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Ethical investment decoded

by
23 October 2020

Can you tell your SIs from your ESGs? Christine Miles takes an up-to-the-minute look at ethical finance

istock 

Renewable energy is one positive investment area

Renewable energy is one positive investment area

THIS summer, the online clothing retailer Boohoo became the latest company to hit the headlines over allegations of slave labour in its supply line.

In an independent review conducted by Alison Levitt QC, allegations that the company paid its Leicester-based factory workers below the minimum wage were found to be “substantially true”. The company was also accused of poor governance and “inexcusable” failures to assess the risk to workers during the pandemic.

In response, the Labour MP for Leicester West, Liz Kendall, has written to shareholders this month, asking them “to demand a new chair and CEO to lead the changes the company and the people of Leicester desperately need”.

The scandal, and the company’s subsequent promises to implement change, highlight the ongoing demand for business and ethics to meet.

This has been the basis of the growth in the development of the ethical-investment market: a sector that has fared well during the volatility of the financial markets hit by the pandemic and a drop in oil prices.

According to the director of Good Money Week (GMW), Charlene Cranny, research by Morgan Stanley on fund performance between 2004 and 2018 showed that sustainable funds performed just as well as non-sustainable funds. “That held true during the pandemic,” she said. In fact, “sustainable funds performed better. There is no compromise that you have to make financially. And, during the pandemic, interest has shot up. The performance has been clearer than ever.”

The increase in interest in ethical investing “can also be seen by the large number of funds being launched,” says Neville White, the head of responsible investment at EdenTree, part of the Ecclesiastical Insurance Group — “not only by established investment companies, but by new companies, people like BlackRock and Vanguard launching specific sustainability products.

Valley House staff outside one of their houses in Coventry, assisted through finance provided by the Social And Sustainable Housing (SASH) fund, launched in May 2019. The Valley House charity provides supported housing for young parents without family help, and victims of domestic violence

“We’ve seen so many launches — I think, probably more than in any other single period prior to the pandemic. And, of course, these are also backed up by hundreds of millions of dollars in terms of investment. They wouldn’t do that if they didn’t see that that there was a return involved.”

The UK Investment Association (IA) gives the best estimate of the size of the UK sustainable-investment (SI) market in 2020, Ms Cranny says. The IA membership manages a total of £7.7 trillion, and they estimate the size of the UK SI market to be £2 trillion, or 26 per cent of the market.

This market’s effect has “made a huge difference in terms of changing corporate behaviour”, Ms Cranny says; and Mr White believes that “it’s absolutely true that all of the individual engagements that fund managers are doing, individually and collectively, is having an enormous effect on business.”

 

ETHICAL-investment options exist right across the financial sector, from funds and bonds to bank accounts and savings, and have moved into newer areas of finance, such as funding platforms.

The positive-investment platform Ethex acts as a one-stop shop, promoting financial products related to three main themes: fighting climate change, reducing poverty, and building resilient communities. In addition, the website operates a secondary market in which the shares of unlisted ethical companies are bought and sold.

The CEO of Ethex, Lisa Ashford, says that the platform has received more investment so far this year than the whole of last year. “Obviously, there are people in absolute dire straits at the moment, having lost their jobs.

“Those who have managed to retain their jobs have found themselves with potentially more disposable income, because they are not spending it on all of the things they would have done before; and, with interest rates so low, they are looking for places to put their money.”

 

EDENTREE launched its first ethical fund in 1988, when there was only one other product in the market. “There was very little choice in the ’80s or ’90s,” Mr White says. “If you are a private investor wanting to invest for good, you’ve now got such a breadth of different types of products to put your money in to achieve your values and your particular interests, which just weren’t there 20 or 30 years ago.”

But, now that the marketplace is becoming more crowded, “differentiation of what those products actually can offer the client becomes really important”, he says.

A Bukonzo farmer, Mary Kalyatha, at home with her family. Based in western Uganda, the Bukonzo Organic Farmers Co-operative Union is one of the few coffee co-operatives in Africa managed by women. The co-­operative has been supported with finance from Shared Interest

“The terminology has changed really rapidly: it’s gone from ethical to SRI [social and responsible investment], which has now practically disappeared, to ESG [ethical, social governance] to sustainability. This can act as a barrier in terms of the underlying investor really understanding what the product is about. . .

“There is a danger with some of the new products: they have a very light touch, and so it’s quite hard to really drill down and see what makes them sustainable, what makes them ESG, unless they define it for themselves. So, there is some work to be done.

“Certainly, with our funds, we define ourselves as responsible and sustainable; so the business responsibility is really important, and we define for clients what those funds are there to do, in order to avoid any charge around ‘greenwash’” [conveying a false impression that a company is doing more to protect the environment than it really is].

“Right now, anyone can use ESG and slap it on a fund,” Ms Cranny says. “There are no strict criteria around what the fund has to look like.”

Regulators and policymakers are currently working on this. Work going on by the EU and the Financial Conduct Authority in the UK “trying to nail down what sustainability means, what ESG means, what responsible investment means, what impact means — and making sure that investors are told what level [funds] are at in terms of quality: is it that 20 per cent of their holdings have a high ESG score, or is it 80 per cent of their holdings? This is the transparency that fund managers need to develop for their clients,” she says.

Because of overlapping sustainable investment approaches, and a general lack of consensus around definitions and standards, the Investment Association have created a Responsible Finance Framework to support more useful reporting from 2020. “That will hopefully give us a sense of size and quality,” Ms Cranny says.

EdenTree employs a process of negative screening, followed by positive engagement to offer screened investment products to both individual investors and charities.

Negative screening is the first hurdle,” Mr White says. “If a company passes that, we then look to see the way the company manages environmental issues, human rights, labour rights, corporate governance, business ethics, and community. . . Essentially we’re looking across those six areas, no matter what company we’re asked to look at, to ensure that they’re a good corporate citizen and worthy of going into the screened funds.”

Its “deeply sophisticated” approach means that EdenTree has been awarded Moneyfacts’ “Best Ethical Investment Provider” for the last 12 years.

 

 

TOP of the list of issues that people are concerned about making their money choices relate to climate change, Ms Cranny says.

Beyond that, “gender was top of the news in 2018, and there’s still a lot of work going on on gender equality. Race is where people are starting to turn their attention; so the things that we’re doing for women we’re also doing for ethnic minorities: things like reporting on the pay gap, things like seeking ethnic minorities to join leadership teams and boards.”

Funding through Sustainable and Social Capital’s SASH fund has provided a new home for this client of Baaca, a charity that provides sup­ported housing for unaccompanied minors seeking asylum, trafficked into the UK, or at risk of trafficking

Top concerns for EdenTree’s clients are climate change, biodiversity, and modern slavery, Mr White says. The company already does a great deal of work on gender diversity, and expects race to be a future area of concern.

“We always see interest in renewable energy, and clean, environmentally sound companies,” Ms Ashford says. One such positive opportunity that Ethex offers is to invest in Energise Africa: bonds issued by companies’ bringing solar-energy access to families in sub-Saharan Africa.

She has also noticed an increase in the number of initiatives for affordable housing. “Homelessness, and appreciating that people who are on the borders anyway are being pushed into more extreme poverty, is something also piqueing people’s interest.”

Good Money Week runs from 24 to 30 October this year, and is set to launch with a series of online guides to help people to get to grips with the new breadth of ways in which they can make money work for good.

“This year, we’re focusing on how we can use our investments, pensions, savings to build back better in the UK as part of an ethical and sustainable lifestyle,” Ms Cranny says. “We’ll be showing people how they can invest, even if they’ve only got £50, and other things they can do to support a greener, cleaner, healthier, and wealthier UK.”

goodmoneyweek.com

 

Good Money ideas

* To put pressure on your pension fund to align with Cop26’s net-zero-carbon-emissions goal, visit Make My Money Matter (makemymoneymatter.co.uk). The website has a tool to email your pension company and persuade them to commit.

* Good With Money (good-with-money.com) has online guides to pensions, funds, and more. It also has reports, ratings, and advice to help to get past the jargon.

* Check which investment funds have signed up to the European SIF Transparency Code at the Eurosif website (eurosif.org/transparency-code). For funds to receive, or sign up to the Transparency Code, fund managers have to report and publish exactly what’s going on in their fund.

 

Other ways to make a difference:

Put a roof over people’s heads

PCCs and dioceses that are wanting to invest long-term in helping to address some acute social needs might be interested in the Social and Sustainable Housing (SASH) fund, launched last year by the social investor Social and Sustainable Capital.

The SASH fund gives loans to charities that are providing supported housing to fund the purchase of safe, stable, and appropriate housing. Clients are typically those fleeing domestic violence, children leaving care, ex-offenders, asylum-seekers, people with complex mental-health issues, and people with drug or alcohol addiction.

Ten supported-housing organisations have so far qualified to receive loans from the fund, which will close to new investors in October 2021, by which time the ambition is to have £100 million under management.

Who: Investment is open only to UK registered companies.

How much: Qualifying PCCs, dioceses, and other church bodies need to invest a minimum of £25,000. The investment is for 12 years, offering a running return of interest over the next nine years before investors start getting their capital back. Interest is six per cent per annum over the lifetime of the fund.

socialandsustainable.com or email gilly@socialandsustainable.com

 

Boost fair trade

Shared Interest is an ethical-investment organisation with more than 11,500 members. Money is lent to fair-trade businesses in the developing world who may not normally be able to access finance, including farmers and handcrafters in remote communities. Shared Interest also supports the creation of markets for those goods, through buyer lending for fair-trade wholesale or retail businesses in the UK, United States, and Europe. Last year, Shared Interest investment amounted to £68.7 million, to 296 organisations in 55 countries.

Who: Share accounts can be opened by individuals (under-16s can be held in trust by a parent/guardian), couples, families, schools, businesses, and community and faith groups.

How much: Invest from £100 to a maximum of £100,000. You can invest by regular standing order from £10 a month. At the time of going to press, the interest rate offered to members was 0.25 per cent. Investments are not covered by any investmen- protection scheme, and interest is not guaranteed.

shared-interest.com/gb

 

Grab a coffee

Cafédirect, the UK’s first UK Fairtrade certified coffee company was founded in 1991 after the global collapse in coffee prices in 1989. Currently, Ordinary Shares in the company are available to investors via Ethex’s secondary market bulletin board. “An ethical company in the grocery retail sector, they’ve diversified away from coffee into tea as well; they’ve launched a premium range of coffees now from London Fields Roastery; they’re rebuilding their position in quite a dynamic marketplace,” the CEO of Ethex, Lisa Ashford, says. Cafédirect invests 50 per cent of its profits in its producers.

Who: Share accounts can be opened by individuals (under-16s can be held in trust by a parent/guardian), couples, families, schools, businesses, and community and faith groups.

How much: The minimum investment is 300 shares. Investments are not covered by the Financial Services Compensation scheme.

ethex.org.uk/ordinary-shares_873.html

 

Peer-to-peer lending

For individuals with smaller amounts to invest, the director of Good Money, Charlene Cranny, suggests peer-to-peer investment, using platforms such as Tickr or the Big Exchange (co-founded by The Big Issue). “Abundance has just started to launch the Community Municipal Bond, and those invest in local councils; so that’s one way you can invest in a local area,” she says. Another platform linking financial return with ethical and social capital investments is Crowdcube.

The public-benefit corporation Kickstarter funds creative projects and Indiegogo tech projects using a rewards model. Make the most of money invested by linking qualifying investments to an ISA, or the Innovative Finance ISA, launched in 2016 to allow people using peer-to-peer or lending platforms to use the ISA scheme.

Who: Various. With the Big Exchange, it is possible to get young people involved through a Junior Investment Savings Account.

How much: Variable: Tickr starts from £5; Big Exchange minimum is £100 lump sum, or £25 a month. Check the small print on any lending platform for any charges for transactions.

tickr.co.uk

bigexchange.com

abundanceinvestment.com

crowdcube.com

indiegogo.com

kickstarter.com

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