Introduction to Ethical Finance
Ethical finance has changed how financial institutions make and execute financial decisions. Ethical finance refers to financial decisions and activities that promote fairness to human being and sustainable environment (Boatright, 2010). Ethical finance involves investing to support environment and the people, avoiding discrimination in lending and use of money as means not an end (Gangi, & Trotta, 2015). Financial institutions have to operate in a generally accepted code of conduct while pursuing shareholders interests. Today, the world is highly interconnected and one entity decision has impact to several other entities either human beings or environment that can be positive or negative. Ethical financial theory puts forward that organizations should use their finances to positively impact humanity and conserve the environment in its sourcing, management and investing of funds. The following essay explains the major considerations of ethical finance in business. This will involve considering all aspects of the theory of ethical finance.
Finance is a critical part of any organization. Finances are neither bad nor good and are used to achieve an end. This can be speculative or supportive and collective for general well being. A speculative approach to finance in an organization leads to negative externalities while supportive and collective approaches enhance positive externalities. Ethical finance is sustainable and continuously increases stability of assets and volume of activities in the long term (Goyal, & Joshi, 2011). This delivers benefits to all organization’s stakeholders. Ethics in finance are therefore essential in managing an organization financial resource because they determine what has positive or negative externalities impact. Ethical finance can be explained in the following components; financial markets, financial management and financial services. These components define all financial activities that a financial institution or department is involved with and require high standards of values and morals to achieve ethical finance.
Financial markets are at the center of financial institutions in trading financial resources. Financial markets enable organizations to acquire funding from stock exchange investors. Financial markets trade equities, currencies, bonds, and derivatives. Financial markets are highly vulnerable to ethical issues that create moral dilemmas. The financial markets are characterized with asymmetric information between the parties trading. The ethical consideration in the financial market is fairness. Fairness in the financial markets can be achieved either procedurally by enabling buyers to determine actual price of securities or substantively by ensuring security price reflect actual value (Nielsen, 2010). Financial markets are important for organizations to source capital and several unfair practices have to be considered for ethical sourcing of funds. First, the financial markets need to be fair in trading practices. The financial markets with unfair trading practices fraud and manipulate investors. This leads to unfair treatment of investors who lose confidence to the integrity of the finance market. Excessive unfair trading markets can lead to finance market crashing (Aktas, De Bodt, & Cousin, 2011). Ethical financing requires stock value to be determined by forces of demand and supply to avoid inflation of values that manipulate investors. Another ethical issue in the financial market is fair conditions. This refers to concepts of level playing field. This is caused by asymmetry information and lack of bargaining power, processing ability, or resources. Most investors in the financial market have limited or unequal information with the stock brokers. Lack of information make it hard to investor to make informed decisions when investing their resources in a company. Inequalities in bargaining resources, processing ability or power in the financial markets disadvantage investors’ ability to make independent judgment when investing. The ethical finance require companies to ensure transparent and accessible stock information to ensure investors are not subjected to unfairness when sourcing company’ funding.
Components of Ethical Finance
The second major component of ethical finance for consideration is financial services. Financial institutions provide financial services to individuals, governments, and businesses create a agency relationship. The financial institution has to act on behalf of the entity that requires funds in several ways that require high standards values to remain objective. First, the ethical finance requires financial institutions to ensure integrity when acting on behalf of another entity. The financial institution enters into agreements in financing that can led to conflicts of interests. The conflicts of interests can either be in terms of confidential information or higher returns the financial institution. For instance, the finance institution can advice the client on the financial service that the financial institution gets the highest interests instead of what is of the best interests to the clients. This therefore requires financial institutions to be ethical in agency relationship and uphold integrity. The financial institution should also not use confidential information to their benefits as it bleaches values of honesty and trust. Another ethical finance issue in financial services is sales practices. Sales practices refer to selling of an institution financial products. Selling is vulnerable to deception and making inadequate disclosure of the product information. Financial institution can deceive a client with an objective to sell larger amount of a financial product (San-Jose, Retolaza, & Gutierrez-Goiria, 2011).
Financial institution can also fail to disclose crucial information such as degree of risk or twisting of information that influence consumers to make information based on vague or inadequate information. According to ethical finance theories, financial institutions have an obligation and should refrain from deception and ensure that there is adequate disclosure of material information (Housby, 2013). Failure to act ethically and disclose financial information when selling financial products is a fraud and abuse to customers who can file criminal charges in courts of law. These disputes have negative effect to the organization reputation and the organization is fined. Lastly, financial services raise ethical issues in investments. Financial institutions directly invest funds in projects or lend a third party to invest and earn interests. The financial institution need to consider social factors when making investments decisions. They should also consider investment impact on the environment. This ensures that no funds from the financial institution are invested in projects that lead to negative externalities (Gitman, Juchau, & Flanagan, 2015). The ethical finance theory requires finance institutions to examine destination of money and ensure it oriented towards positive environmental, social, or economic impact.
Financial Markets
The other major consideration of ethical finance is financial management. Financial management involves making financial decisions that involve acquiring, investing, and recording financial information for financial reporting (Brigham, & Houston, 2012). Financial managers are entrusted by investors to make decisions that are of best interests to maximizing their wealth. The financial managers therefore have to be ethical in handling finances to ensure all stakeholders benefit or their decision enhance positive change to the society. First, the financial management should balance competing interests. Financial decisions should balance the interests of the shareholders and other stakeholders. Such decisions include levels of risks and hostile stakeholders. Financial decisions should balance the level of risk that an investment has while pursing shareholders objectives of maximizing wealth. This entails that financial management decisions should not overlook level of risks to avoid foreseeable losses that can negatively affect shareholder wealth. High risky investment strategies pose danger to all stakeholders. Another competing interest in financial management is executive management compensation. Excessive payments to managements create financial burden in the company thereby undermining the company ability to grow. Therefore financial decisions should balance interests to avoid conflicts of conflicts in the financial institution. Secondly, financial management should adopt professional accounting standards. This involves methods of recognizing, recording, and reporting financial transaction in the company. Financial reporting is an important aspect to making financial decisions regarding an organization. Accounting standards are susceptible to forgery and misappropriation that can mislead financial information users. It is unethical for a company to use wrong or unacceptable methods of recognizing items in financial statements. For instance, over valuation of assets can mislead investors’ decisions to invest. Financial management should avoid creative accounting where financial analysis and revenue management are misleading. Financial institution should therefore report accurately and responsibly using established rules, laws, and standards that are generally accepted. According to ethical finance, companies to adopt integrated financial reporting that discloses all information of the company accounting financial accounts (Gangi, & Trotta, 2015).
In conclusion, ethical finance develops a fairer approach that is more equitable and forms an interaction between the humanity and environment. Ethical finance is sustainable and leads to positive externalities. From the essay, ethical finance major considerations are in financial markets, financial services, and financial managements. These areas are highly vulnerable to unethical decisions and behaviors that can lead to company’s failure or legal charges against the company management. The ethical finance theory puts forward that companies should consider origin of money in the financial market, destination, and values of money in financial services and management objectivity in financial management for ethical finance organization. The essay concludes that ethical business approach is holistic that enhances mutual benefits to all organization’s stakeholders.
References:
Aktas, N., De Bodt, E., & Cousin, J. G. (2011). Do financial markets care about SRI? Evidence from mergers and acquisitions. Journal of Banking & Finance, 35(7), 1753-1761.
Boatright, J. R. (2010). Finance ethics: Critical issues in theory and practice (Vol. 11). John Wiley & Sons.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Gangi, F., & Trotta, C. (2015). The ethical finance as a response to the financial crises: an empirical survey of European SRFs performance. Journal of Management & Governance, 19(2), 371-394.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Goyal, K. A., & Joshi, V. (2011). A study of social and ethical issues in banking industry. International Journal of Economics and Research, 2(5), 49-57.
Hudon, M., & Sandberg, J. (2013). The ethical crisis in microfinance: Issues, findings, and implications. Business Ethics Quarterly, 23(4), 561-589.
Housby, E. (2013). Islamic and Ethical Finance in the United Kingdom. Edinburgh University Press.
Nielsen, R. P. (2010). High-leverage finance capitalism, the economic crisis, structurally related ethics issues, and potential reforms. Business Ethics Quarterly, 20(2), 299-330.
San-Jose, L., Retolaza, J. L., & Gutierrez-Goiria, J. (2011). Are ethical banks different? A comparative analysis using the radical affinity index. Journal of business ethics, 100(1), 151-173.
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