Finance of the future: how a more ethical financial system beckons

Never before have we as a society been so interested in the economy, and thanks to the recession, traditional banking models are being cast under the spotlight. Claudia Cahalane considers how a more ethical, sustainable financial future is emerging

When the Occupy movement rose up after the financial crisis, protesters were criticised for not having solid ideas of what they wanted. But now, those who are seeking a better, more genuine and sustainable economy for people and planet have a clearer idea of what is needed.

“Change and desire for change is beginning to shape around three main areas,” says Chris Hewett, who works on disruptive finance policy for the Finance Innovation Lab. “These are in banking reform, institutional investments and equity markets, and encouraging financial innovation – such as peer-to-peer lending [crowdfunding, for example].”

Could we be at the dawn of a new financial era? It’s early days, but momentum is building. Thirty organisations, including the Finance Innovation Lab, the New Economics Foundation (nef), ShareAction, Positive Money, Move Your Money and Friends of the Earth have signed the recently released document Transforming Finance: A Charter for a New Financial System, which sets out concrete proposals for reforming the economy.

What’s needed?
Firstly, campaigners generally want to see big banks broken up, something some members of the Parliamentary Commission are showing an interest in, says Hewett, speaking to Positive News. They also want a new network of smaller banks to open up, similar to what’s offered in Germany. Such banks only take savings from people in the local area and only lend within a certain radius.

“Change and desire for change is beginning to shape around three main areas: banking reform, institutional investments and equity markets, and encouraging financial innovation”

Nef is currently campaigning for RBS, which was bailed out by the government, to be broken up and turned into a network of regional banks. In addition, there is a chance that credit unions, which keep money invested and circulating locally, will be able to do more in the coming years following a government pledge of £38m for the Credit Union Expansion Project. Until now, credit unions have had limited funds and powers to offer current accounts, but this new money is designed to change that, as well as enabling them to offer ISAs and specialist budgeting accounts.

The Archbishop of Canterbury is also on board, saying he wants the church to offer credit union services to rival “unscrupulous” payday lenders, specifically naming Wonga.

Hewett, in line with Positive Money, believes the state should also be more involved in banking.

“Most other economies have some form of state investment bank. Germany has the KfW, which invests in long-term green infrastructure projects. Britain has the Green Investment Bank (GIB), but it doesn’t compare because it has limited borrowing and lending powers at the moment,” he says.

The KfW is twice the size of the World Bank and lent €70bn in 2011. About a third is lent to energy and climate change investments, such as programmes for energy efficiency in homes. In contrast, the GIB has £3bn of taxpayers’ money and does not, as it stands, support anything similar. But it is something to build on, believes Hewett.

The real economy
“We also need to really look at how much from banks is lent into the ‘productive economy’ and how much is used for speculation,” Hewett adds.

Ethical finance advocates say that about 10-15% of bank credit goes into the real economy – that is, building genuinely sustainable businesses and jobs – while 40% goes into property and the rest into financial institutions, which serve few people.

“A possible solution could be more control and guidance from central banking to limit the amount going into certain areas,” believes Hewett.

The second crucial situation that needs addressing is in the area of institutional investments, according to campaigners. Institutional investors are often members of the general public who have money in pensions and insurance funds. The funds are then invested on behalf of pension holders in businesses to try to make a return.

“A growth in new financial models offers good hope”

It is often assumed that these businesses and fund managers have to maximise financial returns to investors and shareholders at the expense of society and the environment. But this belief is now being challenged by organisations such as ShareAction, which says companies do not actually have such a narrow remit for shareholder returns. It’s, quite simply, an obligation felt by company directors coupled with historical legal cases in this area which have been misconstrued, according to ShareAction.

The Law Commission is considering this matter via a consultation on ‘fiduciary duties’, which closed at the end of June. Christine Berry, head of policy and research at ShareAction, says she is looking forward to the outcome. “In general, we are optimistic that the Commission officials understand the issues and that their report next year will help to address unduly narrow interpretations of the law,” she tells Positive News.

Hewett also highlights the Carbon Tracker Initiative, run by the organisation Investor Watch, which encourages accountants to properly evaluate risk around investing in fossil fuels, for example, which might not deliver the returns expected in the long run, and shouldn’t deliver predicted returns if we want to live more sustainably.

Thirdly, a growth in new financial models offers good hope, says Hewett. He is pleased also that the government will increasingly regulate peer-to-peer lending, particularly as this is something mainstream banks such as Barclays and Santander are now moving into, which could ruin the spirit of concept, whereby the public financially support projects they value, without necessarily having great expectations of financial returns.

Tax breaks for peer-to-peer lenders (such as people who pool their cash to support businesses and projects through sites such as Kickstarter and Buzzbnk) similar to those for ISA investors, would also be welcome, he adds.

“Before the crash, civil society hadn’t been engaged in how finance works; now ideas are really coming,” believes Hewett. “It will take some time to work through and get mainstream debate on all this. But it’s a step on from Occupy and it’s all starting to gel together.”

People investing for a more sustainable future
We meet some individuals who are trying to do something good with their cash, even if their resources are minimal

Rob Greenwood, 64, retired
Rob is a lifelong Liverpool Football Club supporter, but now lives in Manchester. In 2005, he invested £500 in Manchester FC, then a newly formed co-operatively owned football club.

Rob’s story: “After moving to Manchester in 1974 I got to know several people here, including Manchester United fans, on a deeper level outside of football.
“Like Liverpool supporters, Manchester fans and football fans in general, I felt increasingly detached because of the commercialisation of the sport. When American businessman Malcolm Glazer bought Manchester United in 2005, a spin-off group decided to set up a new, fan-owned club via Supporters Direct, and I joined. I’m still a Liverpool fan, but more so, I am a fan of football and I wanted to support the movement.
“There will never be any dividend, but I might be able to get the money back after 10 years. I’ve also bought just over €100 worth of shares in Spanish club Real Oviedo and I’m considering buying into co-operative pub The Star Inn, in Salford.
“It’s not about the profits, I get to be part of the decision-making process and the knowledge that these independent concerns survive and thrive.”

Darren Hall, 44, director of Bristol Green Capital

Darren Hall

Darren Hall, 44, director of Bristol Green Capital
Using peer-to-peer crowdfunding and lending platform Buzzbnk, Darren has invested in The Converging World, which builds wind turbines in India.

Darren’s story: “I committed £4,000 towards a wind power project in India and I get an unheard-of 6% return on my investment for five years, as well as my money back. Plus, I get another ten years of interest for a charity of my choice – The Darjeeling Trust – as part of the deal.
“Bristol Green Capital is all about creating a greener, more sustainable economy, so I’m a big supporter of renewable energy. And I’ve already had my first dividend payment of £240 in January this year.”

Jennie Lang, works in the charities team for a bank
Jennie is increasingly moving her own money into positive investments in a number of ways, including through venture capital trusts via the Abundance platform, Impax and into Cafédirect.

Jennie’s story: “This is partly about trying to do the right thing, but it’s also about self-interest. Climate change is happening; you don’t want to be investing in oil companies when renewables are the future. Oil companies are not pricing in climate change, and conversely we are not valuing low-carbon energy enough.
“A lot of people don’t know what ethical and positive options are out there. Also, the financial advisor culture tries to be ‘low risk’ by gravitating towards recommending the same as what everyone else is buying.
“I was really pleased to see the launch of Ethex earlier this year [an online marketplace for positive investments] because better information is needed so people can see what’s available.

Deborah Crane, 48, works in IT at a financial services company

Deborah Crane

Deborah Crane, 48, works in IT at a financial services company
Deborah describes herself as a left-liberal, hybrid car driving, parish councillor who has always been keen to invest ethically.

Deborah’s story: “In the past, I’ve put money into ISAs and chosen green, socially responsible and ethical investments, but there’s a problem with ‘ethical’ investments – the term ‘ethical’ covers a range and means different things to different people.
“I’ve also experimented with Zopa [an online savings account where your money is lent directly to other people] and Funding Circle [where people lend to businesses]. And recently I put several thousand into renewable energy projects, some through the Abundance platform.
“I’m now tempted to invest in the Oakapple solar project through the site. Returns of around 8% are expected, with the capital being repaid in equal annual amounts over 20 years, with any interest being paid on top. There are others in the pipeline too (not through Abundance), some of which attract 30% tax relief via the Enterprise Investment Scheme (EIS). But why is it that I can get a full tax relief on an investment promoting BP shares – essentially, global warming – through an ISA, but not on my positive investments?”

Ian Chambers, 47, owner of Seven Bees cafe, Brighton

Ian Chambers

Iain Chambers, 47, owner of Seven Bees cafe, Brighton
Iain has been involved in the community buyout of St Luke’s Church in Brighton, and has also invested into the money pot to take over The Bevy pub – which looks set to be the UK’s first community pub on an estate.

Iain’s story: “I think The Bevy could be transformative. The pub that it will replace often had problems with antisocial behaviour, but now thousands of locals have invested £10 or more to get it re-opened as a community pub and cafe. I think the potential is enormous, so I have invested £40 in cash so far, through their community share issue. I’ve also sponsored trees in their community garden and my cafe sponsored the food at a recent fundraiser.
“Five years after the investment, there will be an opportunity for people to get their money back, if the board of directors decides the venue can afford to do this.”

The colour of your money: eight ways to help change the economy

1. Sign the Transforming Finance Charter at thefinancelab.org

2. Join the Finance Innovation Lab’s discussion forum at thefinancelab.ning.com

3. Move Your Money. See moveyourmoney.org.uk to understand what might be the best and most ethical banking option for you.

4. Invest ethically. This can be done for as little as £5 through sites like Buzzbnk. Returns are often social and environmental, but there are sometimes good financial returns too. There are a growing number of co-operatives taking over village shops, pubs and football clubs through issuing community shares.

5. Find out where money you have in savings, insurance and pensions goes. ‘Ethical’ funds often only screen out industries like tobacco or pornography, but are not concerned with human rights or environmental abuse. See Ethical Consumer (www.ethicalconsumer.org) and ShareAction (www.fairpensions.org.uk) for more information.

6. Follow ShareAction and get involved in its campaigns. On 14 September, it’s running a day for people who want to learn how they can nudge their pension fund and their employer towards investing for a sustainable future.

7. Join or start a local Positive Money group (www.positivemoney.org), to meet likeminded people who want to find out how we can change the monetary system.

8. Look into business bartering. This is popular in a number of countries, particularly Switzerland, as a way for businesses to step outside the current economy. Find out more at the Start Ups website (www.startups.co.uk/bartering)

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