How can we tell if a “social bank” really is social?

Social Finance - Fri, 06/28/2013 - 07:21

By Siri Bosheim

Social banks use financial services to create a positive impact on society and the environment. They are characterized by having a primary goal of creating social and environmental impact, which implies that they avoid projects that are profitable but without social or environmental value. On a global level, social banks are organized in the Global Alliance for Banking on Values (GABV), where, amongst other Canadian institutions, Vancity is a member.

The question is—how are social banks different from mainstream banks in addressing social or environmental issues? While social banks claim to have a positive impact on society, they often have weak methods to verify this impact. 

Storytelling is often used as a method to demonstrate impact. While this is a useful tool for presenting a compelling case to lenders and borrowers, it is a weak method for demonstrating impact. After all, mainstream banks can use the same method and appear equally focused on social or environmental objectives. 

A bank creates its greatest impact through its role as a financial intermediary—through its selection of the projects the bank chooses to invest in. For instance, the Norwegian Cultura Bank places as much as 70% of their funds in social or environmental projects[1]. This is a high share, and is a strong argument for positive impact. 

But how can the banks communicate this impact, so that ethical consumers can make a well informed choices? Mymaster's thesis made the case for impact measurement. I argued that social banks need to start measuring more precisely how they contribute to social or environmental impact in order to differentiate themselves from conventional banks. 

My thesis analyzed the Dutch Triodos Bank and the British Charity Bank and studied how each approached the issue of measurement using two different impact measurement methods.

Charity Bank’s methodology is characterized by using the same impact measurement method across its entire loan portfolio. This is illustrated with a spider diagram in which every project is awarded a “score” on four consistent indicators. Triodos Bank’s in contrast, employs a more illustrative approach, whereby impact is illustrated across five sectors through the use of five indicators, (one indicator is assigned to each sector). 

To summarize the results, my analysis concludes that the main strength of Charity Bank’s methodology is to apply a single method to all projects, and the main strength of Triodos Bank’s methodology is that it is descriptive and easy to understand. The analysis also showed that to some extent, both banks follow the path of a “logic” model, emphasizing a quantitative measurement of impact through input --> output --> outcome --> impact. These conclusions are important for further research on impact measurement, because they highlight possible properties for new measurement tools.

Measurement is essential. It is is a way to verify impact and to provide conscious consumers with the knowledge that their money will be used to do good. 

[1] The remaining 30% is mainly for mortgages (see the annual report)