Making the Case for Ethical Banks – an Italian initiative

Date published: 26 April 2017

The discussion about sustainable finance is capturing political attention at a global level, as demonstrated by several institutional and corporate initiatives that focus on aligning financial markets with sustainability goals in the public interest.

Legislatives initiatives at European and national level that acknowledge the key role played by pioneers from the financial sector in enhancing diversity in the banking ecosystem are therefore welcome and much needed, especially in a regulatory framework that too often promotes the "too-big-too-fail" banking model.

In this article, Andrea Baranes from Finance Watch's Member organization, Fondazione Finanza Etica, and Giulia Porino from Finance Watch present the new Italian law on ethical finance and argue that it could serve as a model for the European Union by exemplifying political willingness to regulate on the definition and implementation of sustainable finance.
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At the end of 2016, an Italian law was passed that for the first time defines ethical finance. The new article n.111 of the Banking Act (Testo Unico Bancario – TUB) defines as 'ethical and sustainable financial operators' those banks whose activities conform to the following principles:

a) Evaluate the loans granted to legal persons in accordance with internationally recognized ethical rating standards, with special attention to their social and environmental impacts;
b) Give public evidence, at least annually, also via the web, of the loans described in subparagraph a), taking into account the protection of the privacy of personal data;
c) Dedicate at least 20 percent of their loan portfolio to nonprofit organizations or social enterprises, as defined by law;
d) Do not distribute profits and reinvest them in their activities;
e) Adopt a system of governance and an organizational model with a strong democratic and participatory orientation, characterized by a diffuse shareholding;
f) Adopt remuneration policies that put severe limits in the difference between the higher remuneration and the average in the bank. In any case, such ratio cannot exceed the value of 5.

According to the new law, banks that meet these requirements can obtain tax exemptions in order to promote their capitalization. These incentives are currently extremely limited, partly due to a restrictive interpretation of the European regulations on state aid. The importance, however, is not so much about the practical implication but rather their cultural and political significance. Banca Etica – currently the only Italian institution that falls within the definition – has demanded for years a legislative recognition of ethical finance in accordance with clear and stringent criteria.

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Several papers published by the global alliance for banking on values (GABV), a network of sustainable banks, show that sustainable banks lend almost twice as much in proportion to their total assets as banks that are too big to fail. In recent years while a severe credit crunch has hit Italian households and businesses, Banca Etica has continued to increase its lending, supporting in particular the world of nonprofits, projects with a positive social and environmental impact, and job creation or preservation. A survey from a few years ago showed that nearly half of the organizations that received a loan from Banca Etica had previously been rejected by at least one other bank. At the same time Banca Etica works with a net delinquency rate around 1%, while the average for Italian banks is 4.8%.

This is an increase of loans, granted to customers that are often considered too risky by other banks, with a delinquency rate which is not merely equal or slightly better than the average for Italian banks, but more than four times lower. Banca Etica's deposits and loans grew by more than 10% in 2016, supporting nearly 9,000 projects in the areas of social cooperation, international cooperation, environment, culture and civil society, and the new economy.

The model is proving better not only from a social and environmental point of view, but also in economic terms. This model should therefore be at least recognized and ideally promoted together with the traditional one. We do not mean to somehow build a fence or some sort of reserve for ethical finance, quite the opposite. Indeed, recognizing and catering for the specificities of ethical finance is the first step in overcoming the "one size fits all" approach that characterizes much European financial regulation, where rules are too often tailored to the needs of the larger banking groups.

In order to change finance and to avoid the disasters of recent years it is necessary but not sufficient to confront the Directives and the Regulations arriving from the European institutions. Civil society organizations and networks can no longer limit themselves to playing defense and "counter-lobby". We should adopt a proactive approach and work for the recognition and promotion of a different financial system. We should work for a system where finance is a tool at the service of society and not a goal to make money out of money in the shortest time possible; for a system that operates with full transparency, ensuring participation and evaluating all non-economic effects of economic activity; where sustainability holds together economic, environmental, social and governance aspects.

These are some of the keywords of ethical finance. With this legislative recognition in Italy, a major step forward has been made. However, it is only one step in a long journey. That journey must now also start on a European scale.

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