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Christien Ackroyd explains how the ethical grade concept works, covering best practices, benefits, and which banks are getting it right.
In today’s ever-evolving financial landscape, the concept of ethical credit has gained significant traction, reshaping the way individuals and businesses approach borrowing and lending. Ethical credit goes beyond traditional metrics and assessments, incorporating social, environmental, and sustainability factors to guide loan and credit decisions.
Ethical credit practices transcend the narrow confines of profit, embracing a broader perspective that considers the greater good. By evaluating borrowers’ ethical practices and their impact on society and the environment, ethical credit creates a powerful bond between finance and society.
Some examples that illustrate ethical credit best practices that aim to promote sustainability, social justice, and a positive impact are:
- Green loans direct financial resources towards environmentally friendly projects, such as renewable energy initiatives, energy-efficient building upgrades, sustainable agriculture practices, and environmentally responsible businesses.
- Microfinancing empowers individuals and small businesses in disadvantaged communities or developing countries, providing them with access to financial resources that were once beyond their reach.
- Social impact investing supports projects and businesses that have a positive social impact, financing affordable housing, education programmes, healthcare initiatives, and community development projects.
- Fair trade financing uplifts businesses that uphold fair trade standards, promoting fair wages, safe working conditions, and sustainable production methods.
- Impact assessments shed light on the social and environmental outcomes of lending activities, ensuring that credit is channelled towards endeavours that create positive change.
Benefits of ethical credit
The benefits of ethical credit extend far beyond the reach of finance. While the positive impact on society and the environment is evident, ethical credit also holds immense potential for institutions.
By focusing on a customer base that’s often less wealthy, institutions may initially question the revenue incentives. This market represents untapped potential, with fewer competing companies.
Ethical credit practices have the power to enhance a company’s reputation and brand value, setting them apart from their competitors. Ethical credit can help providers build trust with stakeholders and avoid risks from unethical practices
Ethical credit controversies
The lack of objective and standardised criteria for evaluating ethical practices leads to differing opinions among ethical credit providers. Different providers might have different opinions on what is ethical, which can lead to accusations of bias or greenwashing.
Exclusions based on ethical criteria may deny credit to businesses that need financial support or have the potential to transform their practices in a positive manner.
Critics argue that such exclusions hinder economic growth and limit opportunities for businesses to improve their ethical standards.
Balancing the need for positive impact with financial viability poses a risk-return trade off, as ethical credit providers must ensure repayment and financial sustainability. Assessing the ethical practices of borrowers requires diligence and resources, potentially resulting in higher administrative costs.
These concerns highlight the importance of keeping the conversation going and working on refining ethical credit practices. Standardisation, transparency, affordability considerations, and impact reporting help to ensure that ethical credit truly aligns with its intended objectives.
Ethical credit done right
Triodos Bank, based in the Netherlands, operates on the principle of financing projects that have a positive social, environmental, and cultural impact.
Triodos Bank conducts rigorous assessments of borrowers and projects to ensure they meet its strict ethical criteria. It provides loans to a wide range of sectors, including renewable energy, sustainable agriculture, organic farming, social housing, and fair-trade initiatives.
Triodos Bank’s transparency, impact reporting, and commitment to sustainable finance have earned it recognition as a pioneer in the field of ethical banking.
Grameen Bank is a notable example of an ethical credit provider focused on microfinance. It was founded by Nobel laureate Muhammad Yunus and aims to alleviate poverty by providing microcredits to low-income individuals who lack access to traditional banking services.
Grameen Bank primarily serves borrowers in rural areas of Bangladesh, offering them credit to start or expand small businesses. It follows a unique lending model based on trust, group accountability, and social collateral, enabling individuals to improve their livelihoods and contribute to local economic development.
BRAC Bank Limited is a private commercial bank based in Bangladesh, founded in 2001. It is a subsidiary of BRAC, a leading development organisation in the country.
The bank focuses on providing financial services to small and medium enterprises (SMEs) in Bangladesh, with a mission to contribute to the overall economic development of the country. In addition to its operations in Bangladesh, BRAC Bank also has a presence in Uganda, where it provides inclusive financial services for low-income communities to build their livelihoods.
Christien Ackroyd is product director – core and modules at Paymentology.