What Is a Building Society?  

Building societies are a kind of financial institution unique to the UK, Australia and New Zealand. Like credit unions, they’re owned by and responsible to their members rather than shareholders. But their mission is slightly different than credit unions, and it’s right there in the name.  

Building societies focus on providing mortgages and other services that help members buy homes. All very pro-social – and one might expect that, as a pro-social organisation, not burning down the planet that those houses stand on might be important to them too. 

And obviously, since their focus is on loaning money for homes, they’re not going to loan out money to develop fossil fuels, right? Right?!  

We wish we could say yes. But the answer is...it depends. 

Measuring the Green-ness of Your Building Society 

If you read our article about credit unions, you know that in the UK, credit unions generally aren’t large enough to provide loans to develop fossil fuels, but in the US, several are. 

In the UK, some of our building societies have enough financial power to make a significant positive impact on our much-needed green energy transformation. But it also means that some of them are large enough to invest in fossil fuels. And, unfortunately, whether large or small, any financial institution is capable of greenwashing. 

Here at Bank.Green, when we evaluate the climate-friendliness of financial institutions, we ask four questions: 

• Do they lend to companies involved in the fossil fuel sector (and if not, do they have a clear policy about it)? 
• Do they measure and disclose the greenhouse gas impacts of their lending? 
• Do they have credible climate targets? 
• Do they offer green lending products for customers? 

Using these questions as our guide, let’s dig into how the building society sector (and some specific institutions) measure up. 

Building Society Loans to Fossil Fuel Companies 

Seems like an obvious question, with an obvious answer: Building societies are set up and owned by their members, with their sole purpose to finance mortgages for their members, so they shouldn’t contribute to fossil financing…right? 

The short answer is: probably, yes. But the answer isn’t as black or white as you’d expect. 

Fossil Fuel Companies Sing: Hey, Big Lender, Lend a Little Cash to Me 

Most building societies also make commercial lending loans, which are loans to a business. This could be a loan to the person who started the cute little soap shop that just opened on your high street. But it could also be a loan to buy the property down the block where the new petrol station opened. A clear policy stating “we don’t write commercial loans for the fossil fuel industry” would be helpful. But most don’t have one. (Many of the ones that do have a Great or Good rating in our UK League Table.) 

And, if the institution is large enough and has a high enough percentage of business in commercial lending, it could be to develop a gas pipeline or oil platform. Most building societies only have 1% of their total loans in commercial loans. But a few, such as Bath Investment and Building Society, Cumberland Building Society, and Yorkshire Building Society, loan far more. The key question is: How do we know whether or not those commercial loans are supporting fossil fuels? 

Disclosure: When a Financial Institution Reveals All (of Its Fossil Fuel Investments) 

The best way for a building society to reassure us that they’re not investing into fossil fuels is to be transparent about it. And the processes for this already exist. Going through an external disclosure platform such as CDP, or aligning with the industry reporting standard, PCAF, is an easy way for building societies to publicly demonstrate their support for a just and equitable climate future. Plus, it gives them a little green star that they can demonstrate, to show how sustainable they are! 

Since it’s so easy, and since so few building societies are actually investing in fossil fuels, you’d expect that most of them would have gone through this process. Yet as of the time of writing, only three UK building societies – Ecology, Nationwide and Skipton – have measured the carbon footprint of their lending using the industry standard disclosed with PCAF, while only two of the three UK building societies with a high percentage of commercial loans – Coventry and Yorkshire – have disclosed with CDP. Unfortunately, they’re not exactly on track for first class honours. On CDP’s scale of A to D, they’ve only achieved ratings of ‘C’ in 2023 and 2022 respectively. Here’s hoping they’ve pulled their socks up for 2024. 

So, why aren’t most building societies disclosing their fossil fuel investments? 

Agency Book Arrangements: A Legal Requirement (and a Back Door to Fossil Fuel Investing) 

The UK financial system has a little quirk. All UK building societies (other than Nationwide) are required to deposit funds into larger commercial banks in order to access payment services and ‘cover’ their payment activities. If this sounds like a rule that huge banks would set up in order to have even more money to invest...well, we do know it is a rule set up by the large commercial banks, although we cannot definitively say that is the reason. This relationship is called an ‘Agency Bank Arrangement’. 

These relationships are about as transparent as the Thames after a sewage discharge. But we did some detective work using the one breadcrumb they leave behind: sort codes. 

A sort code is a six-digit number that identifies a particular financial institution. UK financial institutions use them to transfer money between themselves. The first two digits identify the bank. For example, ’20’ = Barclays. The last four refer to a specific branch or location of the institution. 

How Green Are Building Societies’ Agency Banks? 

Using available online data, initial Bank.Green research found that 38% of UK building societies deposit their customers’ funds into banks with “good” or “great” ratings, namely: Co-operative Bank, Nationwide and RBS. However, the majority, an alarming 62%, do not. Instead, they put their customers’ funds into some of the worst fossil fuel financiers, including Barclays, HSBC and Lloyds. 

In a word: yikes. So why don’t they do better? We asked, but we didn’t get very many answers. Kevin Gray, who is the CEO at Bath Building Society, said, “The level of deposit will depend on the likely largest daily net outflow of funds that an institution might expect the bank to pay to avoid overdraft and costs. This will be different for every institution.” In the case of Bath Building Society, they try not to keep too much in the way of funds with their clearing bank, because their clearing bank doesn’t pay interest. 

Why Not Partner with a Green Bank? 

Well, good on them for minimising the amount of money they’re putting with these climate destroyers. But why not switch to a great holding bank, rather than sticking with the dirty one they’re with? 

The answer is pretty similar to the one you get when you ask your mum why she doesn’t change to a greener bank. They’ve been with them for a long time, the current partner institution offers services that another might not, and gosh, it’s just such a hassle. 

Are Holding Banks Using Building Society Funds for Fossil Fuels? 

We called many holding banks to ask if they were using funds from building societies for fossil fuel loans. They didn’t respond. It’s possible they are neatly keeping this money segmented away. But we doubt it. 

Building Society Greenhouse Gas Impact Disclosure 

Lots of financial institutions promote that they are “going green” through feel-good but ultimately meaningless policies such as eliminating plastic straws or rewarding workers for biking to work instead of driving. What they aren’t willing to talk about are how many emissions their loans produce.  

Some of this is understandable. As the consulting firm McKinsey points out, “The process of assessing and setting targets for financed emissions is far from simple. It involves multiple complexities arising from differences between sectors, geographic variation, shifting counterparty plans, changing industry standards, and a nascent and rapidly evolving data environment, to name a few forces.” Tl;dr: it’s complicated. 

WIth that being said, few building societies have indeed rolled up their sleeves and made the big reveal, and we’d like to celebrate them here: 

• Coventry Building Society 
• Nationwide Building Society 
• Ecology Building Society 
• Leeds Building Society 

Credible Building Society Climate Targets 

Another way for a building society to up its game is through the internal and external policies it is putting in place to align itself with science-based climate targets. Publishing a climate or sustainability action plan with clear short, medium and long-term targets and internal governance mechanisms to ensure accountability shows that they're committed to taking action. 

But most building societies show a decided fear of commitment and are unwilling to set any sort of a public target. There are a few brave ones that are paving the way. These shining superstars are: 

• Coventry Building Society 
• Yorkshire Building Society (and Chelsea Building Society, whose policies are controlled by YBS) 
• Nationwide Building Society 
• Ecology Building Society 

Building Society Green Lending Products 

There are a couple of different types of green lending products that building societies can provide. One is to provide a better rate on mortgages for homes that are well-insulated, energy efficient, and don’t use coal, oil or gas for heat.  

But, as we all know, two thirds of homes in the UK are not energy efficient. Those homes need retrofitting to become both more energy efficient and more comfortable to live in. As the Financial Times has pointed out, the banking sector (including building societies) could help this by “approving long-term loans for retrofit work as part of a mortgage.” 

Fortunately, there are some building societies that do exactly this. They are a small fraction of the sector, and they are providing a model that other institutions should follow.  

• Coventry Building Society offers a lower rate if you are borrowing money for energy efficiency improvements 
• Nationwide Building Society gives cash back if you buy an energy efficient home and offers loans for energy efficiency improvements with 0% interest for the first several years. 
• Ecology Building Society offers special rates for self-builds, renovations and conversions that meet specific Energy Standard ratings.  

Building Societies Need to Deliver on Their Green Potential 

Building societies may have the easiest route to going green of any type of financial institution in the UK. All it takes is a little disclosure, a couple of green lending products – and maybe a switch to a different holding bank. A few are on their way. We hope that the rest will turn green, but we won’t hold our breath until we turn blue while we wait.  

If you want your money and your mortgage with a truly green building society, check the Bank.Green Sustainable Banks listings. Make the switch and tell your old financial institution why you’re leaving. It may be the kick in the assets they need to invest in a greener future.