What is ethical finance?
Blog //21-07-2022

What is ethical finance?

by Amanda Grant, Chief Product Officer

Today, more than ever, there’s an expectation on businesses to operate ethically. It can be difficult to know exactly what this looks like, as it can be a somewhat abstract or subjective concept. And there’s also the question of what this means for finance teams specifically.

In this article we explain what ethical finance is, including the origins of this trend and the components it is made up of. We also highlight some barriers to ethical finance and the benefits of implementing it, while giving our top tips on how to make your finance team more ethical.  

Understanding ethical finance

Profitability, revenue, income, expenditure, financial health, growth, and the bottom line, are just some of the metrics used by finance teams to judge the success of their business. There’s no doubt that these must continue to be important. But it’s no longer feasible for financial targets to be the only measure of success. And it’s not an option to hit financial targets by any means necessary (without facing some negative repercussions).

If profit is the only driver behind every decision, morality may be bypassed completely. Profitability must be strived for in conjunction with other value-driven goals. If the business builds ethical foundations (in terms of culture / best practices), then every financial decision will pass through this filter too. As we’ll come onto, it’s important for finance teams to think about the impact they have on the people and the world around them.

So where did this trend originate? The rise of the internet / social media certainly led to greater visibility around ethical concerns that would have previously remained hidden. There’s greater awareness around aspects like mental health too, meaning there has been a bigger emphasis placed on wellbeing and the way people are treated at work.

There’s also a clearer understanding of climate change and the impact companies are having on the environment. And, due to better frameworks being put in place, it’s easier for employees, customers and business partners to speak out if they feel they have been treated unfairly in the workplace.       

What are the components of ethical finance?

  • Environmental

Ethical considerations in the business world tend to fit somewhere within the ESG framework. The first part of this acronym relates to anything environmental. Green finance is any finance-related activity that boosts eco-friendliness. This can be achieved by partnering with businesses that have green credentials. It also helps to have green initiatives throughout the organisation, such as getting involved with environmentally focused charities. Companies should look to operate sustainably, as this reduces waste while enhancing their efficiency.  

  • Social

The Social component of ethical finance is when a company’s financial activity has a positive impact on the surrounding community. This could involve charitable action that helps social causes in the local area. And employees could be given designated time during the year to volunteer for these causes, so they can give something back. If a business is financially wasteful or reckless, they may detriment those around them, including their own people.  

  • Governance

The way that a finance team approaches governance can have a big say on their moral impact. For example, remaining compliant in an increasingly progressive industry is one way to be ethical. It’s also linked to the way they self-govern, which can include their structures and hierarchies. They should be transparent about the way money is generated and where it is spent, so that stakeholders have complete visibility. And they should also ensure fairness around aspects like recruitment and pay, as well as progression / promotion opportunities.  

What are the barriers to being ethical in finance?

  • No central definition

As we’ve touched upon, morality can be ambiguous in some regards. But finance managers should at least try to define what being ethical means for their team, so that there is a framework for them to refer back to. Without this definition, employees will likely be unaware of how they’re expected to behave / act in certain. It also means they may attempt to interpret morality in their own way, leading to an inconsistent approach across the organisation (with regards to aspects like investments).  

  • Lack of industry-wide best practices

It shouldn’t just be up to businesses to determine how they implement ethical finance. There should be some industry-wide guidance they can lean on too. Without some form of existing template, it may be difficult for finance teams to get ethical initiatives up and running. It can be crucial to get the right tools / structures in place so that employees can conduct themselves in the way you want them to. Industry guidance can make it easier for finance teams to know which morality metrics they should be measuring and improving.  

  • Conflict of interests

Sometimes there can be a scenario in which finance employees want to make a difference ethically, but those at the top haven’t bought into the idea. This can completely stifle the adoption of ethical finance, as, after all, these individuals are the key decision-makers. Perhaps they are unaware of the shift towards ethical finance (and the associated benefits), or they fear it could be a risk to the business’s profitability and productivity. It may require an intervention from finance employees to educate / persuade them about this matter.

  • Low awareness

There may be a low awareness, not just among senior figures, but across the company generally. If they are particularly out of touch with the industry or their client base, this trend may have passed them by. The finance sector is evolving continuously, so it’s crucial to stay on top of any changes, otherwise new strategies that are beneficial will never materialise.  

  • Fake ethics

There’s a risk that some businesses will promote themselves as being an active player in ethical finance (to paint themselves in a more positive light) while in reality doing very little to contribute to this. One example of this is ‘greenwashing’, where companies exaggerate their environmental contribution to reap the rewards. This is a significant hindrance to ethical finance, as externally it will be very difficult for people to know the company is faking their ethical stance, meaning they can’t influence change.

What are the benefits of ethical finance?

  • Improved reputation – Companies that are known to be a force for good will enjoy greater brand positivity.
  • Improved cash flow – Prospective customers, lenders, investors and partners are more likely to put their money into an ethical business.
  • Better talent retention – The workforce is more ethically-conscious, meaning they will choose their employer carefully.
  • Higher productivity – Existing employees can be more motivated if they are part of a cause they believe in.
  • Remain compliant – ESG-related legislation continues to evolve.
  • Remain relevant – The shift towards ethical finance means those well-positioned will be future-proofed.

How to make your finance team more ethical

  • Create some core values

The business should implement some central values to clear up any moral ambiguity and to create a consistent brand image. This also keeps everyone pulling in the same direction. There should be a clear framework when it comes to financial decisions, such as how finances are managed, which businesses can be partnered with, and what kind of investments can be made.  

  • Involve employees

It’s important to get the finance team involved with the creation of ethical practices, as they may have some of the best ideas. And they will be more likely to embrace these changes if they feel they have been a part of the process. Having an open conversation with stakeholders also ensures the business taps into the values they care about most.  

  • Provide training

Any new starters in the finance team should be given the appropriate training so that they fully understand how they’re expected to operate from an ethical perspective, and how they should represent the company. This includes any frameworks they should adhere to. And finance managers should keep existing employees updated if ethical expectations change.  

  • Align values with company goals

With regards to the ethical values and initiatives that are put in place, it is sensible if these are aligned to existing business objectives in some way. This means the team can remain ethical while continuing to hit growth / profitability targets. Finance teams, for example, could look to streamline their accounting processes, which would increase both their efficiency and sustainability.   

  • Have ESG initiatives

There should be dedicated ESG initiatives set up within the finance team, to increase accountability for these types of activity. There should be goals related to these initiatives, and performance should be measured to see if these goals are being achieved. A common example is for a finance team to measure their carbon footprint, with perhaps the target of reaching net zero. This would improve financial performance too as reduced energy usage would lead to lower costs.    

  • Reward ethical behaviour

If ethical behaviour is incentivised, it stands a better chance of spreading among the team and becoming a part of the culture. People could perhaps be nominated for moral behaviour or given prizes if they have exceeded certain ethical targets.

  • Lead from the front

Finance managers should lead by example with the way they want their team to perform and behave. If they are not seen to abide to the ethical values that have been put in place, this can filter down to the wider finance function. 

  • Recruit a diverse team

A finance team should be made up of a rich blend of individuals with a range of different backgrounds and experiences. The hiring process should be fair, recruiting people for their track record, competence demonstrated, and suitability (in terms of team chemistry and company values). It can be useful to prioritise particular moral traits when looking to build an ethical team.   

  • Celebrate your achievements

It’s important to shout about your successes, if, for example, ESG targets have been reached. It can encourage ethical employees to keep going if they see their hard work is celebrated. It shows them that they’re working towards something too. It also demonstrates your morality to the outside world, increasing your chances of attracting talent and gaining new business.   

Using technology to be more ethical

At Advanced, we provide a Cloud-based accounting solution called Advanced Financials. This software helps finance teams to be more ethical by streamlining their accounting processes. Higher efficiency means that time and energy wastage can be kept to a minimum. The system has dedicated finance functionality for the likes of expense management, asset management, accounts payable/receivable, purchase management, sales invoicing, bank reconciliation, credit management, and much more.

The software automates the manual aspects of these activities, giving finance teams more time to get involved with environmental / social causes. Cloud-based technology facilitates remote working for employees, ensuring they can reduce their carbon footprint by commuting less. When you combine Cloud functionality with centralised finance processes and sophisticated reporting, visibility increases drastically, ensuring costs can be reduced and unethical methods can be rooted out.  

 

If you’re looking to make your finance team more ethical, while gaining the benefits that come with this, be sure to read more about our Cloud-based accounting software 

Blog Advanced Financials Financial Management
Amanda Grant

Amanda Grant

PUBLISHED BY

Chief Product Officer

Amanda joined Advanced in 2018 and was promoted to CPO in 2019 following a successful stint as Product Strategy Director, being responsible for the correct investment decisions.

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