In our past editions, we’ve mostly focused on goods and products you can purchase. But an area we haven’t touched on are banks and financial institutions.
A core component of our everyday economy, banks exist to help channel money between borrowers and lenders, servicing a wide variety of people that need support or want to build. And as America grew, so has the financial industry; there are savings institutions, credit unions, insurance companies, brokerage firms, investment banks, and many more.
The groups and people that these financial institutions support range from the general individual public all the way up to big corporations. Most of these organizations are for-profit, just like normal products, meaning it is in your best interest, both financially and morally, to understand who our financial institutions fund and invest your money in. Here are our two cents on the matter.
At a Glance
Before we dive deeper, let’s clear up a few things. When you deposit your money into a checking or a savings account for banks, it is used for loans or mortgages for other customers.
Financial institutions today are valued at around $26.5 trillion, picking up from the recession over 10 years ago. With more investment from millennials and Gen Z, as well as the increase of technological advancements in fintech and startups, these companies will continue to grow.
With this much money comes great responsibility for banks, but many of the large, household financial institutions don't really make the cut when evaluated for their environmental and ethical impact. But on the bright side, there are more banks taking a stand on putting money towards ethical investments.
Environmental Cost
They say there's no such thing as a free lunch. Banks can't offer to store your money for free. So how do they make money and what do they use it for? Banks use your money to make loans and investments, and they keep the profits. Many of these investments aren't very environmentally conscious. The money goes to the world's biggest emitters with funding for extraction and drilling. According to Bloomberg Green, "greenhouse gas emissions associated with financial institutions’ investing, lending and underwriting activities are more than 700 times higher, on average, than their direct emissions".
The financial institutions that you put your investments in could be having large impacts on the environment. 35 of the world's major banks have provided 3.8 trillion to fossil fuel companies since the Paris Agreement in 2015. The number one way a bank impacts the environment is how it invests its money.
In 2020, the top 3 fossil fuel investors were JPMorgan Chase at $51.3B, Citi at $48.4B, and Bank of America with $42.1B. Check out this detailed report by Rainforest Action Network which ranks each bank and awards points across each sector.
While there's a rise in the amount of investments made in unsustainable companies, there also has been a rise in ethical finance. 20.6B was put into sustainable funds in the US in 2019. The financial services sector is key to achieving a net zero carbon future. It's disappointing to see people put in effort to reduce their footprints by buying local, taking public transport, driving less, etc but this effort is negatively offset by the money they put in their banks.
Human Cost
The unfortunate reality is that banks are not "social good enterprises that keep the welfare of the community in mind". They are profit-first institutions that often have predatory and unequal practices. Here's a bit more insight:
Banking: The banking system is not designed for low and middle class households — in 2017, a study conducted by the FDIC found that there were 8.4M unbanked households and an additional 24.2M underbanked households.
There's a reason people avoid banks in favor of riskier financial institutions: at major banks (Wells Fargo, Chase, Bank of America, etc), 25-40% of accounts are unprofitable. To offset the costs, banks impose fees for withdrawals, wire transfers, debit card swipes, and more. These fees drive people away from banking with these large institutions.
Lending: Even after the Fair Housing Act banned racial discrimination in lending, minorities continue to be denied mortgage loans with interest rates much higher than their white counterparts. A yearlong analysis across millions of records that controlled for applicant income, loan amount, neighborhood, etc found lending disparities across major metropolitan areas.
Alternatives to Consider
There are lots of groups and places to learn more about more socially responsible investing. However, we do ask that you do your research and be careful of greenwashing, something companies do to misrepresent their product or service as more sustainable than it really is. We are also not financial advisors, and our opinions on this edition should not be considered financial advice.
When researching, here are some certifications or characteristics to look out for:
B-Corp Banks: Certified B-Corps are businesses that meet the highest standards of social and environmental performance, transparency, and accountability.
Global Alliance for Banking on Values (GABV): GABV is a network of financial institutions that use “finance to deliver sustainable economic, social, and environmental development.” Here are some GABV banks and credit unions.
The Good Trade, NerdWallet, and Mighty Deposits all have lists of socially responsible banks.
What You Can Do
Learn how your bank matches up to others in its investments in fossil fuels. This resource by Rainforest Action Network is a great place to start.
Consider switching to a bank that invests in more sustainable and ethical causes. There are many ways in which we try to reduce our carbon footprint, and where we put our money is one of the lesser known ways.
Consider Socially Responsible Investing (SRI): You can put your money to work! Synonymous with "ethical investing", you can put their dollars towards companies and initiatives that align with your values.
You can use ESG (environmental, social, and governance) factors which are a set of guiding principles.
Educate your friends! We're all banking on each other for the future of our planet. 🏦
Questions or comments on this piece? Suggestions on what we should cover next? Send us a note.