There is a growing trend of people wanting to be more connected to the impact of their money. As consumers, for example, we are increasingly concerned about more than just the taste of our food; we’re concerned about how crops are grown and animals are treated, too. That same trend is now gaining ground in how people think about savings and investments. Often, the process of investing is a bit like putting money in a black box – it is easy not to worry too much about what goes on inside, as long as the right numbers come out again. But in recent years, as some of the practices inside the box have come to light, we haven’t always liked what we have seen. As a result, more people are begining to think about what their money does, as well as what return they get.
The first step in this direction is often referred to as “negative screening”. This is where a fund manager will apply a list of ethical criteria and screen out those companies that could be considered to do social or environmental harm, such as those in industries like tobacco or weapons manufacturing. Most of the “ethical” or “socially responsible” funds available today adopt this approach to varying degrees. The best take a step further, adopting a positive screening approach. This means they don’t just weed out the unwanted companies, they actively seek those with strong ethical practices.
Social investment is another step on again. It means investing in organisations whose primary purpose is not creating shareholder value, but addressing particular social or environmental issues. Yet unlike making a donation, it is still an investment and should be expected to return the investor’s money at least in full, if not in some cases with a comparable market rate return.
The concept of investing for social benefit isn’t entirely new. Almost 500 years ago Sir Thomas White, a prosperous clothier and later Lord Mayor of London, used his wealth to provide loans to apprentices who were too poor to buy their own tools, helping them into a trade and out of poverty. But over the last 15 years or so, the social investment market has significantly accelerated. The infrastructure has become far more developed, while also – and most importantly – more charities and social entrepreneurs are exploring ways of using investment capital to generate more income and to deliver their mission. Here’s a look at some of the options currently on offer:
Social banks
An easy way into social investment is to open an account with an ethical bank such as Charity Bank or Triodos. Both offer savings accounts and ISAs, and both will use your money to make loans to charities and social organisations. Deposits with Charity Bank benefit from the protection of the Financial Services Compensation Scheme (FSCS), while savers with Triodos (part of Triodos Bank NV in the Netherlands), are covered by the Dutch guarantee scheme up to the equivalent of €100,000. Both banks currently offer savings rates of up to 1 per cent gross, with Triodos offering higher rates if you lock your money in for up to five years.
Unlike the “black box” approach of most other banks, Charity Bank and Triodos have sections on their websites providing information about the organisations they lend to. One such organisation is Lake District Calvert Trust, which offers people with disabilities access to outdoor activities in the national park.
In 2009 it began a major £3.8m investment to increase capacity and build a new hydrotherapy pool and sensory room. Charity Bank provided a loan as working capital over five years while the take-up of the recently extended facilities increases.
Community shares
Community shares are a unique form of share capital that can be offered by co-operatives and community benefit societies to raise finance.
Unlike ordinary shares in a company, community shares don’t fluctuate in value, but may pay a rate of interest and can usually be withdrawn in accordance with the rules of the society. Shareholders are also the members of the society, with each having an equal vote regardless of the amount of shares held.
Organisations with this legal form benefit from an exemption under the financial promotion regulations, making it possible for them to promote these shares directly to the public to raise capital. Often these societies have a focus in a particular local community, for example running community-owned shops or facilities. Many renewable energy initiatives are also formed as co-operatives to enable them to raise capital directly from the public. One example is Plymouth Energy Community, which installs solar panels on community buildings and schools, thereby reducing energy bills and using the surplus funds to tackle the challenges of energy costs, fuel poverty and climate change. Its first share offer in 2014 raised over £600,000.
Ethex and Microgenius are both investment portals that provide information on live community share offers.
Charity bonds
The public perception of charities is often that they rely entirely on money given to them through grants or donations. Many charities, however, also generate income by providing services under contracts with public sector bodies, or through trading. And where reliable revenue streams exist, raising debt finance can enable charities to expand their activities and create greater social benefit.
Recently, a number of charities have launched bond issues to raise finance from their supporters and the public, and as an alternative to a secured bank loan. Most of these have been “mini-bonds” which are unlisted and don’t require a prospectus to be approved by the UK Listing Authority. Some mini-bonds are transferable on a matched-bargain basis, and Ethex (mentioned previously) aims to provide a market place to help sellers find buyers. In 2014, Retail Charity Bonds was launched by Allia as an issuing platform to raise finance for charities through bonds listed on a recognised stock exchange. The bonds can be purchased through a broker and can be held in an ISA and traded in a formal secondary market. The first bond, issued in July last year, raised £11m for Golden Lane Housing, a subsidiary of Mencap which provides homes for people with a learning disability.
International development
For investors wanting to make a global impact, two options are investing with Shared Interest or Oikocredit.
Shared Interest lends funds to fair trade organisations around the world, mainly in more remote areas where they are unable to access fair finance. Its borrowers include organisations such as Huatusco, a coffee co-operative in a small rural town in Mexico. Shared Interest offers the opportunity to open a share account from £100. It currently pays 0.5 per cent interest to its shareholders.
Oikocredit is an international co-operative which makes loans and investments to enterprises that help people build sustainable livelihoods in developing countries across the world. Around 20 per cent of its loans and investments go directly into cooperatives and other social enterprises, with the other 80 per cent going to microfinance institutions that provide financial services to people who would otherwise have no access to them. Oikocredit currently pays 2 per cent on investments in its depositary receipts.
Phil Caroe is director of social finance at Allia
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