What Is Ethical Finance?

What Does Ethical Finance Mean?

Ethical finance involves choosing financial companies and products that provide positive financial returns while also prioritizing the greater good. Their business models consider more than just profits. Instead of choosing products based only on expected returns, the consumer looks for reassurance that the company’s mission is aligned with their own values.

It may be more difficult to find ethical financial products than traditional ones, but you do have options. Here’s what it may look like in practice.

ESG Investing

ESG investing is a form of socially responsible investing (or conscious investing). With this strategy, you consider your moral values alongside a company’s potential financial returns. At the beginning of 2022, there was $8.4 trillion in U.S. sustainable investment assets under management by ESG-aligned companies, according to the Forum for Sustainable and Responsible Investment. ESG investing considers the following factors when evaluating a company:

• Environmental sustainability: Their energy consumption, waste production and overall effect on the climate
• Social consciousness: How the company affects the greater community at large, which may include ethical manufacturing and the humane treatment of workers
• Corporate governance: Their policies around equality and whether they maintain a fair, diverse and inclusive culture

Ethical Banking

How you approach regular banking can also support your values. That may mean choosing socially responsible financial institutions.

Some banks may invest in businesses that exploit their workers, have a large carbon footprint or have a history of discriminatory behavior. Others may not be transparent when it comes to their values. Conscious banks, on the other hand, are committed to remedying these kinds of issues.

Community Development Financial Institutions (CDFIs) are a good example. They’re designed to create economic opportunity for individuals and small businesses in underserved communities. Roughly 5.9 million U.S. households are unbanked, according to the Federal Deposit Insurance Corporation (FDIC), meaning they don’t have a checking or savings account. Unbanked rates are particularly high among low-income households. CDFIs aim to support these underserved markets.

Outside of CDFIs, banks and credit unions may demonstrate social responsibility through their policies, endorsements, community engagement and more.

How to Find Ethical Financial Products

If you’re interested in ethical finance, you can begin by taking stock of your current financial products. That includes your checking and savings accounts, as well as your investment and retirement accounts. What financial institutions currently maintain them? How do they measure up in terms of social responsibility?

Bank of America, for example, has committed $1 trillion to low-carbon, sustainable business initiatives over the next several years. However, you may find that the financial institutions you’re currently using fund environmentally destructive efforts or have a history of sexual misconduct claims. That may motivate you to jump ship.

Here are some ways to find and vet ethical financial products:

• Look for certifications and registrations. Special designations are given to ethical financial institutions. For example, CDFIs must meet certain eligibility requirements to become certified. For-benefit corporations, also known as B-corps, are structured like traditional for-profit businesses—but they also aim to make a positive impact and prioritize social causes and the environment.
• Browse their websites. If, say, you’re looking for a new life insurance provider, do a digital deep dive into your options. MassMutual, for example, is an insurer that’s openly supportive of the LGBTQ+ community. This comes through in their service lines and marketing materials. Consider searching keywords that are important to you such as, “environmentally friendly banks” or “socially responsible credit unions.”
• Consider your investment accounts. Whether it’s a regular brokerage account or a retirement account like a 401(k) or individual retirement account (IRA), you might be able to invest directly in companies and causes you care about. ESG-themed exchange-traded funds (ETFs), mutual funds, index funds and individual stocks are out there. What’s more, investment research firms like Morningstar allow you to view companies’ ESG ratings, making your search a little easier.

Challenges of Supporting Ethical Financial Companies

Choosing to support ethical financial companies with your money doesn’t come without its own challenges, however.

• Finding them requires research. Aligning all of your financial products with your values isn’t always simple. Be prepared to do your research based on what’s important to you, and make peace with maybe not being able to fully support only ethical companies. This can take time and energy, but it may be worth it if you’re able to support certain causes and companies.
• Due diligence comes with the territory. There isn’t a clear definition of what’s considered an ethical financial product. As a result, you may end up supporting a company that isn’t fully aligned with your values. Even if they once met your criteria, things change—and a formerly “good” company can behave badly. Ethical finance requires some sustained vigilance on your part.
• They may not offer all the services you’re looking for. You might find a socially responsible bank that mirrors your values and is doing really great work in your community, but doesn’t provide the financial services you need to meet your goals, like mortgage lending.

The Bottom Line

There are lots of ways to use your money for good. ESG investing and socially responsible banking are two ways to put ethical finance to work. It isn’t an exact science, but the goal is to choose financial products and partners that share your values.

No matter where you choose to bank and invest, ensuring your credit is on solid ground is important. You can check your credit score and credit report for free from Experian, and use the information you find there to help you set and adjust your financial goals.