Green Banks – The fairy tale of sustainability

II Table of contents

I Abstract

III Table of figures

IV List of tables

V List of abbreviationsX

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

VIReferencesXIII

VIIAppendix

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 academic research results, a web-based survey identifies bank customer’s attitude towards sustainability, ethics, their banking and 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, which should serve as a general standard for Ethical Banks.

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.

III 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

IV List of tables

Table 1: Final list of positive criteria

Table 2: Final list of negative criteria

V List of abbreviations

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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.

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.

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.

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.

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.

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.

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.

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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).

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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.

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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 ethical standards banks find themselves in. Hence, issues arise when one tries to distinguish between traditional and Ethical Banks.

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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. Abbildung in dieser Leseprobe nicht enthalten

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, p. 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 information 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)

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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 develop over time and help individuals make the right choices, but are not already present at birth (Aristotle & Ross, 2011, p. 13).

2.3.2.4 Ethical learning and growth

According to Fisher and Lovell (2009, p. 120 f.) ethical learning and growth theory is based on encouraging people to voluntary “learning that enable people to decide for themselves to act ethically”.

This means that Ethical Banks have to specify EGPs, but the actual application and implementation must be carried out by each employee’s actions. This is based on the idea that “policy [..] should be the yardstick against which the morality of actions should be judged, […] [which] can only be achieved indirectly. An ethical organisation cannot be achieved by decree” (Fisher & Lovell, 2009, p. 120 f.). Famous theories are Individual Growth by Cowey and Senge, Communitarianism by Etzioni and Ethical Egoism by Rand (Fisher & Lovell, 2009, p. 120 f.).

2.3.3 Stakeholder Theory

Because the previous sub-chapter has given an introduction to ethical decision-making, the following will outline how a company can ensure ethical beliefs are reflected in their business.

To implement ethical beliefs, Goodpaster (1983), Campbell and Kitson (2008, p. 15) identified four steps a company has to carry out:

1. Identify issues and situations raising ethical questions,
2. Apply rational principles to produce ethical strategies and procedures,
3. Coordinate ethical strategies and procedures with demands, interests and constrains of stakeholders and
4. Implement agreed ethical strategies and procedures.

In the context of a fast-paced and ever-changing environment, banks have to continuously monitor and reassess their ethical strategies in order to guarantee adequate ethical behaviour (Meadowcroft, 2007, p. 156). Hence, a fifth stage should be added.

According to Ferrell, et al. (2010, p. 82) “to determine whether a specific […] situation has an ethical component is to ask other individuals”. This is consistent with stakeholder theory’s core statement: “Paying attention to […] stakeholders of a business is a useful way of developing ethically responsible behaviour” (Campbell & Kitson, 2008, p. 17). Therefore, stakeholder’s opinion has to be included in determining Ethical Bank’s EGPs.

2.4 Emerging issues and the need for empirical research

Because Ethical Banks have become serious competition for traditional banks, supposedly Ethical Banks and traditional banks use the term ‘Ethical Bank’ in order to sell bank services under the cloak of ethically correct conduct, although ethics is applied to individual products only or serves as a secondary objective. Therefore, standardised principles have to be introduced to build universally applicable rules Ethical Banks have to follow to be eligible to call themselves ‘Ethical Bank’. This should be combined with the legal protection of the term ‘Ethical Bank’, so that violations against standards can be punished.

But because EGPs suffer from a “lack of agreement […], it is difficult to find incidents of deviant behaviour which marketers would agree are [either ethical or] unethical” (Ferrell & Gresham, 1985, p. 87). Therefore empirical research has to be carried out to determine specific criteria either omitting or permitting Ethical Banks certain business. Stakeholder theory suggests that bank customers should be involved in this research, as ”paying attention to […] stakeholders […] is a useful way of developing ethically responsible behaviour” (Campbell & Kitson, 2008, p. 17).

3 Theoretical Framework

According to Sevilla, et al. (2007, p. 55) a Theoretical Framework serves as an “interrelated construct […] that presents a systematic view of phenomena by specifying relations among variables”, aiming to present the linkage between literature and the attempted study.

The basis of this study is the triple-bottom-line concept, meaning that Ethical Banks engage in three key factors - social, environmental and economic development - while traditional banks focus on the latter one.

Because of bank’s central role in the economy, they are required to satisfy specific prudential legal requirements for customer protection, supervised by committees in their respective countries, the European Banking Authority or Central Banks. Instruments like the protection of bank deposits, the Basel framework and national law imposing disclosure requirements, ensure safety of customer’s money. Even during the crisis only few banks defaulted, rescue packages were put together quickly and banks at risk were taken over by other banks rather than defaulted (Gros & Mayer, 2010; Die Zeit Online, 2012). Because retail customer’s deposits seem rather safe, the following study will investigate Ethical Bank’s social and environmental aspects only.

As Literature Review results show, there are differences in defining Ethical Banks, in the way environmental and social data is disclosed and EGPs banks are applied. Because the disclosure is unstandardised, obscure and confusing for stakeholder, the identification of truly Ethical Banks is rarely possible for non-experts. Like law ensures security of bank deposits, ethically correct banks should be legally omitted or permitted to conduct certain business. According to Wilson (1997, p. 1326) this policy “can either be positive or negative, the former being supportive of companies which are particularly [ethically] approved […]. The latter aims to avoid investing in companies which are involved in unacceptable products or countries, or whose business methods are regarded as unethical”. In order to evaluate the ethicalness of decision and implement ethical belief into banks, the four-step model of Goodpaster (1983), Campbell and Kitson (2008, p. 15) shall be applied including Meadowcroft’s (2007, p. 156) extension:

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Figure 7: Four-step model to implement ethical beliefs

Within the research scope, step 1 will be carried out by content analysis of bank’s environmental reports, homepage disclosures, guiding principles, investment and lending policies, as well as investment criteria used by EIRIS’ ethical funds (Appendix B). The collected information serve as indicators for ethical issues banks may be confronted with.

In the second step, all collected information will be analysed, summarised and edited so that guiding principles can be derived from these information and ultimately categorised into groups.

In the third step, the categorised guiding principles will be coordinated with the demands, interest and constraints of stakeholders. Therefore, in accordance with stakeholder theory, stakeholders will be asked to express their opinion and experience with Ethical Banks and rate EGPs on a Likert’s scale from 1 (ethical) to 5 (unethical). This is coherent with Literature Review findings, as “individuals […] [have to be asked] how they feel about the ethicalness of a decision” (Ferrell, et al., 2010, p. 82) in order “to determine whether a specific behaviour or situation has an ethical component”(Ferrell, et al., 2010, p. 82).

After assessing the survey results, the identified positive and negative EGPs can be implemented. According to Burlando (2001, p. 377), the idea of establishing positive and negative EGPs goes back to the 1980s, when EIRIS established a catalogue of ‘ethically negative’ economic activities, later expanded by positive criteria (EIRIS, 2007). The problem is that these policies are rarely disclosed in detail and according to Wilson (1997, p. 1333) the adoption of an arbitrary 5% to 10% rule for unacceptable activities may be included. However, a percentage of unethical activities violates the ethical codex and ultimately betrays customer trust. Consequences must be the establishment of strict criteria and constant supervision of compliance.

The final step should be the continuous monitoring and reassessment of implemented principles because of the ever-changing environment.

4 Data and methodology

This chapter deals with research methodology and data collection. It includes a research design description and explanation of how the survey was established and conducted. Finally, practical problems and limitations will be discussed.

4.1 Research design

Polit and Hungler (1999, p. 155) defined research design as an outline for conducting studies so that control can be exercised over factors influencing the validity of the study’s results. Research design is a plan to guide the study by obtaining answers to predetermined questions.

As the research onion by Saunders, et al. (2012, p. 128) shows (Figure 8), the researchers own beliefs and values can influence the research design and their respective results. Research approaches can differ from philosophical stances, practical considerations and important assumptions underpinning research strategy and methods chosen. Hence, the research approach is inevitably linked to the research question, aims and objectives of the study.

4.1.1 Post-positivism

This study follows a post-positivist approach, but allows research outcomes to be interpretative and explanatory. According to Robson (2002, p. 18), positivism requires research to be “carried out systematically, sceptically and ethically”, focussing on data collection and facts. The positivist belief in empirical testability is broadly associated with quantitative research. Hence, well-structured empirical research based on numerical data is required to prove literature concepts and theories. The objective view, which is closely connected to positivism, accepts observable and measurable facts as empirically verifiable (Crotty, 1998, p. 27; Hart, 2005, p. 409). Crotty (1998, p. 27) argued further that the objective view aims to detect universal realities based on “objective, empirically verifiable” knowledge.

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Figure 8: Saunders' (2012, p. 128) research onion model

This research suggests that individuals and banks have different opinions on ethical and unethical behaviour. This does not comply with objectivism but embraces an interpretivist scientific thought. From an interpretivist viewpoint, “meanings are constructed by human beings as they engage with the world they are interpreting” (Crotty, 1998, p. 43). Hence, interactions between individuals in society and interactions with the environment may construct meanings, realities and notions that differ and bear “quite different connotations” (Crotty, 1998, p. 43).

To ground this research’s logic, empirical research based on numerical data needs to be approached from a subjective epistemological viewpoint – the post-positivist theoretical perspective. The post-positivist philosophical stance rejects the positivist view of “the objective existence of meaningful reality” (Crotty, 1998, p. 40), but adopts a more constructionist viewpoint by allowing research outcomes to be interpretive and explanatory (Ryan, 2006, p. 18).

Because this study embraces a post-positivist stance, research aims are more of a “learning role rather than a testing one” (Ryan, 2006, p. 18). Based on numerical data, this research explores bank customers’ banking habits and ethical views, notions and opinions towards sustainability and categories of EGPs.

4.1.2 Inductive research approach

Emerging from different philosophical assumptions, Saunders, et al. (2012, p. 143 ff.) offered two research approaches – deductive and inductive. While the deductive approach focuses on empirical hypothesis testing, the inductive approach aims to explore a field by reviewing existing concepts and theories. David and Sutton (2011, p. 108 ff.) added that it is a widely held belief that deductive research is quantitative, whereas inductive research is qualitative. However, the blurring of this distinction is common in this context.

As this research is not meant to be hypothetically tested, it offers guidelines for implementing EGPs into Ethical Banks. This is consistent with the viewpoint that “theory should be built up from exploration of reality, not used to predict it” (David & Sutton, 2011, p. 14), making this research an inductive approach.

4.2 Survey

This sub-chapter aims to describe the research process by explaining the research design, applied survey method and distribution.

4.2.1 Research process

The actual fieldwork of the research process consists of four stages:

Figure 9: Research process

In the first stage, a suitable research method was chosen to meet the research aim and purpose. Because the overall aim of this study is to identify EGPs stakeholders agree on, the method of snowball-sampling was chosen.

The second stage of the research process consisted of designing and piloting the questionnaire. After relevant questions were established - based on bank’s environmental reports, homepage disclosures, existing guiding principles, investment and lending policies of EIRIS’ investment funds (Appendix B) - a logical sequence was determined and a pilot survey established. Amendments by the responsible research supervisor were proposed and implemented, before conducting the pilot study.

According to Blessing and Chakrabarti (2009, p. 114), a pilot study can detect potential problems and negative factors influencing the quality and validity of the results. It is basically a trial base survey, so that problems are revealed, improved or prevented before the final questionnaire is carried out. To ensure comprehensibility of the research question, the pilot study was carried out on 5 participants. Results show that participants had completely understood the questions, but the evaluation scale of criteria had to be revised. Chapter 4.2.1.2 deals with survey design in more detail.

Simultaneously, the third stage was carried out, compromising the acquisition of further participants on basis of snowball-sampling. Sub-chapter 4.2.1.1 will provide further details.

After having revised the questionnaire and obtained further participants with the help of snowball-sampling, the last stage was executed – the distribution of the final questionnaire to all participants.

4.2.1.1 Survey method and distribution

This research follows a quantitative approach using an online questionnaire created with GoogleDocs to collect primary data. The advantage of GoogleDocs is that it is free of charges, has the ability to create unlimited questions, is technically simple, easy to include a logical sequence into the questions and is straightforward in exporting the data to Excel and eViews (Google, 2012).

An online-survey was chosen because it is a fast and cheap way to interview participants in several countries over a time period at any time of the day. Furthermore it ensures privacy and anonymity, which may ultimately promote authentic answers. (Denscombe, 2010, p. 178; Bethlehem & Biffignandi, 2012, p. 46 ff; Russell & Purcell, 2009, p. 27 ff)

With respect to the explanatory research purpose, the nonprobability snowball-sampling method was used. According to Babbie (2010, p. 193f.), snowball-sampling is a process where “each located subject suggests other subjects”. It is primarily used for exploratory studies and an informal method to access a wide population (David & Sutton, 2011, p. 232).

The online-survey was sent to 100 EEA bank customers within the researcher’s social network. Further potential customers were contacted, so that ultimately 243 stakeholders were invited and 96 responded (chapter 5.1).

According to David and Sutton (2011, p. 232), snowball-sampling is often criticised for inevitably resulting in biased samples, as the researcher relies on his social contacts to invite survey participants. However, the advantage is that extensive data can be gathered because the sample size can grow considerably with this technique.

4.2.1.2 Survey design

The survey consists of 26 questions (see Appendix A). Most of them are closed-ended questions that limit participants’ answers to a fixed set of responses. Closed-end responses are easier to evaluate, as they can often be directly transferred into an Excel-format. However, if the researcher did not properly structure responses, they may be left unanswered. In order to overcome such issues, open-ended questions were added which allow individual answers. (Babbie, 2010, p. 255).

Types of closed-end questions used in the questionnaire are either multiple-choice questions or Likert’s scales offering the following five answer possibilities to measure participants’ attitude towards certain business situations (Albert & Tullis, 2008, p. 124):

1) Agree strongly that this criterion is ethical;
2) Agree to some extend that this criterion is ethical;
3) Undecided whether the criterion is ethical or not;
4) This criterion being ethical applies to a lesser extend;
5) This criterion being ethical does not apply at all.

Although survey research has its disadvantages, it allows establishing a panoramic, but limited and therefore accessible framework to investigate the concepts discussed in the Literature Review.

The questions addressed bank customer’s attitude towards sustainability and ethics in general, their banking habits and ethical attitude towards the following nine areas:

- Leisure and entertainment,
- Animals and plants,
- Weapons,
- Energy,
- Medical and pharmaceuticals,
- Commodities,
- Transportation,
- Law, International Agreements and Corporate Governance,
- Finance and Support.

4.3 Data collection and analysis

The collected data included nominal, continuous and ordinal variables. The quantitative variables were coded and analysed using eViews.

Having created the questionnaire using GoogleDocs, the data is already preformatted as a spreadsheet and can be transformed into an Excel or eViews file. Because this research aims to answer the question which business transactions are either preferred or omitted for Ethical Banks according to bank customer’s judgement, the questionnaire’s key areas were nine predetermined business areas (chapter 4.2.1.2).

To evaluate each criterion’s ethical relevancy (positive criteria), respectively filter out unethical conduct (negative criteria), number one (“Agree strongly that this criterion can be considered ethical”) and two (“Agree to some extend that this criterion can be considered ethical”) of Likert’s scale were summed up, as well as number four (“This criterion being ethical applies to a lesser extend“) and five (“This criterion being ethical does not apply at all”).

After having added the gradations, the results were benchmarked against 50%. This means that if 50% of the participants agreed on one criterion being either strongly ethical or to some extend ethical, this particular criterion was added to the final list of positive criteria, which shall ultimately set the standard for Ethical Banks being present in the EEA. Negative criteria vice versa.

The benchmark of 50% was chosen because - as absolute majority - this “rule is a time-honoured, simple and egalitarian way of aggregating individual preferences” (Chapman, 1990, p. 73). In this case the majority of survey participants should decide what is considered as being ethical or unethical behaviour. The special role of the ‘absolute majority’ rule becomes further evident when looking at politics or shareholder voting.

4.4 Practical research problems

Saunders, et al. (2012, p. 208) acknowledge access as being a “critical aspect for the success of any research project”. EEAs bank customers represent the population, which enables this project to access a high number of individuals. However, only 96 individuals out of 243 answered the questionnaire.

62 responses were collected after distributing the survey for the first time. After sending a reminder-email two weeks later, 96 responses were generated in total. The low response rate (39.5%) may be connected to the length of the survey - 26 questions with up to 36 items. This may inhibit participant’s willingness to complete the questions. Furthermore, survey content requiring participants to answer personal questions about pornographic, legal or financial content may inhibit the willingness further. But because survey-questions are connected to the results of the Literature Review, the large scope of the empirical study was necessary.

Further errors may arise due to language barriers and lack of technical knowledge or equipment, making it impossible to understand or fill out the questionnaire. Although “English is the most widely understood [language]” (European Commission, 2012b) in Europe, some of the questions contain technical terms that can falsify the results because of comprehensibility issues.

5 Findings and analysis of results

The study aims to quantitatively examine individuals’ attitude towards Ethical Banking and their personal opinions on concrete examples of business situations. In the following, the findings of quantitative research will be discussed with reference to the concepts outlined in the Literature Review.

5.1 Respondents’ characteristics and attitude towards different bank types

As Figure 10 shows, the majority of participants resides in the UK and Germany. Due to the fact that the researcher himself commutes between Germany and the UK; and the selection of interviewees was by personal E-Mail-invitation, it is comprehensible that the concrete choice of participants was influences by the researcher’s preferences and circle of acquaintances. This is consistent with Saunders, et al. (2012, p. 128) (chapter 4.1).

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Figure 10: Survey-participants by country

The gender is distributed evenly among the participants (55.2% female, 44.8% male), the absolute majority being within the age rage of 20 to 40 years, accounting for 58.3%, followed by 0 to 20 years old (16%). This is due to the survey being conducted online and these age ranges being referred to as “The Net Generation” (Tapscott, 2009) with an innate understanding of technology.

With respect to awareness levels of social and environmental issues, 77.08% consider themselves as either being absolutely aware or possess the ability to recognise environmental and social issues. Only 5.21% of the respondents care neither about the environment nor other people around them.

Findings reveal that 78.1% of the respondents have their bank products (on average respondents owns 3.9 bank products) either at one primary bank (37.5%) or spread between two banks (40.6%). However, research shows that 85.4% are not happy with their primary bank and planning on changing it soon, which is in line with the finding of Ernst & Young (2011, p. 7) (chapter 1.1). Reasons are primarily unsatisfactory service standards and prices, the distance to the branch or even the banks secrecy standards.

Because of the high dissatisfaction among customers, the next questions will concentrate on Ethical Banks, serving as an alternative to traditional banks.

Findings outline that 43.75% of the participants have heard of the term Ethical Bank and are aware of the fact that there are differences between banks solely offering ethical products or following a completely ethical business approach. 19.05% even having an account with a presumably Ethical Bank, namely GLS Bank, Crédal, Cultura Sparebank, ETIKA, Valartis Bank, TISE, Ethik Bank and HSBC.

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