At Australian Ethical, we apply a rigorous ethical screening process to all our investments. We actively seek out companies that positively impact the planet, people and animals. And on the flipside, we avoid investments that cause unnecessary harm.
Assessing the finance sector against our Ethical Charter can be challenging. Big bank bashing is a national pastime, and with reason. The banks do deserve criticism on many fronts, including for far-too-frequent incidents of irresponsible lending, unconscionable fees and poor financial advice. They also lend to high-emissions companies and projects that contribute to climate change.
Can banks be good for society?
In spite of these serious shortcomings, responsible and well-regulated banks can do good. They make loans to individuals to help them pursue their goals, and to fund commercial activity which meets individual and societal needs. They help individuals and organisations save, invest and manage risk. Without them we’d be back to a barter system for the exchange of goods, services and capital (until bitcoin gets bedded down at least).
Australian Ethical invests in both small and large banks, provided they are assessed to be aligned with our Ethical Charter, of course.
Big versus small banks
Smaller banks can have a strong customer-focussed culture which produces better outcomes for customers and their communities, and so supports their alignment with our Charter. As a result, many smaller banks in Australia pass our screening process. If you’re interested, click here to see a full list of where we invest. For example, we have invested in the Credit Union of Australia, the People’s Choice Credit Union, Beyond Bank, Heritage Bank, Bendigo and Adelaide Bank and bankMECU.
However smaller financial institutions don’t always serve customers better, with some smaller banks performing below the big banks when measured according to the frequency of customer disputes or according to treatment of borrowers facing financial hardship. And sometimes the large banks really can make a difference in terms of financial inclusion. For example, NAB works with Good Shepherd Microfinance to improve access to financial help for many Australians who are excluded from mainstream finance. NAB has approved 150,000 microfinance loans for low-income Australians since 2005.
Can big banks help stop climate change?
On the climate front, large banks are needed to support the massive shifts of capital needed to combat climate change. To limit warming to two degrees Celsius (2°C), more than US$1 trillion needs to be invested in clean energy every year through to 2050 (according to a 2014 report by the International Energy Agency). Smaller Australian banks aren’t able to fund large-scale clean energy infrastructure. They just don’t have the capacity to make loans for big projects – whether climate friendly or not. Australian investment in clean energy totalled more than $4.29 billion in 2016. More than half of this was contributed by loans from the ‘big four’ Australian banks (with other contributors including major overseas banks and equity investors). NAB alone lent $1.3 billion to renewables in 2016, and Westpac ranked in the top five banks globally for syndicated lending to renewables.
Of the big four banks, we currently invest in Westpac and NAB. We assess that these two banks are implementing their commitment to lend in line with the economic transition our society needs to limit warming to 2°C. This assessment can be a bit complicated because of the scale and diversity of lending by large banks.
We use a climate scorecard which assesses lending to:
- the fossil fuel sector, including the type of fuel and its emissions intensity;
- renewable energy and energy storage, and;
- technologies and activities which reduce energy usage or store carbon (e.g green buildings, low-emissions transport and reforestation).
We also look at the way banks facilitate financing by others. For example, we look at how a bank might help companies raise financing for environmentally friendly initiatives, including through what are known as green bonds. For each of the climate scorecard categories above we look at banks’ current lending, historical trends and lending targets. It’s also worth noting that smaller banks haven’t built the capital markets capacity to help their clients with the issue of green and social bonds.
There are also ‘no go projects’. We do not, and will not, invest in any bank which lends to an Adani Carmichael coal mine. Internationally, we won’t invest in any bank which lends to a Keystone XL pipeline transporting oil from the tar sands of Canada.
We also consider the banks’ support for government climate policy aligned with the 2°C transition – both directly and indirectly through participation in industry associations.
How we invest and protest for a better future
As we invest selectively in banks, we also advocate that they can and should do better. And our climate investment expertise, perspective and public voice does make a difference. When we put pressure on banks, we’ve seen positive competition between the large Australian banks to improve the sustainability of their lending and other activities.
At Westpac’s last AGM, Australian Ethical asked the Chairman to rule out support for the proposed Adani Carmichael mine in order to clearly and publicly demonstrate the integrity of the bank’s climate commitments. Earlier this year, Westpac’s 2020 climate action plan has ruled out lending to the Carmichael mine.
For its part, NAB has committed to finance environmentally positive activities of A$18 billion by 2022. It is also part of an international pilot group of 12 global banks developing tools to measure, manage and report climate risk and performance.
We welcome these initiatives, and we’ll continue to scrutinise and influence the banks to do more to address climate change and restore trust in the banking sector.
Investments named are current as of the publication date of this article, but may change over time. We list our investments on our Who we invest in page.