Sustainable finance

‘Traditional’ philanthropy – or giving without expecting a financial return – is one way to do something positive with your money.

However, the way you choose to lend, deposit or invest can be an even more powerful force for good. Funds lent to or invested in a business, social enterprise or charity are normally repaid (with interest) and can be re-lent or invested several times. So money that’s recycled in this way can make more of a difference than a one-time cash donation.

What is sustainable finance?

Sustainable, or ethical, finance is a broad term which means different things to different people.

To some it means Socially Responsible Investment (SRI), the term for investment in publicly listed companies with screens to weed-out the ones that produce negative impacts or to select companies judged to be more ‘ethical’ than their peers. This is the most established and widely available form of ethical investment, though it could be argued that this is essentially a ‘reduced harm’ strategy.

Others believe that sustainable finance can only truly mean social investment. This is finance which is used to support the ‘social economy’ or environmentally driven organisations. These kinds of investments have traditionally been scarce and trading in them harder than in the more liquid, mainstream markets.  But they are becoming increasingly accessible through specialist funds (see case study), or investments and deposits offered by ethical financial institutions.

While definitions may vary, essentially sustainable finance¹ is about using money to encourage socially responsible business and to create a sustainable society. Consumers are increasingly putting their money where their mouth is, by not only buying organic, fair trade and environmentally friendly products (growth in ethical consumption is outstripping normal household consumption three-fold), but also by depositing and investing their money in ways that reflect their wider ethical view of the world.

The history of sustainable finance in the UK

The historical roots of sustainable finance are grounded in religion. Ethics were behind the medieval Catholic Church’s desire to avoid usury and behind Islam’s avoidance of interest. Methodists, Quakers and Hindus all have a history of rejecting investments in sectors that contradict their beliefs, such as alcohol and gambling.  These early efforts to screen-out certain investments were the key drivers behind SRI funds and early sustainable finance in the US and the UK.

However, today ethical investment is no longer a niche market, with growing awareness that the social return on money counts. In the past few decades specific events and global trends have resulted in an expansion of the sector. The oil scares of the 1970s and the Chernobyl nuclear disaster were catalysts for the development of renewable energy investments. Growing opposition to apartheid and the boycotting of businesses operating in South Africa also fuelled ethical screening moves. Increased concerns about pollution, intensive farming and genetically modified produce have driven the organic sector. Greater awareness of third world poverty and the need for sustainable solutions has been behind the emergence of the fair trade and microfinance sector.

Three main types of ethical banking institutions have emerged:

• Co-operative banks and credit unions: Formed in the 19th century to provide finance to their members, many co-operative banks expanded their activities and lost their special social mission when commercial and savings banks started offering banking services on a broader scale. Some of these institutions have more recently rediscovered their roots and are redirecting some of their activities to support specific areas such as community development, the non-profit sector and environmental development.
• Social banks: In the last 40 years, new social banks have emerged, driven by social and human development concerns, including care for the environment. They want to stay true to their values even as they grow and change.  Growth is not a target on its own, and financial profitability is seen as a condition for further development.
• Microfinance institutions: Microfinance has developed to provide banking for the ‘unbankables’ (people without access to finance). It contributes to poverty alleviation through micro-lending for income-generating activities of the poor themselves. Microfinance banks focus their efforts in the poorest parts of the world.

Outlook

The mainstream financial sector has responded to calls for more sustainable finance options by offering an increasing array of ethical investment funds, and by introducing lending policies which outline minimum environmental criteria. There are now more than 600 ethical investment funds worldwide and their number is constantly growing. The amount invested in Britain’s SRI retail funds is now over £8 billion, up from the 1997 figure of less than £1.5 billion². 

However, the ethical quality of these products differs substantially in terms of quantity and content. The main growth has been in SRI funds, with a focus largely on negative screening and ‘best in class’ investment. Mainstream financial institutions are also increasing their range of environmental investment offerings. This is expected to continue to expand at a fast pace as consumers drive demand for environmentally sound products. These offerings are largely driven by expectations of substantial financial returns in a high-growth sector.

However the most interesting future developments are likely to be in investment opportunities that blend financial returns with social or environmental benefit, and for which the positive impact of the investments is the key driver.

While mainstream financial institutions remain focused on making as much profit as possible, rather than on social and environmental impacts, access to truly sustainable investment offerings will remain the domain of social financial institutions. Expanding these specialised institutions and funds, and broadening their product offerings, will drive growth in truly sustainable finance.

How to get involved in sustainable finance

To maximise the social impact of investments and savings, you need to answer some key questions. These will govern the types of investment and savings that work for you.

• Do you want your money to actively make a positive difference, or are you happy to pursue a ‘do not harm’ strategy?
• Are you trying to make as much financial profit as you can with your investments, or are you happy to accept a potentially reduced but decent financial return alongside positive social benefits?
• Are you interested in a particular social or environmental goal, or do you want to drive development of a specific sector?
• Do you need easy access to your funds or are you happy to make a longer-term commitment, or take some risk, which may have more impact?

Considering these questions will help you to better evaluate the range of sustainable finance options available. However, it may not be possible to achieve all of your aims, in which case you will need to make some tough decisions about what is most important to you. For example, you may not be able to actively invest in fair trade businesses while maximising your financial returns and having easy access to your funds. 

Sustainable savings and investment options

Sustainable banking options fall into two broad categories: savings and investment. But there are many subsections to these, such as:

• Savings options: Deposit accounts, bonds
• Investment options: SRI funds, sector-specific listed funds, microfinance funds, fair trade funds, social venture capital funds, individual ethical businesses

As people and institutions struggle to deal with the problem of social and environmental change, sustainable finance is emerging as one of the most powerful solutions. Sustainable private banking advice can help determine the best options for investors and depositors.

Recommended resources

Independent commentators

• foundation">New Economics Foundation
• Investment Forum">UK Social Investment Forum
• Investment Research Service">Ethical Investment Research Service
• International Association of Investors in the Social Economy (INAISE)
• European Federation of Ethical and Alternative Banks (FEBEA)
• Institute for Social Banking

UK ethical banking organisations

• Triodos Bank UK
• Charity Bank
• Co-operative Bank
• Unity Trust Bank

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¹ Sustainable finance offers social investors an opportunity to combine financial with social returns. As with any investment decision, we advise you to consult an investment professional in evaluating your options.  

² EIRiS: Key ethical / socially responsible investment (SRI) statistics