Are mutual banks really more ethical (and who decides)?

With all the attention being paid to the choices made by super funds and fund managers regarding environmental and social impacts, you might well be wondering if your bank is also making ethical choices too.

Enter mutual banks, flags waving. A growing number of mutual banks - banks that are owned by the customers rather than shareholders - are making the case that they are a good alternative for customers who are seeking community-based banking arrangements and spruiking their environmental and social bona fides as evidence.

Some of these mutual banks are staking a position as being explicitly ethical banks, or banks that have policies that meet environmental, social and corporate governance (ESG) criteria. Mutual banks point to their ownership structure and their role in local communities as demonstrating positive impacts and as an alternative for new customers.

Recently, Heritage Bank announced that they had enacted an ESG statement that codifies the bank's practice around sustainability issues, as well as opens the door to further products and services aligned with an ESG approach.

Heritage Bank chief executive Peter Lock says the mutual began assembling its ESG policy 18 months to two years ago. It operates in Queensland and New South Wales and has more than $10 billion in assets, Lock told sister publication FS Sustainability.

Being able to articulate an ESG policy and the focus on the social and community aspects of their operations is "natural ground" for a mutual bank, says Lock.

"The social and community aspects of what we do are important," he says. "Good governance and modern contemporary thinking are almost demanding of an ESG policy anyway."

Now that Heritage Bank has endorsed the ESG policy, the bank will apply it to products and services, including looking at green, social and sustainability bonds and credit products, although Lock said nothing was in development at this time.

Two other mutual banks - Bank Australia and Teachers Mutual Bank - have gone one step further and have been certified as ethical banks by the Responsible Investment Association Australasia (RIAA). RIAA has certified these banks in much the same vein as they certify investment products.

RIAA's criteria includes banks not being involved in any major controversies in the past 3-5 years, excluding lending to certain sectors, protection against the negative impacts of lending activities (like carbon offsets) or has a program of environmental and social activities to enhance or complement the lending product, having a responsible lending program, responsible marketing, offering support to customers facing financial hardship, and assisting customers to enhance their financial literacy.

Several banks such as Bank Australia, Teachers Mutual Bank and Community Sector Banking are all predicated on an explicitly ethical mission statement and have developed products in line with those business strategies.

Teachers' Mutual Bank has a commitment to ethical banking, and has a list of negative screens, or sectors to which it does not lend, where the primary purpose of the entity or business is alcohol, armaments, correctional facilities, cryptocurrency, deforestation or gross environmental degradation, gambling, military activities, political activities, pornography, slavery, tobacco or uranium.

Bank Australia has similar commitments, noting that it doesn't lend to the fossil fuel, live animal export, gambling, arms and tobacco industry, while lending money for housing for people with disability, renewable energy projects and providing lending services for not for profit organisations.

Another bank, Community Sector Banking is a bank jointly owned by Community 21 and Bendigo and Adelaide Bank. While not a mutual bank, it was established more than a decade ago by 20 not-for-profits. It serves the not-for-profit business sector, and its Social Investment Deposit Account has been certified as a responsible banking product by RIAA as well.

In short, if you're seeking a retail banking experience that may more closely align with your values, it is possible to find a home for your money with mutual banks, although you will have to examine whether product fit, fees and other considerations also align with your expectations.

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