Ethical finance allows you, your staff and shareholders to make informed choices about the financial institutions your business deals with. You can use ethical finance for most business dealings, including bank accounts, insurance, commercial mortgages, investments and savings.
Using ethical finance is one way of making your environmental and social commitment known. This can be an effective way to attract investment, boost your reputation with customers and improve your chances when selling to large firms or public sector organisations.
1. Your ethical priorities
Establish what ethical means in practice
- Decide if you want to focus on 'negative' or 'positive' ethical issues.
- A negative ethical finance promise means the product does no harm to the environment or society. For example, an ethical investment portfolio would not include shares in industries such as gambling or pornography or firms that cause pollution.
- Positive ethical finance means that your money is used actively to improve society or the environment. For example, some insurance policies donate money to charities when you sign up.
Understand key negative ethical issues
Currently, negative issues include businesses that are involved in:
- child labour
- testing on live animals
- the weapons trade
- human-rights abuse
- nuclear power
- oppressive political regimes
- ozone depletion
- polluters of air, land and water
- exploitative practices in the developing world
- forestry abuse
- the motor and oil industries
Understand key positive ethical issues
Positive issues include:
- organic farming
- companies with good employee records
- disaster relief
- energy efficiency
- public transport
- environmentally-friendly technology
- fair-trade, ethical or organic food
- sustainable goods and services
- carbon-neutral firms
- renewable energy sources
- firms that promote the interests of workers in developing countries
- plant welfare
- waste and water management
- alternatives to animal testing
Consider the levels of ethical responsibility available
- Once you have chosen the issues that mean most to you, understand the varying degrees of ethical responsibility you can choose to take.
- In particular, ethical investments and pensions are often graded by level of responsibility.
- Many ethical financial products, particularly investments, are also known as socially responsible investment (SRI). These are graded from 'light green' to 'dark green' by their social and environmental value.
- Sometimes known as 'best-of-sector' funds, light green funds generally reflect trends in the conventional investment market. They will invest in corporations in Europe and the US, including oil and chemical firms, but will avoid firms that impact on the environment and the arms trade.
- Medium green funds use tougher ethical criteria. For instance, they will invest in small firms, but may be involved in pharmaceuticals or banks. These funds also invest in the developed world.
- Dark green funds use strict ethical screening to cut out industry sectors, such as gas and oil, and tend to invest in smaller firms.
- Engagement funds are used to invest in firms who tend to have environmental policies, such as environmental management systems or sustainable development policies.
- The FTSE4Good Index Series has been designed to measure the performance of companies that meet globally recognised corporate responsibility standards.
Match your ethical and business priorities
- You may want to consider linking your ethical financial products to the nature of your business. For instance, a business selling wooden furniture might want to find a company pension scheme that invests in reforestation.
- Consider whether a particularly appropriate ethical finance product could increase your business' environmental profile.
2. Ethical products and providers
Choose financial products
Consider where and how you could incorporate ethical finance across your daily business activities. The range of ethical finance products includes:
- bank accounts
- credit cards
- building society accounts
- commercial insurance
- investment schemes, including unit trusts and venture capital opportunities
- commercial mortgages
- pension schemes, including stakeholder pensions
Consider specialist religious products
- In addition to reflecting social and environmental concerns, many banks and building societies offer products and services based on religious belief. For example, Islamic banking products that are compliant with Sharia law.
- Islamic mortgages and bank accounts do not charge or pay interest.
- All Sharia investments are made into permissible companies. Customers' funds are not invested in firms involved with alcohol, gambling, tobacco or pornography.
- Currently several UK banks offer Sharia-compliant mortgages.
Choose the right provider
- Both mainstream banks and specialist providers now offer ethical financial products.
- Decide if you wish to deal with an institution that is an ethically responsible business itself.
- Consider banks and institutions which operate good environmental policies. For example, HSBC was the first bank to make itself carbon neutral.
- You can usually check information about the ethical practice of most mainstream banks on their website.
- Consider providers which invest in the local community, by offering favourable credit terms to charities and social enterprises or which invest in companies with high levels of socially responsible investment (SRI).
- Choose a provider that takes care of its workforce. Look out for awards that recognise employee care, such as Investors in People.
Consider ethical banks
- Ethical banks such as Triodos Bank only invest in charities, social businesses, community projects and environmental initiatives.
- Charity Bank was set up to support charities and social enterprises, and is owned by charities and social purpose organisations.
- Some ethical banks also offer loans to businesses customers for projects that create social and environmental value.
- Some large financial institutions, such as The Co-operative Bank, make a commitment to ethical banking.
Find a registered ethical provider
- The UK Sustainable Investment and Finance Association (UKSIF) is the national network for promoting sustainable and responsible financial services.
- Currently, banks and building societies registered with UKSIF include HSBC; Barclays PLC; the Ecology Building Society; NatWest Group; Standard Chartered; and Triodos Bank.
- UKSIF also has details of registered investment management firms and financial advisers.
3. Use a specialist financial adviser
Find an ethical adviser
- Ethical independent financial advisers (IFAs) will help you match your environmental and social concerns with the right investments. While IFAs will not generally advise on day-to-day banking products, they can help you with company pensions and investments.
- Run as a charity, the Ethical Investment Research Service (EIRIS) does not offer direct financial advice to businesses, but can help you find an ethical financial adviser or investment fund.
- The Ethical Investment Association (EIA) is a national organisation of IFAs who provide ethical investment advice.
Give your IFA the right information
- Before you meet an IFA it is a good idea to list which positive and negative ethical issues are most important to you, your customers, your staff and shareholders.
- At the same time, outline your firm's key financial needs.
Ask your IFA the right questions
- Check your financial adviser is genuinely independent. For example, an adviser linked to one ethical pension provider won't be able to give you any details on any other suitable schemes.
- Find out how many clients the IFA has, and how many of them have made ethical choices. Ask for references, or ask if you can talk to the adviser's existing clients.
- Check how long the adviser has been authorised and their registration with the EIA or UKSIF, or if they are listed on EIRIS's YourEthicalMoney.org.
- Ask what they charge.
- Make sure the adviser is registered with the Financial Conduct Authority.
4. Payroll giving schemes
Understand charity giving schemes
- Payroll giving schemes allow employees to donate to a charity they choose straight from their gross pay before tax, effectively increasing the value of their contributions. It only costs a basic rate taxpayer £8.00 to make a £10.00 donation. For a higher rate taxpayer, the cost is only £6.00.
- Employees choose the charity they wish to donate to, and donations are automatically deducted from their pay.
- For higher rate and additional rate taxpayers, payroll giving is the only way that a charity will automatically receive all the tax on a charitable donation. (In other circumstances, the tax payer has to reclaim the tax on their self-assessment tax return.)
Set up a payroll giving scheme
- To set up a scheme, choose a payroll giving agency who will handle the donations on your behalf. There is a fee payable.
- All modern payroll systems can incorporate the facility without extra paperwork and there is no tax paperwork to complete.
Understand the business benefits of payroll giving
- A 2002 survey found measurable business benefits to payroll giving. Almost two-thirds of companies that ran a scheme found payroll giving had improved their firm's image, while a third believed staff morale was boosted.
- Employers can apply for a payroll giving quality mark to use in their marketing materials.
- Once your scheme has been put in place, you can apply for the annual Payroll Giving awards for employers.
- Read about the FTSE4Good Index Series.
- Find ethical banking organisations and IFAs belonging to UKSIF.
- Find an ethical financial adviser through EIRIS's YourEthicalMoney.org or an EIA member financial adviser.
- Check a financial adviser on the Financial Services Register.
- Download a list of approved payroll giving agencies from HM Revenue and Customs.
- Find a member of the Association of Payroll Giving Organisations.