What’s in a name – the search to define responsible banking products

If you want to invest your money in products that exclude fossil fuels, or includes impact investments, or funds that donate proceeds to foundations, it’s possible to find those products and invest away. But what about if you want to open a bank account, take out a mortgage or a business loan or line of credit from a banking institution that is in line with your ethics? That’s a little more of a challenge, but the Responsible Investment Association Australasia (RIAA) is working on an answer.

RIAA administers a Responsible Investment Certification Program, which tests whether a product or fund’s investment intentions and processes are consistent its responsible investment claims. The certified products and superannuation funds can be found on the Responsible Returns website for ease of first-pass research for anyone who is interested.

Now RIAA is turning its attention to responsible banking products, adapting the specific criteria for its investment certification towards the banking industry. RIAA has developed an interim Responsible lending product principles program, and is testing the criteria with participating banks that are RIAA members.

“We have done some work on this with a few of our members,” says Nicolette Boele, executive manager – policy, research and certification at RIAA. “This is more empirical research where we’ve built up what we think might be the key principles around responsible lending. We’ve had a few different members say, we would love to have parts of our products certified under your program. Historically, we’re set up to certify investment products, not banking products, but we’ve been retrofitting the product category with responsible banking principles and came up with seven responsible lending criteria.”

The criteria are:

  • Not involved in any major controversies in the last 3 – 5 years on an issue that would bring disrepute to the RIAA Program if the applicant were certified.
  • Excludes lending to certain sectors, because customers, internal policies, communities and/or social norms say no go
  • Protects and/or mitigates the negative impact of the activities to which it lends (e.g. social, environmental) or has a program of environmental and social activities to enhance or complement the lending product
  • Has responsible lending screening criteria, policies and processes (i.e. only lend to people or organisations if they have the capacity to repay their loan)
  • Responsible marketing and promotions
  • Offers support to customers facing financial hardship
  • Assists customers to enhance their financial literacy

“They’re guidelines, not program requirements,” Nicolette says. “The reason we haven’t made them as final, we want to take the time to receive submissions/applications and see whether these work across all types of banks, for mutuals, listed retail banks etc., are there other aspects that we can strengthen, or aspects that may broaden the scope of what we require as well.”

“At this time, we have firmly ruled out certifying credit cards, even with these principles applied.”

The principles have been developed in concert with and are being tested by banks that are existing members of RIAA, including Bank Australia, Community Sector Banking and Teachers Mutual Banking, Nicolette says.

“At the moment, we use them,” she says. “We identify that the debt part of financial products is as important as the equity side, and we can assist our members who are taking on a commitment to superior transparency, holdings disclosure and performance, committing themselves to have their investment processes independently verified to be consistent and inside legal documents, we want to create the space for that to happen, which is why we’ve added the seven principles to our product provider category in the certification program for any of our existing member to step up and have a go at this.”

One bank that is testing the criteria is Community Sector Banking, a bank jointly owned by Community 21 and Bendigo and Adelaide Bank. It was established more than a decade ago by 20 not for profits. Community Sector Banking’s Social Investment Deposit Account https://www.communitysectorbanking.com.au/banking/social-investment-deposit-account has been certified as a responsible banking product, and Senior Lending Manager Jim Hardy says that the need for responsible and ethical banking is important “now more than ever” to restoring trust in the banking sector. Jim is also a member of RIAA’s board.

“There is a greenwashing risk, where organisations that have a CSR policy might well look for greenwashing of their lending products,” Jim says. “There is a challenge at the moment and RIAA is looking at this, and it’s like putting a gold medal wine label on a gold class beer. RIAA is looking at the classification of investing, and look at the the classification of banking, because you can’t bundle them together. It’s quite difficult to do that. And this is my personal view, unless you have a clear line of sight from a banking product to a social outcome, you run the risk of not being able to say this is a responsible use of product.”

Jim says the Social Impact Deposit Account is a responsible banking product because the outcomes have positive social impact.

“You have to go straight to the outcomes,” he says. “Is the intent being fulfilled at the back end? What is the measurement of social impact from the use of capital? If I go back to SIDA, we know there’s a fair return for the money, but you have the opportunity to make a donation, and the money has contributed to financial inclusion, or it has alleviated homelessness through programs granted. I have a clear line of sight. From a consumer looking in, they have to be comfortable that what they’re investing in have clear outcomes that they can measure and identify with.”

Jim notes that banks in general have to comply with statutory responsible lending policies, but that this sort of classification goes beyond the statutory definition.

“We’re looking at what is a responsible investment, versus what is an ethical investment, because ethical invest is a gold standard,” he notes.

The criteria are still in draft status because there is active testing of products and active discussions around the setting of the criteria.

“You have to start somewhere,” Jim says. “Then it’s a constant journey and that’s why we have chosen to have the product recertified every two years – if something does come up, it can be delisted if you like, or it can be uncertified. But you have to start somewhere.”