how to make ethical investments

There are many everyday ethical decisions that we now consistently make, such as buying Fairtrade tea, choosing a green electricity supplier or shunning Starbucks in favour of local independent coffee shops.

What about ethical investments? Managing money is another opportunity to make positive ethical choices, but as yet isn’t as mainstream as it could or should be.

The team at Ethical Consumer has just released their first guide to Innovative Finance ISAs to show consumers how to make ethical investments so that they can potentially use some of their savings to more effectively help tackle issues as diverse as climate change and the housing crisis.

Tim Hunt from Ethical Consumer explains what an Innovative Finance ISA is, and takes a look at the most ethical ways to invest in one.

Innovative Finance ISAs (IF ISAs) are a relatively new savings product introduced in 2016 to offer investors an alternative to the traditional Cash and Stocks and Shares ISAs.

They are great news for ethical consumers who are looking to use their savings for the benefit of society and the environment by offering the potential to invest in fully transparent ethical projects.

An IF ISA is essentially a way to invest in projects and businesses via a crowdfunding platform such as Abundance or Lendahand, potentially giving total control on where your money is invested. The good news is you can invest in some of the projects for as little as £5, making it an easy way for new ethical investors to test the water.

Changing money markets

IF ISA’s currently account for less than 1% of the UK ISA market but they are rapidly growing in popularity. Last year  £290 million was invested in them, eight times more than in 2016/17.

For too long consumers have allowed banks and financial institutions to take decisions for them, sometimes investing in damaging products and businesses, like fracking or palm oil plantations.

Now consumers can cut out the middleman at the bank and create portfolios of ethical projects to invest in using IF ISAs.

There are currently more than 65 platforms in the UK offering IF ISAs, with a wide range of projects to invest in. Aware that consumers are now more likely than ever to look for an ethical option, some of these platforms are marketing themselves as offering ethical investment opportunities.

We’ve done the research and awarded four platforms ‘Best Buy’ status these are Abundance, Energise Africa, Ethex and Triodos Bank.

All four platforms offer investments in a range of environmentally and socially minded projects both in the UK and abroad.

Abundance has been a pioneer of raising green finance ever since it launched in 2012. Historically, Abundance has allowed customers to invest even very small amounts, from £5, in different projects. It only funds what it calls ‘socially useful’ projects. These have largely been green energy in the form of wind turbines and solar farms, but have also included a project recycling used cooking oil into bio-diesel and, most recently, affordable housing.

Energise Africa is designed to provide working capital to projects that install and sell solar home systems in sub-Saharan Africa. The aim is to provide more than 111,000 rural families access to renewable energy over the next three years. Home systems tend to provide simple electric lighting and phone charging facilities.

Ethex recently funded the Solar for Schools Community Benefit Society (CBS) that was set-up in 2016 to enable schools in England and Wales to derive some financial and environmental benefit from solar panels.

Triodos is the first UK bank to launch its own crowdfunding platform. Since its launch the Triodos crowdfunding platform has raised £20 million for eight pioneering organisations delivering positive change. An example is the £1.8 million bond that was successfully raised for Mendip Renewables in 2018, which owns and operates a 5MW community solar scheme and uses its retained profits to support charities in Somerset.

Ethically Invest sensibly

In the Ethical Consumer guide to ethical investments, it reminds potential investors that whilst only Financial Conduct Authority (FCA)-regulated platforms can offer an Innovative Finance ISA, they come with no other protection. IF ISAs don’t qualify for the savings element of the Financial Services Compensation Scheme (FSCS) that protects up to £85,000 should a firm go bust. Neither do they get the FSCS investing element that covers up to £50,000 in case your investing platform goes bust and hasn’t done what it is meant to with your money.

It is also more difficult to access your money with an IF ISA. Most of the assets (or loans) will be fixed term, making instant access impossible. You should, therefore, take into account the length of time the asset is held for when making a decision about what projects to invest in.

That said you can limit your risk by investing in these Best Buy options that work closely with projects to ensure that they succeed, and by investing small amounts of money into a number of projects spreading your risks.

If you can afford to take a risk with a small amount of your hard earned cash, then these platforms provide consumers the opportunity to make ethical investments directly into projects that have tangible positive impacts.

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