How To Choose An Ethical Bank, Pension & Investment Plan – ETHICAL UNICORN (2024)

A few years ago I shared a post on ethical banking written by my good friend Holly Rose. As time has gone on I’ve become increasingly convinced that switching your bank account, alongside supporting the divestment movement and getting involved with changing international law, is one of the most powerful ways to have a positive individual impact.

Many of the issues we’re facing are, whether it be climate breakdown or systemic injustice, are moral issues to us. We hope that people and corporations will realise their wrongs and change their ways because it is the right thing to do. Unfortunately, this is not quite the landscape we’re in right now so, until further notice, we need to strategise and act effectively. And one of the most important assets we can utilise is our money.

We can often think of this in terms of the power of how and what we consume, but our money holds power simply in how we choose to store it. Banks are some of the biggest investors in fossil fuels, nuclear weapons, and the arms trade, and they’re using our money to do it. So choosing wisely when it comes to banking is choosing what we want our money to fund.

Last year Ethical Consumer came out with new data on the best banking options for multiple situations, comparing UK banks on a variety of measures including environmental policy, workers’ rights and political involvement. I recently went through their research to create this updated, in-depth guide on choosing an ethical bank.

This is what I found.

Current accounts

A current account is a standard bank account that lets you access everyday services like receiving money and paying bills. It’s therefore also an account that you’ll use very frequently.

When choosing where to open a current account, ask the following questions:

Is it an ethical investor?

The bank should be transparent about where it invests your money.

Does it pay its fair share of tax?

Tax avoidance is a big issue in the banking sector, with many banks operating subsidiaries out of known tax havens such as Switzerland and Luxembourg.

Is it financing climate change?

All of the big banks have extensive investments in fossil fuels, including the most damaging ones like tar sands and ultra-deep sea drilling. Ethical Consumer’s feature on fracking also details which major banks are involved with fracking companies. The most involved are Barclays and HSBC, both of which provide banking services to fracking companies and also own portions of several of them.

Is it funding the arms trade?

War on Want released a report detailing the relationship between UK financial institutions and companies that sell weapons and military equipment to countries such as Israel, Saudi Arabia and Bahrain (read more on how we need to stop selling weapons to Saudi Arabia here). All of the largest banks hold significant shares in these companies or provide loans to them. Additionally: Old Mutual (part owns Kent Reliance), ICICI Bank, Santander, Lloyds Banking Group (Bank of Scotland, Birmingham Midshires, Halifax, Lloyds, Scottish Widows), Danske Bank, TSB Bank, Citibank, HSBC (HSBC, First Direct, part owns M&S Money), Bank of Ireland (Post Office), and RBS Group (Coutts, Ulster Bank, RBS, NatWest) all are directly involved in the financing of the nuclear weapons industry.

Fortunately, Ethical Consumer’s report also highlighted specific banks that actively boycott unethical investments and lending, with many instead turning to impact investing, selecting investments and lending to companies that create a positive impact socially or environmentally.

Companies to avoid

These big banks consistently come bottom of Ethical Consumer’s rankings tables based on the criteria above:

• HSBC (including First Direct and M&S bank)
• RBS (including NatWest and Ulster Bank)
• Lloyds (including Halifax and Bank of Scotland)
• Barclays
• Santander

Companies to support

Triodos Bank consistently ranks as one of the world’s leading sustainable and ethical banks. It has strict minimum standards for companies that it invests in, directly addressing the alcohol, gambling, p*rnography, tobacco, and weapons industries, as well as involvement in conflict minerals and human or labour rights abuses. Triodos has been recognised by the International Campaign to Abolish Nuclear Weapons for this policy, excluding all companies involved in arms-related activities.

Triodos also has a specific environment section of its minimum standards detailing its approach to biodiversity, deforestation, energy, genetic engineering, hazardous substances and contamination, natural resources and mining, and water. In 2017, 38% of its loans went to environmental projects, including renewable energy, organic agriculture, and environmental technology. It also has strict policies on animal testing, factory farming, fisheries, fur and speciality leather.

Finally, Triodos is well known for its transparency. Beyond its clear policy for its investments and lending, it publishes a full list of the companies in which it holds shares and how it voted in their AGMs, making it an industry-leading responsible investor.

After Triodos, Ethical Consumer’s top ranking options were:

• Cumberland Building Society
• Nationwide Building Society
• The app-based banks Monzo, Revolut, and Starling.

To find recommendations for bank accounts outside of the UK, check out Holly’s list of international ethical banks here.

Savings accounts

Asavings account is a deposit accountheld at abank or other financial institution that earns a small amount of money each month, helping you save money over time. When you deposit your money with that institution they then loan it out to other people, charging a slightly higher interest rate on the loan than the interest they pay you, allowing them to earn money from the difference.

When choosing a savings account, ask the following questions:

Is it an ethical investor?

Make sure that your chosen brand is clear about how it will invest your money, keep an eye out for ethical investment policies.

Is it a mutual?

Is the organisation owned by and run for the benefit of its members rather than short-term financial gain? Savings accounts that are by mutual organisations, such as building societies, usually operate more ethically.

Is it financing climate change?

Is it funding the arms trade?

Is the company a likely tax avoider?

Avoid banks who lack robust tax policies. In 2016 Ecology Building Society became the first building society to receive the Fair Tax Mark. However, most of the banking sector is still shrouded in secrecy and aggressive tax avoidance. In terms of taxes:

Worst rating: Virgin Money, Danske Bank, Bank of Ireland, Santander, Lloyds Banking Group, Citigroup, HSBC, Tesco Bank, and TSB.

Middle rating: Handelsbanken, RBS, Coutts, NatWest, Ulster Bank, and Barclays.

Best rating: Triodos, The Co-operative Bank, Charity Bank, Clydesdale Bank, Yorkshire Bank, ICICI Bank, Al Rayan Bank, Sainsbury’s Bank, and Metro Bank and the following building societies: Chelsea, Ecology, Norwich & Peterborough, Nationwide, Coventry, Cumberland, Kent Reliance, Leeds, Newcastle, Principality, West Bromwich, Skipton, Yorkshire.

Companies to avoid

You may notice a repeating pattern here, but the big five banks that dominate the savings market are, of course, the bottom of the score tables, and best to avoid:

• HSBC
• RBS
• Barclays
• Lloyds
• Santander

Companies to support

The savings sector has three organisations who scored highly with Ethical Consumer due to their ethical and transparent lending policies and their alternative ethos. These are

• Ecology Building Society
• Triodos
• Charity Bank

Ecology Building Society focuses its lending on projects concerned with carbon reductions and environmental impact, with its ethical lending policy prioritising sustainable housing practices, sustainable lifestyles, sustainable economic activity, and other similar ventures.

Triodos offers financial services to a range of projects including organic food and farming businesses, renewable energy enterprises, recycling companies and nature conservation projects.

Charity Bank only lends to charities, social enterprises or organisations with a charitable purpose. Every year it publishes a report with details of all the borrowers it supported with loans and the projects that this money had helped to fund.

Triodos and Charity Bank also both publicly disclose their investments, making them more transparent and accountable.

Building societies

Ethical Consumer also recommends the other building societies covered in their guide, plus the 32 smaller building societies that are not on their score table, and credit unions. This is because they are ‘mutuals’ which means they’re owned by and run for their members. All customers are members and are able to vote at AGMs or stand for election to the Board, whereas banks are run to maximise profits for external shareholders, meaning that mutuals generally operate more ethically.

Additionally, building societies often are more ethical than banks because regulations stipulate that at least 75% of a building society’s assets must be held in residential property mortgages, rather than invested in companies with questionable ethics.

To find your local building society search the members list on theBuilding Societies Association website. To find your local credit union use the Find Your Credit Union website run by ABCUL – the Association of British Credit Unions.

Pensions

A pension is a fund into which money is added during an employee’s year of working, meaning that when they retire they can take regular payments from their pension to support themselves. Pensions can be offered through your workplace, while the UK government also offers a state pension which is taken from National Insurance payments.

When you pay into a pension fund this money is invested, with the aim of increasing the value of the fund’s assets to ensure each person will receive their pension payments. The value of global pension assets is currently around £29.7 trillion. The UK is the second largest market, with approximately £1.9 trillion in funded andprivate pension arrangements. That’s a lot of financial power, and this is why pension funds are such a large focus of the divestment movement.

Being part of a pension fund makes you a stakeholder in the companies in which that pension fund invests, so again, it matters where you put your money.

TheEIRIS website lists the top 100 UK schemes and whether they incorporate ESG (environmental, social and corporate governance) issues into their investment processes. It also provides a step-by-step guide to investigating your occupational pension scheme’s investment policy and encouraging it to take ESG issues into account.

For example, in November 2017 theEIRIS foundation launched the Fuelling the Firecampaign, focusing on the fossil fuel investments of public sector pensions by local governments. The Greater Manchester Pension Fund topped the table, with £1.7 billion directly or indirectly invested in fossil fuels (over 10% of its total value). If you’re part of one of the regional pension funds in the Local Government Pension Scheme (LGPS), then it’s worth looking into this further.

When it comes to workplace schemes, the good news is that it has become easier for them to divest from fossil fuels. Previously, some pension scheme trustees argued that they were bound by ‘fiduciary duties’ to seek the best returns regardless of any other considerations like climate change. Now, the government is introducing new investment regulations, enabling pension schemes to “mirror members’ ethical concerns” and “address environmental problems”.

Here is what to look for when choosing a pension provider:

Is it bespoke?

Bespoke saving can be a good option for those wishing to tailor their investments to their ethical worldview.

Have you sought advice?

Always consult an independent financial adviser before choosing a pension provider. You can check out Ethical Consumer’s guide to finding an ethical Independent Financial Advisor here.

Is it invested in fossil fuels?

If you’re part of one of the regional pension funds in the Local Government Pension Scheme (LGPS) then check out the Fuelling the Fire campaign.

Companies to avoid

Although all of the companies in Ethical Consumer’s pension guide provide an ethical pension option, they are all involved in the market of venture capitalism. Therefore, be wary of a company’s other activities when choosing an ethical pension, and avoid companies that score poorly against Ethical Consumer’s ranking. In particular:

• Fidelity
• Standard Life Aberdeen

Companies to support

Ethical Consumer’s top two options were:

• Royal London
• Aviva

However, it is worth noting that Royal London scored 12 while Aviva scored 8.5, which is a large difference. Aviva still has significant investment in the arms trade, and only Zurich achieved a best rating for its environmental reporting (although it didn’t score well in other areas). Also, all funds examined were considered to be medium- or high-risk for likely use of tax-avoidance strategies, so it’s about finding the best option you can.

Ethical Investing

There are two main ways of investing: directly or into funds. To invest ethically directly you can invest into projects like wind farms or ethical and sustainable companies.

Many people tend to opt for investment funds however, as funds are a safer way of investing than buying shares. Buying shares makes you the direct owner of a small part of a company, whereas an investment fund involves pooling your money with other people in a collective investment which is managed by a fund manager. Each fund manager will, on average, run three or four slightly different ethical funds, and most funds have a specific theme around which all the investments are based, so it’s important to make sure you’re investing your money into things you believe in.

What to ask when choosing an ethical fund:

Is it fossil fuel free?

Find a fund that is not investing in coal, oil and gas.

Is it fully transparent?

You need to feel comfortable with what your money is invested in, even some ethical funds will contain shareholdings in companies you might not agree with, such as BP, so it’s important to check transparency and see that no information is withheld.

Does it have a strong screening criteria?

Different funds have different negative (eg. no investing in tobacco or arms companies) and positive criteria (eg. a focus on investing into renewable energy projects) to guide their investment decisions.

When you see funds that interest you, the next step is to look in depth at their prospectus, because the details are complex. Look for a full list of fund shareholdings, to see what the criteria translates to in practice. If a fund only lists its top ten shareholdings and won’t provide you with a full list, don’t invest there.

Is it owned by an unethical companies?

Most companies offer an ethical fund while also still running mainstream funds (except WHEB, Triodos and Impax, which are specialist sustainable investors). It’s important, therefore, to try and avoid the worst of these companies when possible.

Companies to avoid

The companies that scored lowest with Ethical Consumer include:

• Aberdeen Ethical World Equity Fund (Standard Life)
• Standard Life Global Equity Impact Fund

Companies to support

• WHEB Sustainability Fund
• Triodos Sustainable Pioneer Fund

Like pensions, when it comes to investing it can be helpful to seek out an Independent Financial Advisor (IFA). Some IFAs have built up a speciality in ethical investing, so will be able to advise in much more detail. You can read Ethical Consumer’s guide to finding an ethical Independent Financial Advisor here.

Honestly, I understand that a lot of this seems complex, and parts of it (such as investing) can seem incredibly distant from the real world we’re living in. However, even if you just switch your current account provider, this can make such a big difference when done collectively. Make sure to tell your bank exactly why you’re leaving and the changes you’d like to see, and let’s see what change we can make together.