Ethical Banks. Implementation of Unified Ethical Guiding Principle

Table of contents

I Abstract

II Acknowledgements

III Table of contents

IV Table of figures

V List of tables

VI List of abbreviations
1 Introduction
1.1 Background
1.2 Research focus
1.3 Research aim and objectives
1.4 Outline structure
2 Literature Review
2.1 Ethical Banks
2.1.1 Definition
2.1.2 The role of Ethical Banks
2.1.3 Stages of sustainability
2.2 Measuring social and environmental development
2.2.1 Environmental Reporting
2.2.2 Ethical Performance Measurement
2.2.3 Ethical Guiding Principles
2.3 Ethical decision making
2.3.1 Definition
2.3.2 Theories
2.3.2.1 Teleology
2.3.2.2 Deontology
2.3.2.3 Virtue ethics
2.3.2.4 Ethical learning and growth
2.3.3 Stakeholder Theory
2.4 Emerging issues and the need for empirical research
3 Theoretical Framework
4 Data and methodology
4.1 Research design
4.1.1 Post-positivism
4.1.2 Inductive research approach
4.2 Survey
4.2.1 Research process
4.2.1.1 Survey method and distribution
4.2.1.2 Survey design
4.3 Data collection and analysis
4.4 Practical research problems
5 Findings and analysis of results
5.1 Respondents’ characteristics and attitude towards different bank types
5.2 Evaluation of ethical criteria
5.2.1 Leisure and entertainment
5.2.2 Animals and plants
5.2.3 Weapons
5.2.4 Energy
5.2.5 Medical and pharmaceuticals
5.2.6 Commodities
5.2.7 Transportation
5.2.8 Law, International Agreements, Corporate Governance
5.2.9 Finance and Support
5.3 Final list of criteria
6 Conclusion
6.1 Summary of findings
6.2 Limitations
6.3 Opportunities for further research

VII References

VIII Appendix A

IX Appendix B

IV Table of figures

Figure 1: Key factors of Ethical Banking – The triple bottom line

Figure 2: The role of banks in the economy

Figure 3: Four stages of sustainable banking

Figure 4: Ethical development of European banks consolidated by country

Figure 5: KPMG Corporate Reporting Quadrants 2011 (based on countries)

Figure 6: Framework for ethical theories

Figure 7: Four-step model to implement ethical beliefs

Figure 8: Saunders' research onion model

Figure 9: Research process

Figure 10: Survey-participants by country

Figure 11: Evaluation of negative leisure and entertainment criteria

Figure 12: Evaluation of positive leisure and entertainment criteria

Figure 13: Evaluation of negative animal and plant criteria

Figure 14: Evaluation of positive animal and plant criteria

Figure 15: Evaluation of negative weapon criteria

Figure 16: Evaluation of positive weapon criteria

Figure 17: Evaluation of negative energy criteria

Figure 18: Evaluation of positive energy criteria

Figure 19: Evaluation of negative medical and pharmaceutical criteria

Figure 20: Evaluation of positive medical and pharmaceutical criteria

Figure 21: Evaluation of negative commodity criteria

Figure 22: Evaluation of positive commodity criteria

Figure 23: Evaluation of negative transportation criteria

Figure 24: Evaluation of positive transportation criteria

Figure 25: Evaluation of negative legal and corporate criteria

Figure 26: Evaluation of positive legal and corporate criteria

Figure 27: Evaluation of negative financial and social criteria

Figure 28: Evaluation of positive financial and social criteria

V List of tables

Table 1: Final list of positive criteria

Table 2: Final list of negative criteria

I Abstract

Because Ethical Banks have developed from niche players to serious competition for traditional banks, supposedly Ethical Banks and even traditional banks use the term Ethical Bank in order to sell bank services under the cloak of sustainable and ethically correct business conduct.

Therefore, the focus of this research is to make truly Ethical Banks distinguishable from traditional banks by investigating, analysing and determining principles, Ethical Banks have to fulfil or refrain from in order to call themselves truly ethical. Based on the results of the academic research, a web- based survey identifies bank customer’s attitude towards sustainability and ethics in general, their banking, as well as their ethical attitude towards nine areas of business, banks may be confronted with. The survey result build the basis for a list of positive and negative Ethical Guiding Principles (EGPs), which should serve as a general standard for Ethical Banks that want to settle down within the European Economic Area and Switzerland.

The main conclusion drawn from this study is a comprehensive list of positive and negative EGPs, applicable either directly to Ethical Banks or as a basis for further research. But because of the ever-changing environmental, social and legal environment, EGPs need to be continuously reviewed and validated. If directly implemented, a control mechanism within or outside the bank must monitor and ensure compliance with these principles.

II Acknowledgements

I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project and my Master’s degree.

First, and foremost, I owe my deepest gratitude to my mother, who has continuously supported me with her endless love, understanding, patience and encouragement. Thank you for giving me the strength to make this dream come true. I could not have done it without you.

My thanks and appreciations go to my father in providing the financial means and guidance through my education and helping me once more to relocate.

Furthermore, I would like to sincerely thank my project supervisor, Neeta Shah, for the valuable guidance and advice through the process of this study. Her prompt responses and useful comments enriched my ideas and helped me overcome any project issues. I felt motivated and encouraged every time I attended a meeting.

VI List of abbreviations

EEA

(= European Economic Area) The EEA compromises all EU member states, as well as Iceland, Liechtenstein and Norway, since they entered into the EEA Agreement in January 1994. Even though Switzerland was one of the founding member of EFTA, later, they did not join the EEA Agreement, but established bilateral agreements with the EU. However, for reasons of simplifications, in the course of this dissertation the term EEA shall refer to Switzerland, as well. (EFTA, 2012a)

EFTA

(= European Free Trade Association) EFTA was founded in 1960 in order to encourage free trade between the Western European countries. Today, EFTA allows Iceland, Liechtenstein and Norway in accordance with the EEA Agreement to take an active part in the European Internal Market. (EFTA, 2012b)

EIRIS

(= Ethical Investment Research Service) “EIRIS is a leading global provider of research into corporate environmental, social and governance performance” (EIRIS, 2012). Their mission “is to empower responsible investors” (EIRIS, 2012) with their knowledge. For ethically aware consumers they have established investment funds and an advisory website for green and ethical finance (YourEthicalMoney.org, 2012).

FEBEA

(= European Federation of Ethical and Alternative Banks) FEBEA is a non-profit organisation under Belgium law since 2001, compromising 25 member banks. All of their members “share the same concern for transparency and social and environmental utility” (FEBEA, 2012b). Furthermore, “FEBEA aims to create financial tools [..] to help existing European initiatives and encourage the growth of new initiatives in the field of alternative finance“ (FEBEA, 2012b).

Millennium Development Goal

The United Nations Development Programme “partners with people at all levels of society to help build nations that can withstand crisis, and drive and sustain the kind of growth that improves the quality of life for everyone. On the ground in 177 countries and territories, [..] [they] offer global perspective and local insight to help empower lives and build resilient nations” (UNEP, 2012a). Until 2015, the Millennium Development Goals aim to eradicate poverty and hunger, achieve universal education, promote gender equality, improve child and maternal health, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability and develop a global partnership for development (United Nations, 2012).

UNEP

(= United Nations Environment Programme) “The United Nations Environment Programme (UNEP) is an international organization established in 1972 to catalyse and coordinate activities to increase scientific understanding of environmental change and develop environmental management tools“ (OECD, 2012). UNEP’s areas of interest are: Climate change, disasters and conflicts, ecosystem management, environmental governance, harmful substances and resource efficiency (UNEP, 2012c).

1 Introduction

1.1 Background

“A business that makes nothing but money is a poor business.”

Henry Ford (1903) Histories of companies show that Ford (1903) was right - solely profit-oriented considerations do not suffice to make a company successful. Ever since, companies were “increasingly expected […] to improve their competitive advantage by demonstrating economic progress while maintaining environmental care and social responsibility“ (Arsov, 2008).

Although Jeucken (2002b, p. 1) stated that “humankind’s awareness of its dependence of the environment goes back to the very beginning of human history”, it was not before the 1980s that Western societies realised that the environment has become an issue of increasing concern (Gerrans Hutchinson, 2000, p. 75; Robbins, 2001, p. 3).

Besides, because of the subprime crisis, bank customer’s confidence levels worldwide have changed severely. According to Ernst Young (2011, pp. 2-7), banks experience challenges in maintaining customer relationships due to crisis impacts on trust levels. Especially European banks are affected by decreasing trust and confidence levels, as bank customers look for alternatives to traditional banks.

Considering the lack of consumer trust, in conjunction with changing social demand towards social and environmental responsibility and increasing awareness of customers about ethical and community-oriented banking, traditional banks generally cannot satisfy these demands (Kleanthous Peck, 2006, p. 31; Goyal Joshi, 2011, p. 53).

In fact, according to experts like Burrett (UNEP), traditional banks are “very much on the back foot” (Bloomberg, 2011) with green projects and regard ethical behaviour as “little more than a bolt-on to normal operations” (Street Monaghan, 2011, p. 72). Hence, customers turned to Ethical Banks, which as a result “transformed […] from niche institutions to large, publicly visible players” (Goyal Joshi, 2011, p. 53).

1.2 Research focus

Although the financial crisis may have strengthened the demand for Ethical Banks, little consideration is given so far to ethics in finance and particularly to ethics in banks, so that it is a research subject to develop nowadays (Boatright, 2008, p. 7).

Additionally, customers struggle to identify truly Ethical Banks because there is no such certificate, quality seal or standardised rating that helps customers assess the ethical quality of a bank. Considering other fields of business, quality seals (432 eco-labels in 246 countries) like the ‘CSR-Tourism-certified’ seal in the travel industry, are globally accepted and make the identification of ethical services, respectively products customer-friendly and easy (Global Sustainable Tourism Council, 2012; Ecolabel Index, 2012).

National eco-labels like the German ‘Blue Angel’ or Europe-wide ‘EU Ecolabel’, set standards for eco-friendly products and services, but fail to include financial services (The Blue Angel, 2012; European Commission, 2012a).

Furthermore, marketing slogans suggesting ethical behaviour like Deutsche Bank’s (2012) “Banking on Green” or Lloyds (2012) “Doing more to help Britain prosper” (Lloyds, 2012) may confuse customers in their quest for a truly ethical partner because these banks may not be as ethical after all. UBS serves as an excellent example: While advertising “high ethical standards to all [..] activities and decisions” (UBS, 2011, p. 6) in their ‘Code of Business Conduct and Ethics’ and being one of the first banks to sign the UNEP Statement, UBS was vigorously criticised for violating social and environmental policies by funding the Turkish Ilisu Dam project (Giuseppi, 2001, p. 102). Ultimately, UBS backed out of the project because of rising stakeholder pressure.

To conclude, advertisements, company policies like Corporate Social Responsibility (CSR), regular environmental reports or banking rules that prohibit certain products or behaviour, do not suffice to make a bank truly ethical (Al-Ajmi, Al-Saleh Abo Hussain, 2011).

1.3 Research aim and objectives

Because of the high amount of uncertainty surrounding banks’ ethical performance, this paper aims to investigate, analyse and determine principles

Ethical Banks have to fulfil or refrain from in order to call themselves truly ethical. These guiding principles should serve as a general standard for Ethical Banks that want to settle down within the European Economic Area (EEA).

Therefore, a web-based survey will identify bank customer’s attitude towards sustainability and ethics in general, their banking habits, as well as their ethical attitude towards nine areas of business that banks may be confronted with.

Based on the academic research and survey results, a set of Ethical Guiding Principles will be established to limit banking activities to a predetermined social and environmental framework.

The following analysis focuses on banks in the EEA, as these countries share similar features such as employment and social rights or environmental policies (European Commission, 2012c). Hence, survey results can be applied to banks of the EEA only.

The objectives of this research specifically are:

1. Investigate Ethical Bank’s definition and significance;
2. Evaluate critically ethical behaviour as disclosed in environmental reports, Ethical Performance Indicators and Principles;
3. Investigate theories explaining ethical behaviour and decision making;
4. Examine critically bank customer’s opinion towards Ethical Banks in general and determine Ethical Guiding Principles that are most relevant to them;
5. Formulate negative and positive criteria so that Ethical Banks can conduct their business accordingly, to be ultimately rewarded with the title ‘Ethical Bank’.

This research will contribute to Ethical Bank’s development in a number of ways: first by providing a critical review of issues pertinent to Ethical Banks; second by critically examining Environmental Reporting standards to identify potential problems when comparing reports; third by introducing ethical metrics to raise awareness of the great potential hidden in this tool; fourth by reviewing existing theories of ethical decision making, allowing a meaningful study result interpretation from which behavioural standards for Ethical Banks can be derived.

But not only is this research relevant for banks, it is useful for retail bank customers searching for a bank that makes the triple-bottom-line a reality, but without requiring them to actively evaluate a bank’s ethical standards.

1.4 Outline structure

The research is structured as follows:

Chapter 1: Introduction

This first chapter provides the reader with background information on Ethical Banks and highlights their development. After that, the focus of this research is discussed and justified; and the overall research aim and individual research objectives are identified. not visible in this excerpt

Chapter 2: Literature Review

The Literature Review defines the term Ethical Bank, discusses the role of banks in the economy and identifies stages of sustainability. Furthermore, issues surrounding Environmental Reporting, Ethical Performance Measurement and Ethical Guiding Principles undertaken by EEA banks with ethical business expertise, will be contrasted with existing literature. To conclude, the ethical decision-making will be discussed in the context of individuals and businesses. not visible in this excerpt

Chapter 3: Theoretical framework

The third chapter explains the basis of the research problems and explains the theoretical phenomena upon which the study tries to fill gaps in the existing literature and banking practice. not visible in this excerpt

Chapter 4: Data and methodology

Taking a post-positivist stance, this chapter draws up the quantitative research conducted in the course of this study. Therefore the planning, development and execution of the survey will be explained, as well as the analysis of data. Subsequently, research issues will be discussed. not visible in this excerpt

Chapter 5: Findings and analysis of results

This chapter elaborates the survey findings and discusses them critically in the context of the concepts outlined in the Literature Review. not visible in this excerpt

Chapter 6: Conclusion

Chapter 6 summarises the main research findings. It outlines the contributions of the findings and offers suggestions for future research based on the results and limitations of this project. not visible in this excerpt

2 Literature Review

This chapter discusses literature with the aim of investigating Ethical Banks and analysing concepts of disclosing ethical data, performance measurement and guiding principles. Finally, ethical decision-making will be discussed.

2.1 Ethical Banks

According to analysts “the pool of genuinely ethical financial service providers remains small […] [and] only a handful […] stick rigidly to a policy of responsible investment” (Goff, 2011).

2.1.1 Definition

Although there is no uniform definition of Ethical Banks, literature refers to them as “sustainable, social, alternative, development or solidarity” (de Clerck, 2009) commercial banks that meet “the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987, p. 41). Bouma, et al. (2001, p. 101) added that it “is a decision by banks to provide products and services [..] to customers who take into consideration the environmental and social impact of their actions”. According to Goyal and Joshi (2011, p. 53), it is “the modest way to deal with money than traditional banking”.

Summarising those definitions, characteristically are three key factors – social, economic and environmental development. Although, these factors originated in the Treaty of Amsterdam (European Communities, 1997), they describe precisely Ethical Banks as they “not only comprise the natural heritage [..] [they] pass on to the next generation but also the economic achievements and social institutions of [..] society […]. [Ethical Bank’s success] rests on an ecological, an economic and a social pillar. If one of the pillars gives way, the 'sustainability building' will collapse“ (Goethe Institut, 2008). However, the extent Ethical Banks have to comply with these pillars remains undefined. not visible in this excerpt

Figure 1: Key factors of Ethical Banking – The triple bottom line

To cope with this problem, FEBEA (2012a) suggests that Ethical Banks ”not [only] follow [..] minimum or ‘negative’ criteria […] [, but] concrete and positive criteria”. However, FEBEA’s definition seems very general and focuses mainly on investment policies.

Thus, Barbu and Boitan (2009, p. 470) came up with a list of characteristics for each bank type. According to them, Ethical Banks operate with a clear set of values and know, respect and accept all hierarchical levels. Their goal is to obtain financial and social gains by choosing ethical projects on basis of customer’s decision and the degree of positive influence on society and environment. Contrariwise, traditional banks are subordinated to reaching quantitative objectives like profitability. Therefore, they establish investment strategies and risk profiles that lead to the maximisation of financial gains and offer financing without taking into account impacts on the society and the environment.

Stahlmann and Clausen’s approach (2000, p. 78) is similar to Barbu and Boitan’s, who categorise the customers into two types – homo oeconomicus and homo vitalis. On the one hand, homo oeconomicus is the rational and self- interested investor who aims for maximum profit and capital appropriation. Homo vitalis on the other hand is an investor who aims for closed-loop economies with qualitative growth and supports renewable energies.

According to Cowen, Thompson (1999) and Green (1989) Ethical Banking is based on two characteristics: social and economic profitability. San Jose, et al.

(2011) added a third variable - “the recognition of the institutions as a bank or as a credit institution by national authorities”.

Rodriguez and Cabaleiro (2007, p. 233) criticised Cowen and Thompson because Ethical Banking is seen as a constant variable with a scale from the “philanthropic end based on an exclusive social or ethical approach, to another end based only on financial aspects”. Therefore, they took up Cowen and Thompson’s idea and developed a model with two axes – social and economic covenants – to position banks according to their degree of ethical and economical behaviour.

Bearing these theoretical approaches in mind, one can recognise that these findings are if anything a description, but not a generally accepted definition.

And although there is no standard definition for Ethical Banks, banks not complying with their promulgated ethical policy will be punished by their customers and the media, as seen in the case of Paxbank (Spiegel Online, 2009; Stern, 2009). But, if such information do not surface in public, unethical behaviour from those claiming to be ethical would neither be recognised nor punished.

2.1.2 The role of Ethical Banks

Because of banks’ central role in an economic system, it is crucial to realise their importance in contributing towards sustainable development. Figure 2 shows a simplified macroeconomic cycle in which banks are connected to other market participants by money flows.

Street and Monaghan (2011, p. 73) identified seven partner-groups that are directly involved in the economic cycle of a co-operative bank. Certainly, partner-groups change according to the corporate structure of a bank (Burkhardt, Franzen, Kumbartzki, 2005), but the high number of partner- groups exemplifies why banks play such an important role in the economy. This is coherent with stakeholder theory that underlines that “paying attention to the needs and rights of all the stakeholders of a business is a useful way of developing ethically responsible behaviour” (Campbell Kitson, 2008, p. 17). not visible in this excerpt

Figure 2: The role of banks in the economy (Jeucken Bouma, 1999, p.24)

Jeucken and Bouma (1999, pp. 22-24) added that banks have attracted governments and institutions as they can influence the pace and direction of economic growth quantitatively and qualitatively by transforming money by scale, duration, place and assessing, respectively spreading risk in the economy.

According to Bernanke (1983) and New Keynesians, banks can limit asymmetric information because of the ability to assess financial and environmental risk. Banks can ultimately make sure money is lent to ‘good’ borrowers only (Clary, Dolfsma, Figart, 2006, p. 43; Thomas, 2006, p. 258).

KPMG (1999, p. 12) stated that the financial sector is generally considered as non-polluting, however their size and position make their impact significant (Jeucken Bouma, 1999, p. 29; Giuseppi, 2001, p. 103). Indeed, banks are less polluting than manufacturing industries, but indirect effects are substantial (Tarna, 2001, p. 149) since “a bank transforms money into place, term, size and risk in an economy and, as such, it affects [not only] economic development, [but sustainable development]” (Jeucken, 2002b, p. 2).

2.1.3 Stages of sustainability

Despite opportunities ethical behaviour can offer (Sörensen, 2001), banks still find themselves in different stages of sustainability and many have not reached the final level yet, which is required to call oneself Ethical Bank.

According to Bouma, et al. (2001, p. 22) sustainability is a three-stage-process: First, banks are defensive and ignore environmental and social issues. In the next stage banks act more proactively towards sustainability and include ethical issues to a certain degree in their business activities for example by implementing environmental cost savings and eco-efficient procedures. The final stage - sustainability - (where Ethical Banks find themselves in) embraces an ethical corporate philosophy and looks for sustainable rate of returns and long-term profits.

Jeucken (1998, p. 20), Niskala and Mätäsaho (1997) extended Bouma’s model (Figure 3) by subdividing the stage of proactivity into preventive (internal integration of ethical procedures) and offensive banking (external measures). This makes a more precise distinction between stages possible. All those models emphasise that with an increase in sustainable awareness, the need for enclosing environmental information rises. not visible in this excerpt

Figure 3: Four stages of sustainable banking (Jeucken, 1998, p. 20)

Figure 4 shows Jeucken’s findings by accumulating the results of national banks on country-level. Although, research was carried out nearly 10 years ago, one can see differences in the application of ethical policies and stages of not visible in this excerpt

Figure 4: Ethical development of European banks consolidated by country (Jeucken, 2002a, p. 16)

German, Swiss and Dutch banks (Figure 5) make it even harder because they already implemented high degrees of ethical and environmental awareness into their business programs.

Figure 4 also shows that 10 years ago the average of investigated banks had not reached the level of sustainability. Taking the 2012 Environmental Performance Index into consideration (analogue to Millenium Development Goals) where EEA countries rank within the Top 50, corporations have experiences a rapid positive development of sustainability and ethics (Yale Center for Environmental Law Policy, 2012, p. 10).

Therefore, “in order to investigate the rigour of the approach taken [by EEA’s Ethical Banks], we have to get beyond the marketing and into the method by which the investment [and lending] philosophy is applied” (O'Rourke, 2003).

Thus, the next chapter will focus on Environmental Reporting. not visible in this excerpt

Figure 5: KPMG Corporate Reporting Quadrants 2011 (based on countries) (KPMG, 2011, p. 4)

2.2 Measuring social and environmental development

2.2.1 Environmental Reporting

Unlike financial information, there are neither standard Environmental Reporting guidelines, nor a universally accepted definition of sustainable reporting (KPMG, 2008, p. 8). In comparison to financial reports, environmental reports differ in many ways because there “are no required contents or presentation styles” (Lober, et al., 1997, p. 62). And while researchers criticised a decade ago that banks encourage short-term goals only, today there are several reporting guidelines by different institutions, reflecting the urge for ethical behaviour in the financial service industry. ‘Sustainable Reporting Guidelines’ being the most common (Schmidheiny Zorraquin, 1996, p. 4; Tarna, 2001).

In general, each approach has different strengths and weaknesses, and according to Lober, et al. (1997, p. 62) corporate environmental reports differ by the amount of quantitative and qualitative disclosure, the degree of interaction between the reader and the report, and “the reports’ ability to convey an evolution in corporate performance over time” (Lober, et al., 1997, p. 62).

Cultural differences seem to be a further differentiating factor. Jeucken (2002a, . 13) discovered that there is “conformity within a country […], [but] while the economy is global, […] peer pressure appears confined within nation borders”.

However, certain similarities are striking in all reports (Dias-Sardinha, et al., 2007, p. 16):

- “[The] use of qualitative and/or quantitative indicators […],
- clustering of indicators into categories […], and
- [the] use of structural information that may be organized in frameworks.”

Against this background, Henriques and Richardson (2004, p. 72f.) outlined that poor standardisation means that stakeholders - including customers – cannot comprehend the extent organisations act environmentally and socially responsible because in many cases these reports just don’t make “sense when taken out of the context of capitalism, local laws and culture […], the state and the functioning of wider environmental systems” (Henriques Richardson, 2004, p. 72f.).

It seems clear that simply requiring banks to disclose environmental information will not help stakeholders to make informed decisions on ethical bank behaviour.

2.2.2 Ethical Performance Measurement

Because stakeholders have difficulties making decisions on Ethical Banks, Stigson (1999, p. 6) proposed to include metrics to measure ethical behaviour. Since environmental reports suffer from a lack of comparability, ethical metrics set in proportion to economic indicators can help maintaining credibility, prepare qualitative and quantitative ethical data in a comprehensible way and help converting data into conclusive and concise information about ethical performance.

Bartolomeo (1995) defines metrics as ”quantitative and qualitative information that allow the evaluation […] of [a] company[‘s] effectiveness and efficiency” with respect to social and environmental aspects. These Ethical Performance Indicators (EPI) allow adopting “appropriate measures of environmental [and social] protection in terms of effectiveness and efficiency; the empowerment of [..] [ethical] policy by a better definition and monitoring of [social and] environmental objectives; an effective definition of responsibilities and an aid for the implementation of […] [an ethical] management systems; and the improvement of external and internal communication on [..] [sustainable] achievements and programs” (Bartolomeo, 1995).

As the definition indicates, EPIs have the potential to become a central management tool. This is further underlined by the establishment of ISO- Standards 14031 and 14032, defining Environmental Performance Evaluation as a “process to facilitate management decisions regarding an organization’s environmental performance by selecting indicators, collecting and analysing data, assessing information against environmental performance criteria, reporting and communicating, and periodic review and improvement of this” (Gee, 2001, p. 26). Skilius and Wenneberg (1998, p. 6) added that EPIs prepare qualitative and quantitative ethical data in a more comprehensible way and help converting data into conclusive and concise information about social and environmental performance.

Yale University (2012, p. 16) has successfully established such indicators, but on country level.

2.2.3 Ethical Guiding Principles

Apart from environmental reports and EPIs, banks usually disclose their own Ethical Guiding Principles (EGP). However, reviewing internet-presentations and environmental reports of 28 banks standing for ethical behaviour (Appendix B), has resulted in major differences in the extent and content of EGPs. Given prior analysis of Environmental Reporting and EPIs, it is not surprising that there are large disagreements between the content, form and extent of bank’s EGPs.

Especially local banks, like ‘Femu qui’ (Corsica) or ‘Colonya Caixy Pollença’ (Spain), disclose either no information on ethical principles or provide general about corporate values, objectives or code of conducts. This is coherent with research by Melrose-Woodman and Kverndal (1976) - analysing ethical codes in 130 UK companies, showing that 60 companies did not disclose any ethical codes, following the opinion that “attitudes to social responsibility would be evident through management decisions” (Schlegelmilch Houston, 1989, p. 10).

A different approach to implement ethics is an Ethical Policy Unit/Committee, as used by the ‘Co-operative Bank’ and ‘Caisse Solidaire du Nord-Pas-de-Calais’. According to Winlow and Hall (2011, p. 400) such committees are an “attempt to compensate for the loss of the traditional symbolic order” and aim to ensure “that the bank has the appropriate means for promoting proper decision making and compliance with laws, regulations and internal rules; provides oversight of the compliance function” (Basel Committee on Banking Supervision, 2010, p. 13). Its tasks are similar to Sharia advisors in Islamic Banks because they help underlining the merits of Ethical Banking, establishing and monitoring the compliance with ethical principles, and informing customers. “In Islamic terms this is a matter of Ijtihad, […] of fundamental principles to changing circumstances” (Wilson, 2002, p. 52). Hence, the committee should occupy a pro-active role - involved in business aspects and regulations.

Larger banks like the German ‘GLS Bank’, Dutch ‘Triodos Bank’ or British ‘Unit Trust Bank’ serve as pioneers and have sophisticated EGPs. Their ethical values are expressed in ethical codes and positive and negative criteria. This is in line with the idea of Islamic Banking, where banks conduct business according to Sharia principles, prohibiting Riba, Gharar and Maysir. Profit/Loss sharing and Halal activities are supported by Islamic Banks and serve as positive criteria. (Marimuthu, et al., 2010, pp. 53-54)

Wilson (2002, pp. 51-52) added a word of caution as “Islamic banks often describe themselves as […] ethical financial services, but they do not spell out explicitly what is meant by this”. However, one similarity between Ethical and Islamic Banks is that “the word ethical is used as a label, […] but there is no attempt to make the link between what is ethical and the specific methods of conducting financial transactions […] [and] to explain the ethical merits of how the bank conducts its business directly to the clients” (Wilson, 2002, pp. 51-52).

Hence, only few Ethical Banks disclose detailed information on their underlying ethical principles, commandments, prohibitions and their overall investment and lending policy. Merely stating to be ethical is insufficient.

2.3 Ethical decision making

Having discussed Ethical Bank’s relevancy, the question arises what the term ‘ethics’ means and how it applies.

2.3.1 Definition

Although Ethical Banking is considered as a relatively new field of research, ‘ethics’ itself is not. According to Paliwal (2007, p. 3), over centuries philosophers struggled with approaches of humans towards ethics.

The term ‘ethics’ has its origin in ancient Greek. The word ethikos means customs, habit of life or tradition. When Cicero later searched for a Latin translation of the ancient Greek word, he chose mos (‘moral’). Unless for some exceptions these two words have the same meaning (Grace Cohen, 2010, p. 3 f.).

Ferrell, et al. (2010, p. 6) added that the term ethics has many nuances and “values and judgements generally play a critical role when we make ethical decisions”. Reaching from Taylor’s (1975, p. 1) “moral judgement, standards and rules of conduct”, to the definition of The American Heritage Dictionary (2006, p. 611) as “the study of the general nature of morals and of the specific moral choices to be made by a person”, to Wroe’s (1965, p. 320) approach of differentiating ethical decisions from ordinary decisions or “the amount of emphasize that decision makers place on their own values and accepted practices within their company” (Ferrell, et al., 2010, p. 6).

According to Grace and Cohen (2010, p. 2) “ethical issues are often grey; […] [and] people can differ on the subject of ethics as they may not on the laws of physics or the facts of geography”. Crane and Matten (2010, p. 5) added that there are overlaps between law (“minimum acceptable standard of behaviour”) and ethics, which they consider as the grey area. However, many moral issues are not covered by law.

In order to implement high ethical standards in society, individuals and companies need to follow moral principles. Collins (1994) argues that business ethics is an oxymoron because generally there can be no ethics in business and in a sense business itself is unethical (Crane Matten, 2010, p. 4). Carr (1968) outlined that business, can be regarded as a game of poker, where different moral standards apply. Because of these divergences, it is inevitable to implement ethical rules and principles as company policy.

2.3.2 Theories

“In order to identify what makes acts right and wrong […] we need to turn to major ethical theories” (Boatright, 2007, p. 31), which can enable us to think through ethical issues in business and make decisions.

Figure 6 provides a broad and simplified overview of theories. According to Fisher and Lovell (2009, p. 102), the horizontal dimensions are based on Dworkin’s work on rights. Dworkin (1977, p. 22) defined ‘policy’ as “a goal to be reached, generally an improvement in some economic, political or social feature”, whereas ‘principle’ was defined as a “standard that is to be observed, not because it will advance an economic, political or social situation, but because it is a requirement of fairness or justice or […] morality” (Dworkin, 1977, p. 22). The vertical dimension (Figure 6) contrasts individual and institutional views on ethics, and the performance of their respective ethical duties towards society.

2.3.2.1 Teleology

According to Fisher and Lovell (2009, p. 125), “the rightness […] of an action […] can only be judged by its consequences”. This means that the action is morally right, when it produces the desired result. Two teleological theories that guide decision-making are ‘egoism’ and ‘utilitarianism’. With respect to banks, egoism-theory means that banks follow only their own personal interests, namely profit making, whereas utilitarianism-theory is based on continuous comparisons of costs and benefits to all stakeholders. (Ferrell,et al., 2010, p. 155) not visible in this excerpt

illustration not visible in this excerpt

Figure 6: Framework for ethical theories (Fisher Lovell, 2009, p. 102)

2.3.2.2 Deontology

Deontological ethics is a non-consequential theory based on duty. It has derived from religion as duties were written down in Thora’s 613 Mitzvot or God’s 10 biblical commandments. Its overall aim is fulfilling obligations based on the “principle of the matter” (Mizzoni, 2010, p. 104). At a later stage, Kant developed the religious approach to imperatives by defining duty as “something one is required to do” (Mizzoni, 2010, p. 177). Examples are the prohibition of torture, not to lie or not to break promises.

2.3.2.3 Virtue ethics

Virtue ethics are “personal qualities that provide the basis for the individual to lead a good, noble, or ‘happy’ life” (Fisher Lovell, 2009, p. 103). Although virtue changed over time, the most recognised person on this subject stayed Aristotle who developed the idea of the ‘great-soul-man’, displaying virtues of the highest order within society. These virtues are personal characteristics that

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