Financial institutions and products

Where does your money go?

Financial institutions depend on your money, in the form of bank accounts, pensions and mortgages, to fund their investments. But how are they investing your money?

A sustainable company balances economic considerations with social and environmental ones. This is called Ethical Finance. It is not the day-to-day operations of finance companies that are of concern, rather it is the impact of decisions about where and how investments and loans are made. Some examples of ethical issues are fair pay and conditions, equal opportunities, the environment, nuclear power, human rights and intensive farming.

Other 'moral' concerns might include the arms trade, animal rights, the gambling industry and world debt.

Ethical policies can make financial sense as well, as unsustainable companies are often bad investments, vulnerable to turns in public opinion (e.g. GM foods), and greater international regulation. A disregard for the long-term future of a trade or industry does not bode well for the long-term investor.

Banks and Building Societies

Think about your bank or building society. What are their ethical policies on:

• Lending to regimes with a poor human rights record? The Abbey National and the Co-operative Bank have lending policies. They also (along with HSBC and Barclays) have lending policies on the arms trade.
• Reducing financial and social exclusion (i.e. access to basic account facilities)? The Bank of Scotland has set up a Social Banking Team but others have chosen to scale down with branch closures.
• Support for community projects/businesses/charities? Ask your bank as most have local sponsorship or support programmes.
• Environmental issues (e.g. assessing the environmental impact of a project before lending)? Most banks have a policy, but few have a robust Environmental Management System. Exceptions include Halifax, Co-operative Bank, Lloyds TSB and Northern Rock.
• Reducing Third World debt? This applies especially to banks rather than building societies as these generally concentrate on UK lending.

Actions

• Question your existing bank or building society about the issues above and find out about alternatives if you are not happy with their answers. You can do this directly or use one of the sources below. There are contacts for three 'specialist' institutions in this field below, but thanks to consumer pressure many high street institutions are addressing some of the issues above, if not all.

Contacts

More information about direct investment as a shareholder is available from:

• The Ethical Investment Research Service (EIRIS) Provides on-line publications which examine sustainability issues in greater depth.
  www.eiris.org
• The web site www.ethicalconsumer.org have carried out surveys of banks and building societies and details of how to obtain these are listed under 'back issues' on the website

Pensions

If you are part of an occupational or stakeholder pension scheme, fund trustees are obliged to state if they do or do not follow social, environmental or other ethical policies in their Statement of Investment Principles. Ask for details of this statement from your scheme administrators. If the scheme does have an ethical policy, is there a report on how this has been actioned over the past year? If there are any ethical issues not covered, ask why these have been left out.

If the Statement says that the fund does not follow any environmental, social or ethical policies, write back and ask the trustees why they have made that decision, mention other large schemes that have adopted such policies (e.g. West Yorkshire local authorities or the Universities Superannuation Scheme) and invite the trustees to survey the scheme members. Make any links between the company's policies and the pension scheme's behaviour – remember it is your money that they are investing and keep reminding the trustees of this, particularly when new ones are appointed.

Mortgages

Now that many building societies have de-mutualised and become more like banks in their investment policy, their investment activities are of more concern to the ethically-minded home-buyer. Most consumers are more concerned over their investments rather than their borrowings, but both products are essential to banks and building societies and in a competitive market they will respond to your demands.

Contacts

• The Ecology Building Society provides mortgages for energy efficient housing, renovation of derelict properties or those in disrepair, and for ecological businesses.
  www.ecology.co.uk
• The Norwich and Peterborough Building Society offers green mortgage products on new homes with a SAP (energy efficiency) rating of 80 or more, or for properties that the borrower wishes to make more efficient. For the first five years of each mortgage, eight trees a year will be planted, compensating for the greenhouse gas emissions from the house that year.
  www.norwichandpeterborough.co.uk

Ethical Investment

Investments can be divided into those where you own shares directly and can exercise your shareholder's rights, and those where you only own stocks and shares collectively and the fund manager controls those rights.

With a portfolio of shares, some investment trusts (e.g. open-ended investment companies) and some 'self-invested' personal pensions give you shareholder's rights to attend AGMs, vote on motions and ask questions of the companies policies. If a fund manager controls these rights then you can lobby the manager in the same way as pension trustees (see above). EIRIS offers a review service for a portfolio holder to check the companies against a tailored checklist of your ethical or environmental criteria.

Shared Interest

This is a system of investing in fair trade with people in the Third World. The system allows you to invest part of your savings in a generous but sensible way so that groups of people in the Third World can earn a better living for themselves and their families. Your loan can earn you interest if you wish and be returned when you need it. By making this loan you will enable people to buy the materials they need to make their handicrafts. The money is not lent to governments or government organisations; it is targeted at disadvantaged people in co-operative enterprises.

Contacts

• Shared Interest Society Ltd.
  2 Cathedral Square, The Groat Market, Newcastle Upon Tyne.
  Tel 0845 840 9100
  www.shared-interest.com