The essentials: Ethical banking - Invest in the best

Ethical finance is more popular than ever with the voluntary sector. Joe Lepper offers some advice on choosing a fund.

As charities increasingly look for sustainable sources of funding, such as bank loans and investment funds, ethical finance has never been higher on the agenda.

Specialist ethical banks and investment funds are now commonplace in the financial sector, and some of the main players, such as Triodos Bank, have seen a massive surge of business in recent years.

Stephen Hine, head of international relations at Ethical Investment Research Services (Eiris), says that charities ought to consider ethical banking and investment, whatever their size.

Both fit well with the ethical nature of what they do, he says, adding that, for example, "a medical charity investing in tobacco goes against its ethos".

Hine also warns that a failure to look at ethical finance options could have a serious effect on a charity's reputation and drive away donors and stakeholders.

Whether you are trying to develop an ethical finance policy or to improve your existing ethical stance, these principles should help you on your way.

1. Develop a policy that fits the ethos of the charity

Julia Dreblow, social responsibility investment marketing manager at Friends Provident, one of the best known ethical investment firms, says it operates a basic policy of avoiding investments in companies involved in "bombs, booze and baccy".

"Not investing in the arms trade, alcohol and tobacco firms stems from our roots in the Quaker movement," she says. "But they are also areas that most good ethical funds avoid."

It is not only these more obvious areas that charities need to consider, however. Dreblow adds that ethical investing and finance also offer an opportunity to promote a charity's distinctive ideals.

Save the Children, for example, has an ethical investment policy centred on the 1989 UN Convention on the Rights of the Child.

As a result, all of the charity's investment decisions are geared to avoiding firms that act contrary to the interests of children and to actively promoting those involved in good practice.

Sue Cooper, senior loan manager at Triodos, says there is a lot of help on offer for those wanting to develop an ethical finance policy, from the Charity Commission to specialist consultants.

2. Choose the right fund or bank

Once a charity has developed an ethical finance policy, it is crucial that it picks the right fund or bank to suit its needs. Factors to consider include a charity's size, the amount of money it can invest, the duration of the loan repayment and global reach.

For many investors, it makes sense to use a pooled ethical fund where fund managers constantly seek out ethical investment opportunities and monitor companies for unethical activity.

Neil Barton, business sponsorship manager at the RSPB, explains that the charity used to handle its investment portfolio in-house, creating a bespoke service that avoided firms with poor track records, particularly in terms of the environment.

"However," he adds, "it was felt that it was becoming increasingly difficult and costly to manage this, so a decision was made to use specialist pooled ethical funds."

Save the Children had a financial review two years ago and has also opted for ethical fund managers - Newton Investment Management and Epworth Investment Management - to handle its investments through a pooled fund.

When it came to its banking needs, however, the charity decided not use ethical specialists, as Nick Kavanagh, the charity's finance director, explains. "We operate in 50 countries," he says. "We looked at the ethical statements of banks when we went out to tender, but first and foremost we required a bank that could best serve our needs as a global organisation. That is why we went for NatWest rather than a specialist."

By contrast, Bristol Cancer Help Centre does not have an international dimension, so it felt that an ethical bank was right for its needs. It now has a relationship with Triodos, which has loaned the charity £1m to build a centre for people with the illness.

Ian Turner, finance director at Bristol Cancer Help Centre, says: "We looked at Triodos, its commitment to the charity sector and its ethical aims in investing in that sector, and decided it fitted us well."

3. Ethical finance is not just about avoiding the unethical

On a simple level, an ethical investment policy avoids companies that have a question mark over their activities.

But charities are increasingly taking a more positive approach, aiming to be active shareholders and seeking out opportunities that mirror their own policies.

For Save the Children, this was an essential factor when choosing its fund managers. Finance director Kavanagh says the charity looks for "positive engagement with companies regarding their activity. But this is not necessarily looking only at bad practice.

Sometimes it is about seeking positive ethical conduct and seeing how investments can help."

He concedes that it is important for some charities to keep their distance from big business and stay independent. But he adds: "There is an argument that without shares or an interest your influence may be limited.

"But if you are a shareholder you can work more closely with the company and perhaps be more effective at changing things."

4. Ethical banking and investment need not cost too much

A common myth about ethical banking and investment is that rates and returns are not as favourable as in the broader market, but organisations such as Eiris say there is little evidence to support this.

Hine believes that investing ethically can actually bring greater returns, because ethical firms tend to be more transparent and better managed.

"If you compare existing ethical funds in the UK with so-called non-ethical funds, the ethical ones will perform as well or better," he says.

"If a firm behaves ethically - has a good labour policy and is transparent, for example - that is an indication that it is better managed and there is a better chance of getting a good return."

Bristol Cancer Help's Turner agrees, saying that it would not have opted for Triodos if it could have got a better deal elsewhere.

"As well as ethical considerations, one of our main reasons for choosing Triodos was to get a competitive deal," he says. "In pure pound-for-pound terms we would not have been any better off getting a loan from a more traditional high street bank."

5. Be ethical in all areas

There's no point in a charity spending time and money seeking out ethical investment and banking options if it is not acting ethically in other aspects of its operations. Working in the not-for-profit sector doesn't guarantee ethical credentials. Activities must be closely monitored and improved.

These include employment relations, environmental considerations and transparent operations. For ethical fund managers, a company's transparency is a key indicator of its ethical stance, and charities need to ensure they adhere to this principle too.

A significant piece of legislation geared at encouraging transparency among charities is the accounting standard Sorp 2005, which emphasises the importance of revealing not only a charity's accounts, but also its other major activities in the financial year. This ensures that a charity's staff, donors and other stakeholders are able to match performance against objectives.

6. Place safeguards to ensure investments stay ethical

Before selecting an ethical investment or banking option, it is vital to check that it has a sound monitoring structure in place to ensure its ethical claims remain genuine.

According to Dreblow, this is important because "circumstances with businesses and investments constantly change and need to be regularly monitored".

Friends Provident ensures its ethical investment products remain reliable by using an independent panel of experts, which it calls the committee of reference.

This panel meets quarterly and has the key task of vetting firms or organisations it might invest in.

Dreblow says: "We feel it is important to have an external panel of experts that can look at this in as objective a way as possible."

Cooper describes another safeguard used by banks and financial institutions.

"A credit checking process will throw up any risks such as social or environmental breaches and will also show how transparent a company is," she says. "One that is not transparent will immediately set alarm bells ringing."

TO FIND OUT MORE

UK Social Investment Forum (UKSIF) was set up in 1991 to bring together those with an interest in ethical investments, including fund managers and charities. It is involved in lobbying and organises events for those interested in ethical investing.

Tel: 020 7749 9950, www.uksif.org

Ethical Investment Research Services (Eiris) has bases in the UK, the US and Japan, and conducts research into firms' social, ethical and environmental policies. It also conducts wider research into ethical investment trends.

Tel: 020 7840 5700, www.eiris.org

The Charity Commission offers advice on ethical investment and banking options, including its document Investment of Charitable Funds: Basic Principles, which has a section on ethical investing.

Tel: 0845 300 0218, www.charity-commission.gov.uk

NCVO jointly published a toolkit last year with Eiris and UKSIF on ethical investment options, aimed at charity trustees.

Tel: 0800 2 798 798, www.ncvo-vol.org.uk

HOW IT STARTED

Ethical investment and banking on an organised scale first started in the 19th century and was driven by Quaker and Methodist groups, with a particular focus on labour conditions and the temperance movement.

Among the key organisations was Friends Provident, which was launched in 1832 by Quakers to offer life assurance to its members.

It began investing in the stock market in the early 20th century, avoiding firms linked with gambling and alcohol, and by 1984 it had launched its Stewardship badged investments.

This was the first dedicated ethical fund offered by a UK life assurance firm, and it now has about £2.4bn in funds under management.

The 1970s and 1980s also saw a significant boom in ethical investment.

The Vietnam War was a key factor, particularly in the US, where the Pax World Fund was set up in 1971 to avoid investments linked to the conflict.

This growth was also fuelled by opposition to the apartheid government of South Africa, with investors increasingly wanting to avoid firms linked with the regime. According to Eiris, there were 280 ethical funds in Europe alone by 2001.

Ethical banking has also grown rapidly, including the launch of an ethical policy by the Co-operative Bank in 1992. Mercury Provident, now Triodos Bank, was set up in 1974 specifically to lend to projects and organisations operating for social benefit.

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