Focussing on what is considered to be right or wrong is nothing new, and is commonplace in our world today, be it financial or social. Moreover, doing something considered to be wrong or unethical, as in the case of some banks, financial institutions and even individual traders in recent years, can both cost and generate, depending on who you are, significant amounts of money.
Over the last few years, the revenue generated through raising fines on financial companies has made a significant contribution to government finances. In the UK, fine revenues became so significant, that in April 2012 the law was changed to allow the money received from such fines to go straight to the Treasury. In the US meanwhile, regulators are seeking to maximise revenue by offering a reward of as much as 30 per cent of the fine to so-called whistleblowers providing material evidence against the perpetrator. With the public and political will in place, regulators have started turning ethics into big business.
In recent years, ethical behaviour has become an increasing area of concern for banks. Avoiding fines has been a major driver of management attention, but deals with regulators have in some cases paired fines with more intangible cultural change objectives.
Following the record money-laundering fine in 2012, the Wall Street Journal estimated in 2014 that one-in-ten staff at HSBC’s investment banking division were involved in compliance. These roles were not only in monitoring and reporting, but also in seeking to change the mind-set and awareness of staff throughout the bank. Similarly, Deutsche Bank made headlines in 2014 when Colin Fan, co-head of the investment bank, issued a video warning to traders about their behaviour, saying:
“Being boastful, indiscreet and vulgar is not OK. It will have serious consequences for your career. And, I have lost patience on this issue.”
His comments were seen as a watershed moment in banking where ethical concerns spread beyond the bottom line.
One ethical area where public mood is not matched by banking or regulator response however is the controversial issue of short-selling. Short-selling is the process by which speculators can make returns from a drop in value of a stock.
Public opinion holds that short-selling is unethical as it allows people to profit from a market downturn. In some cases, short-selling has been blamed for market crashes. Conversely the industry maintains that short-selling is little different ethically from a standard transaction. In addition, short-selling plays a significant roll in enabling liquidity and increasing market efficiency. Bans on short-selling have been implemented in some jurisdictions, but the debate continues as to whether this has any significant ethical or market impact.
Ethical investment has also found significant favour in recent times. In 2013 the UK retail banking sector was worried about the impact of a grassroots ‘Move Your Money’ campaign that encouraged high-street consumers to relocate their bank accounts and savings to organisations with strong ethical backgrounds. One of the major beneficiaries of this campaign was Triodos Bank. Triodos invests in environmental projects and social schemes including housing and care for the elderly. Triodos’ ethical credentials even spread beyond its investments and into financing for charities and a management team that is 40 per cent female.
Ethical banks and other financial organisations typically have charters that prevent them from making excessive profits. This has allowed these organisations to offer favourable returns to small investors despite the reduced diversity of their investment portfolio.
One organisation that believes an ethical return can be just as strong as a standard investment is FTSE. Since 2001, FTSE4Good has run a series of indices comprising organisations that meet its Environmental, Social and Governance (ESG) criteria. These indices allow the creation of index-tracking investments and other financial products with returns approximately equivalent to the FTSE100.
A 2011 report by the Co-operative Bank in the UK showed that sales of ethical goods and services jumped from £13.5 billion in 1999 to £46.8 billion in 2011. This represents around 6 per cent of all consumer spending. Currently the trend shows no signs of abating, and ethical investment and its associated issues will no doubt continue to be a source of revenue and debate for many years to come.