Defining Alternative, Ethical and Sustainable Finance

“In 2013 banks with business models based on the Principles of Sustainable Banking have once again demonstrated higher financial returns than the largest banks in the world. These sustainability focused banks, with a social, environmental and economic triple bottom line at the core of their business models, deliver these results while continuing to be focused on meeting the needs of their clients through lending and deposit products.”
GABV (2014)

What Does Alternative Finance Mean?

The general meaning of the world alternative is:

“(Of one or more things) available as another possibility or choice”, “(Of two things) mutually exclusive” or “Of or relating to activities that depart from or challenge traditional norms”

The three definitions above derive the means of alternative from the chance to choose between at least two options, they refer to something different from a first option that it possible to call traditional. For this reason in order to better understand what is alternative finance we must firstly define which is the other option, the traditional or mainstream finance.

What is a mainstream financial institution? It is possible to agree that the main specificity of a mainstream financial institution is to be profit-driven. From this very simple point of view, an organization that would like to be alternative should have to be somehow different from a purely profit-driven financial institution. Anyway, comparing qualitative and quantitative data from alternative finance to mainstream one will help to define the features of the former and the latter, if there are effectively differences, and which are those differences.

What Does Ethical Finance Mean?

The main problem with all the phenomena defined as ethical is that this word’s mean does not include any value in itself: ethical is just something that takes in account values in its behavior, process, or in its rapport to any other entity.

For example a person could have an ethical behavior referred to libertarian values as explained by Rand, Nozick, Rothbard and others, but, this behavior should be different from an ethical behavior based on communitarianism theories as explained by Sandel or Demaria, anyway both the behaviors should be considered ethical because derived from a defined scale of values.

Furthermore, a person could follow Christian ethics or Muslim ethics, both could be defined as ethical people. We can apply the same framework to financial institutions and their products.

This consideration about the ethical word void in terms of values raises a problem in looking for a finance ethicality definition.

What Does Sustainable mean?

The adjective sustainable referred to finance has been already developed by GABV, which proposes six principles of sustainable banking:

Triple Bottom Line approach: a way to run the business that takes in account people (social impacts), planet (environmental impacts) and prosperity (economic impacts);
Grounded in communities, serving real economy;
Long-term relationships with clients;
Long-term, self-sustaining, and resilient to outside disruptions,
Transparent and inclusive governance;
All the previous principles embedded in the bank’s culture.

Are you interested in understanding what are the features that influence the performance and the resiliency of these Sustainable Finance institutions, and when it is possible to define a financial institution or product as sustainable, alternative ethical or social?