

• Offering online paperless statements and electronic banking options

• Operating sustainably.

But it will also place equal importance on social improvements such as:

• Lending to charities, volunteer groups and Fairtrade businesses

• Investing in social justice and global equality organisations

• Ensuring no child labour is used by suppliers.

Check out the UK members of NZBA if you want to find a bank committed to Net Zero.

Which banks are ethical in the UK?

It’s a matter of opinion, but there are some banks out there that make a notable effort to make sure their investments have a positive impact.

So, how do you know whether a​ ​bank is ethical? There are a number of organisations that champion fairness, and it’s useful to look at their approval ratings when searching for an ethical bank.

Things to look out for include:

• The Good Egg mark

• Ethicalconsumer.org recommendations

• The British Bank Award for Best Ethical Financial Provider.

B Corporation also recognises and awards financial institutions that make a positive social and environmental contribution.

As well as the banks signed up to the Net Zero Banking Alliance for sustainability, it’s also worth checking out which UK banks are members of the Global Alliance for Banking on Values.

Some self-described ethical UK banks include:

Triodos Bank

Triodos – a Certified B Corp – aims to invest only in opportunities that can drive positive change. These could be environmental causes or those that deliver a cultural or social impact.

Triodos Bank publishes details of every organisation it finances on its website. This enables customers and investors to check whether the bank is fulfilling its promises to deliver positive change for people and the planet.

It offers current accounts, savings and investments to individuals, as well as services to businesses and charities.

The Charity Bank

Entirely owned by charitable foundations, trusts and social purpose organisations, Charity Bank uses the money savers deposit to support charities by offering loans they couldn’t find anywhere else.

It also offers savings accounts for people and businesses who want to save ethically. Since 2002, it has used the money deposited by savers to provide over £350 million of loan finance to a wide range of organisations across the arts, community, education, environment, faith, health, housing, regeneration, social care and sports sectors.

Ecology Building Society

​​​Ecology was the UK’s first dedicated green mortgage provider and is a well-established eco building society. It sets out its aim as improving the environment by supporting and promoting ecological building practices and sustainable communities.

It offers savings accounts to anybody. It also offers mortgages for properties and projects that have a positive environmental or social impact, including self-builds and renovations.

Are banks always fully ethical?

​​​Again, it’s a matter of opinion. Some banks may not be fully ethical yet, but they might be taking steps in the right direction.

For example, a bank may be becoming more environmentally sustainable but might still have investments not considered ethical.

Here are some examples of banks generally regarded as partially ethical:

The Co-operative Bank

The Co-operative Bank was considered an ethical bank as it offered one of the first ethical bank accounts available in the UK. However, it was later bought out by a group of US hedge funds, which don’t necessarily share the same values. This makes it a slightly greyer area.

It still promises that it won’t provide services to businesses or organisations that have business relationships with oppressive regimes, and that it will promote human rights and equality across the world.

Nationwide

As a building society, Nationwide isn’t owned by shareholders like the other big names in high-street banking. It’s owned by its members, which means they shape where it focuses its attention, including on ethical projects and programmes to support others.

It has set out five Mutual Good Commitments. It aims to make significant, positive impacts for its members and customers, communities and society as a whole. The commitments align with a number of the UN Sustainable Development Goals (SDGs) and the bank’s net-zero ambition. It aims to be “a beacon for mutual good”.

Cumberland Building Society

The society doesn’t lend money to firms involved in fossil fuel production and aims to be carbon neutral by 2030. It gives 1.5% of its profits to charity. It has set out its aim to be a banking experience that’s kinder to people and the planet.

The newer banks

Some of the more modern, app-based banks are considered partially ethical, and they’re also highly accessible and convenient.

Monzo

Monzo says it has a relatively low carbon footprint because it’s digital and publishes its footprint on its website. It aims to reach net zero emissions as a business by the year 2030, sooner if possible. It doesn’t invest in fossil fuel-based energy companies, or arms or tobacco companies. It’s also part of the Tech Zero Taskforce.

Starling Bank

Starling runs on renewable energy and has funded the planting of 100,000 trees in partnership with Trillion Trees. It was a founding member of Tech Zero and doesn’t make investments in harmful industries. It aims to be net zero by 2050.

Starling offered the first UK Mastercard to be made of recycled plastic. It also works with the National Trust on projects to restore peatland – an important carbon store.

Furthermore, the bank makes a point of avoiding investment in fossil fuels, mining operations and military funding.

Engage

These accounts are run by credit unions, who in turn support those in the local community who would otherwise be unable to open a bank account. To get an Engage account with a Visa debit card, you need to join a credit union that offers the app.

Ethical current accounts in the UK

Some of the banks considered ethical offer the standard products like free current accounts, although many charge a flat fee as this is seen as a fairer business model. They charge everyone an upfront fee, rather than relying on making money from ongoing fees and charges paid by those who may be struggling with their finances.

The recent growth in mobile and app-based bank accounts has changed the way people save and spend. These app-based banks have a number of ethical features, such as sustainability and net zero targets, and restrictions on investments.

Another option is an Islamic current account. While the name might suggest you need to be Muslim to apply for one, that’s not true.

When you deposit savings in an Islamic bank account, the bank will invest it, but not in anything considered harmful under Sharia law. You’ll be paid part of any profit the bank earns.

Islamic banking is ethical because under Sharia law you can’t profit from anything that causes harm. So, investing in alcohol, tobacco, gambling, arms and pornography are not allowed.

​​Ethical savings accounts and ISAs

If you have money to save and are considering a savings account or ISA, an ethical bank is a great way to support a better future. Not only will your money be working for you, but it will also be working to support others, as ethical banks will use the money to invest in good causes.

While it’s important to pick a bank that aligns with your own ethics, you’ll also want to consider interest rates and access. Ethical savings accounts may not offer the same market-leading rates as some of their top competitors. If maximising your interest is important to you, it’s always worth comparing rates.

Islamic accounts with ethical banking

Islamic banking is the name given to any form of banking that adheres to Sharia law. The key differences to regular banking come in the form of Islamic banking’s relationship with commercial transactions and the charging of interest.The differences to regular banking include:

• Profit and loss are shared publicly, to avoid any speculation or gambling

• Lenders and investors can neither pay nor collect any form of interest

• Money is made through a share of the investor’s profits.

Islamic banks don’t pay interest. However, they pay an expected profit rate – so what you earn depends on the performance of the underlying investments, not the bank’s own performance. Because it’s ‘expected’, there’s no guarantee this rate will be achieved. But you can use this rate to compare with a savings account that pays interest.

Specialist Sharia banks offer this form of banking. Sharia-compliant banks should be registered with the Financial Conduct Authority – so check the FCA register to be sure. This means your money should also be protected up to £85,000 under the Financial Services Compensation Scheme, like with other registered banks.

Credit unions

If you’d rather avoid the current accounts, savings accounts and ISAs on offer by the high-street banks, credit unions offer a potential alternative to the traditional options.

Credit unions are set up to connect people who are similar. This could include where they live, where they work or another common bond, such as church groups or a trade union. They offer most of the same money products as the big banks.

While credit unions operate for the benefits of members, each of them will have their own ethical stance. If you have particular ethical concerns, you’ll need to check the credit union’s stance individually.

Are ethical loans and mortgages available?

If you’re looking to borrow money in a socially responsible way, check the products on offer from ethical banks.

There are also building societies in the UK that specialise in green mortgages for environmentally friendly properties that meet specific energy efficiency or sustainability standards. Their savings accounts also help to support sustainable building projects.

Some mainstream banks may now offer preferable rates or cashback schemes on loans to fund green home improvements.

Ethical bank accounts for charities and community organisations

More banks are making it possible for charities, clubs and other community-focused operations to manage their finances safely and efficiently. Here’s a breakdown of some of the charity bank accounts and schemes designed to help these organisations:

• Co-Operative Bank – free everyday banking with its Community Directplus account for any charities and community interest organisations and co-operatives with less than £1m turnover.

• Charity Bank – loans for charities, with savings that support other not-for-profit organisations while you earn interest.

• CAF Bank – the Charities Aid Foundation’s banking arm currently works with around 14,000 charitable organisations. It charges a £5 monthly fee for its current account.

• Reliance Bank – owned by The Salvation Army, Reliance offers a range of banking products, including a current account for managing day-to-day transactions. Its charity account has a £7.50 monthly fee.

Some of these current accounts come with additional benefits, such as free accounting software integration. Other providers may offer support in the form of knowledge and expertise.

What other ethical financial products are available?

A number of investment services offer socially responsible investments, managed with performance and ethics in mind.

Some investment managers will offer ethical or socially responsible funds, which are often weighted towards businesses that conduct themselves in a fair and progressive way. But they may have different funds with investments in other companies that don’t fit the same ethical criteria.

With all investments, including ethical ones, the value of investments can fall as well as rise, so you could get back less than you invest. And just because a fund has performed well in the past doesn’t mean it will give the same returns in future.

Fossil-free and climate-aware funds are also available through green pensions. Providers often work with other sustainable investment funds to provide a socially responsible pension pot.

What matters most to you?

To find out which banks are aligned with what’s most important to you, it’s worth considering what they have to say on topics like:

• Environmental and sustainability impact

• Animal welfare practices

• What they invest in

• How they treat their customers, staff and the world around them

• Any ethical accreditations they might have

• Criticisms of the bank.

You can then decide which bank most closely matches your values and provides the services you need.