With several commissions and inquiries looking into the banks, borrowers will likely be pickier with who they borrow from. As such, brokers need to ensure they can service this growing customer segment. Tas Bindi sits down with mortgage brokers, lenders and ethics experts to talk about the future of lending in Australia.
The banking and credit sector is no stranger to responsible lending, being bound by several laws and obligations to ensure that the service and products that consumers receive are appropriate. But how do borrowers make sure that the lender they are using is the appropriate choice for them? For some, the choice of lender comes down to competitive interest rates and good service. For others, it comes down to whether the lender is ethical.
What is ethical lending?
Ethical lending is a multi-faceted concept, but from an idealistic viewpoint, it is understood as “the responsible sourcing and distribution of funds”. Lenders that avoid providing loans to the fossil fuel and tobacco industries, and to businesses that are responsible for animal cruelty, deforestation and human rights violations, are considered ethical.
Rising consumer demand for lenders to create economic value in a way that aligns with society’s interests is prompting lenders, who have historically provided finance to organisations involved in unethical practices, to reflect on the moral significance of their actions.
At the end of 2017, National Australia Bank became the first big four bank to stop providing loans to thermal coal mining projects, and earlier that year, AMP announced its decision to cease lending to manufacturers of tobacco, cluster munitions, landmines, and biological and chemical weapons.
This move comes a decade after NAB, CBA, ANZ and Westpac collectively lent more than $70 billion to fossil fuel projects, according to figures by Market Forces (an affiliate project of Friends of the Earth Australia).
AMP is estimated to have provided more than $562 million in loans to such projects over the same period.
In March, NAB also became the first bank in Australia to issue a €500 million public off shore green bond, with proceeds expected to finance investments in green technologies in the UK, Europe, Australia and the Americas.
Shortly after, CBA announced raising $650 million for its first climate bond, with proceeds expected to fund 12 renewable and low-carbon projects in Australia.
All of these suggest the emergence of a new status quo where lenders are devoting resources to mitigate the negative impacts of future investments while making positive contributions to society.
Do home loan customers want lenders to be more ethical?
A recent consumer report from the Responsible Investment Association Australasia (RIAA) indicates that Australians are increasingly demanding that financial markets play a socially constructive role in the economy.
“People are expecting their investments to support the emergence of tomorrow’s industries, to remove support from companies that are doing social harm and to create the assets and infrastructure that we will need in Australia late into this century,” the RIAA report states.
According to the association’s research, 92 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically, with 78 per cent willing to switch providers if their current fund is involved in activities that are not aligned with their values.
Australians were found to be particularly interested in investing in renewable energy, healthcare, medical products and sustainable practices, while animal cruelty, human rights violations and pornography were selected as the top three investments they want to avoid.
RIAA’s research also indicates that nearly half of Australians expect their financial advisers to be knowledgeable about responsible investment options. As such, it would not be a far reach for customers to expect their mortgage brokers to be well versed in the greener options that are available to them.
Non-governmental organisations have played a pivotal role in the movement towards a more ethical financial industry, with Market Forces urging home loan customers to warn their banks that they will cut ties if they continue to do business with the fossil fuel industry.
The association’s campaign is driven by the belief that “home loan customers of the big banks are some of the most powerful people in the Australian fossil fuel divestment movement”, given that the banks make “billions of dollars each year from the interest paid on home loans”.
Which lenders are ethical?
Community-owned lenders such as Bank Australia, Community First Credit Union and Teachers Mutual Bank have strict guidelines on who they will, or will not, do business with, and they promise their customers that their funds will be used to make positive social and environment contributions.
Bank Australia’s chief strategy officer, Rowan Dowland, says that “a bank is much more than a place to deposit or borrow money”.
“Your choice of bank can make positive change happen in the world,” Mr Dowland says.
“Every bank account you hold, super account you contribute to and loan you access provides assets and market share to a bank or superannuation firm, who can use that to make investment decisions in local or global markets. That’s power with the potential for positive impact and influence, as well as a big responsibility.”
Mr Dowland explains that Bank Australia’s values act as a compass guiding how it operates. The bank does not lend to industries that cause harm to people and the environment, nor does it lend more than a customer can feasibly repay or offer unsolicited credit limit increases.
“We saw with the global financial crisis that irresponsible lending practices for home loans led to the collapse of many banks around the world,” Mr Dowland says.
“Closer to home, we’ve seen that changing community sentiment about the impacts of climate change. Campaigns for fossil fuel divestment have helped drive change in investor behaviour. These examples are showing us that there is a real need, and potential power, of ethical lending.”
Bank Australia has seen “growth in new customers who are attracted by [its] values-based banking approach”, though Mr Dowland admits that more ethical banks are required to respond effectively to pressing challenges such as climate change and income inequality.
The CSO says: “Overseas, ethical banks have been operating for many years in countries like the UK, France, Germany, the Netherlands and Canada. People from those countries come here and are surprised that there isn’t a bigger focus in Australia.”
Community First CEO John Tancevski says that the credit union’s “socially and environmentally compelling” products — such as the McGrath Pink Visa Card, which raises funds to support the McGrath Foundation, and the Green Loan, which allows customers to fund environmentally friendly purchases such as solar panels and battery systems — have attracted new customers. Such products, he notes, are “truly compelling when they are coupled with value”.
Meanwhile, Mark Middleton, head of third-party distribution at Teachers Mutual Bank, which has been recognised by the Ethisphere Institute as one of the world’s most ethical companies for five consecutive years, says that the bank’s pursuit of profits is never at the stake of the community, and that it ultimately puts profits back into the community.
The “purpose-driven” bank also strives to lead by example, with Mr Middleton explaining that TMB has been carbon-neutral for three years, and 99 per cent of the paper it purchases is from a certified sustainable source.
The bank has also installed more than 1,300 LED lights in its head office in Homebush, subsequently cutting its power use by 70 per cent.
Bank Australia has also been carbon-neutral since 2011 and has committed to obtaining all of its energy from renewable sources.
“Recently, we’ve joined with 13 other organisations to support the Melbourne Renewable Energy Project, which will build a wind farm in Western Victoria and enable us to purchase the green energy it generates,” Mr Dowland says.
Ethical lending: A business opportunity
Mr Tancevski says that Community First expects there to be “a lot of brand repair on the horizon”, given that trust in the banks is currently low, and that focusing on ethics may even be “used as a tactic to repair negative sentiment”.
Andrew Bakonyi, founder of Sydney-based brokerage abfinance, agrees that it would be strategically wise for lenders, and brokers, to adapt to evolving customer expectations, especially if they want to see loyalty from their customers.
The abfinance founder says: “If people protest [coal seam gas] projects by moving their mortgages [to ethical lenders], then the accounting equation for these projects gets a lot more complex. If [the bank was] to make, for example, $50 million from one of these projects, but lost a thousand mortgage customers, it might be an economically detrimental decision, especially if enough people move that they actually end up in the red.”
He suggests that it could be worthwhile for lenders to establish loan terms that encourage ethical business practices, especially when approached by organisations that are responsible for unethical practices such as the use of child labour in overseas manufacturing facilities.
“The [banks have] so much power in dictating their terms… They can say, ‘There is a reputational risk for us to lend you this money to expand your manufacturing business overseas if you are found to have [child labour] in your supply chain. We need you to be a lot more transparent and show us that [you don’t engage in unethical practices] before we feel comfortable handing X million dollars in finance’. That’s a powerful lever,” Mr Bakonyi says.
The abfinance founder also puts forth the idea of introducing measures for loan writers that discourage them from lending to certain businesses.
Bank Australia, for example, does not offer executive bonuses or sales-based commissions to any employees, which means that they can focus on helping customers find the product that best suits their needs.
A common viewpoint is that financial stakeholders are the main reason why the big banks’ ongoing relationship with businesses is deemed to be unethical, and that the first step to addressing the challenge is developing management practices that eliminate trade-offs between “doing well” and “doing good” while satisfying both financial and non financial stakeholders.
Cris Parker, manager at The Ethics Alliance, is optimistic that stakeholders will take into consideration the social and environmental impacts of their actions. She laments, however, that discussions on ethical lending and investments will continue coming down to the question of cost, such as “what are the potential cost benefits and risks of moving to a more ethical model of lending?”
“I hope that in the future, cost and consideration of behaviour goes beyond the dollar figure. It’s just too easy to measure dollars, so it’s prioritised, and we’ve got to break that thought cycle. I think the better we get at measuring positive impacts, the stronger we can continue to drive more ethical practices,” Ms Parker says.
“That said, there is enough evidence out there [showing] that, in fact, financially we will benefit in the long run.”
She points to international research from Calvert Investments, which suggests a correlation between increased corporate engagement with environmental and social challenges and positive financial performance and stock market valuation. Domestically, Regnan’s research indicates a similar connection between share price and conduct among ASX200 companies.
What can brokers do?
Mr Bakonyi says that brokers need to ensure that they have the right information to share with prospective or existing home loan customers who would prefer to borrow from ethical lenders.
“There are a lot of people in Australia that are spending time researching LED light bulbs, making trips to Bunnings and so forth. But in terms of leverage and impact, I’d argue that mortgage is one of the biggest [ways for people] to make an impact,” the abfinance founder says.
“I think the choice to do the right thing according to their own code is an important [one] for people, and it’s something that traditionally hasn’t been offered to [them]. So, people don’t know that they can even ask for it or that it’s as important as they think it is.”
As an avid environmentalist, Mr Bakonyi is well versed in the options available to home buyers looking to borrow funds from ethical lenders. But in 12 months, he believes that there will be “all kinds of ethical brokers out there and [lenders] who continue to lift the bar and innovate” in response to changing customer expectations.
“There are already brokers out there that are recycling, buying organic [produce], involved in school programs because they care about people, the planet and all sorts of societal and governance issues,” Mr Bakonyi says.
“It’s about being comfortable enough to have these conversations [with clients] so they are getting their needs met. I know a lot of brokers get fulfilment out of really happy customers.”
Karen Doust, broker and credit manager at Jenesis Finance, said that she has noticed an upward trend of consumers enquiring about what lenders have to offer beyond competitive mortgage rates and the contribution they’re making to society.
Q. Have you had any clients enquire about the ethics of lenders?
It is a conversation we are having more and more with clients, especially over the last six to nine months. They have been saying: “Yes, the rates are fine, but why else should we be going to this particular lender?”
I think there needs to be more awareness of the fact that people can have their interest rate as a competitive rate and also do good in terms of where they borrow from and where they put their money.
Q. What are some of the common themes among these clients?
Around 90 per cent are young married couples in their late 20s or early 30s buying their first home. I think they are really conscious of what changes they could make in their personal lives to have some sort of positive impact. They tend to care about fossil fuels, general lender values and community interests.
Q. What roles can brokers play in the ethical lending landscape?
I think it’s important to provide clients with the right information, especially around lender values and the options that are available in the market.
For a long time, with the marketing budget the big banks have, a lot of people just didn’t know that there were other options, including smaller banks and non-banks.
We organise loans with a lot of non-banks, credit unions and banks that are backed by super funds. They tend to be the more competitive lenders in the market.
I don’t think everybody realises that while it does take some effort moving banks, it can be worthwhile ethically and financially.
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Tas Bindi is the features editor for The Adviser magazine.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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