ETHICAL BANKS & BUILDING SOCIETIES

Banks and building societies claim to have their customers' interests at heart, but are they really listening? Most of us choose our banks or building societies for reasons of convenience – simply because there's a branch around the corner or maybe because we had an account with a predecessor of one of today's conglomerates. But, as customers, we have the right to make judgements about the ways our banks behave, not least in the realm of their relationships with the developing world.

Support mutual building societies like Britannia. This specifically excludes de-mutualised building societies – those that have become banks – such as the Alliance & Leicester, Halifax, Northern Rock and Bradford & Bingley. The debate over the future of mutual building societies has largely focused on their potential benefits to customers; mutual status means that there are no shareholders to pay dividends to, so profits can be ploughed back into lower loans charges and higher interest rates for savers. These claims appear to be borne out by Which? magazine's July 2001 study, which reported that in general, mutuals still give better deals on mortgages and savings than their de-mutualised cousins. Some mutual building societies can also offer a better option than most banks as they don't take business customers, so they could never fund dubious business practices, like logging or oil exploration. Of those on the table, the Coventry, Yorkshire, Leeds & Holbeck and Portman do not lend commercially. Information on the benefits of mutuals, and a list of the remaining mutual building societies, can be obtained from the Building Societies Association on 020 7437 0655 or www.bsa.org.uk

Several British banks – most notably Lloyds (now Lloyds TSB) and Midland (now HSBC) – were the focus of campaigns in the 1980s and 90s over their holdings of Third World debt. Much of this has now been written off as banks realised that they were unlikely to recoup the loans, and that they were acquiring significant bad publicity. Some, such as the Bank of Scotland, 'swapped' their poorest-country debts for commitments by national governments that they would use the money for domestic development programmes. However, EIRIS has listed some high street banks as still holding some Third World debt. See eiris.org.

British banks have been the targets of other important campaigns about their holding of World Bank bonds, their involvement in the kind of currency speculation that has ruined many developing countries, and their support for the World Trade Organisation's controversial agreement on trade and services. Some of these issues are indicated in the table.

Information on the environmental and social policies and reporting standards of a range of banks can be found in an EIRIS factsheet, available from 0845 606 0324 or www.eiris.org.

Charity Bank

Charity Bank is the UK’s first not for profit bank. It is a unique enterprise, combining the compassion of a charity and the strength of a bank. By investing in dynamic organisations and people with vision, Charity Bank aims to grow the grass roots of charitable funding, helping organisations across the country tackle poverty, exclusion, abuse and prejudice, and enabling them to breathe life back into under-invested communities. The bank offers affordable solutions to charity borrowers, providing them with the type of sustainable investment and short-term capital that is essential for a successful operation, but which is often difficult to find elsewhere.

For savers, the Charity Bank approach allows your money to work for charitable activities. Your deposit will be used to provide credit, and to invest in stable finance options for voluntary groups, social enterprises, community businesses and other benevolent organisations. While donations will always be an important part of funding, Charity Bank believes that donating is most effective when combined with long-term investment. Saving with Charity Bank offers you a social return on your cash, and ensures that your money is being used, not for commercial gain, but for the common good.

www.charitybank.org Tel: 0173 277 4040

CHARITY CREDIT CARDS

Charity avnity credit cards are excellent, because they continually raise money for good causes without serious cost to the customer. Nowadays, there are plenty on offer, most of which let us choose which charities we wish to support. Single charities issue the cards both for raising money and winning publicity. Several banks co-operate closely with them, but not all. Read here for details.

A charity credit card raises money for a charity (or several) when the card is first taken out or first used, and from then on a small percentage, like 25p for every £100 used, goes straight to the charity. The charities benefit from the extra revenue and also because the cards and associated marketing can raise their profile and thus recruit new members.

Few affinity cards charge an annual fee, but it is worth checking on this before taking one. Some have low introductory rates of interest in the first few months, but in general the rates are close to the average available at any one time. This is irrelevant if we pay off our bill in full, as most affinity cardholders apparently do. As the donations depend on the money spent, not on the size of the outstanding balance, there is no loss to the charity if we do clear it every month.

Many banks have been happy to co-operate not only with conventional charities but also with sports clubs, hobby groups and professional organisations, seeing it as a way to gain market share. In terms of ethics, it makes little difference whether our card is Visa or Mastercard. It is more appropriate to ask which bank the charity has teamed up with to issue its credit card. Some of the banks have resisted getting involved, considering cards too costly to administer or being reluctant to pay VAT on donations.

Of the UK high street banks, Bank of Scotland, Royal Bank of Scotland, Halifax, Co-operative and HSBC all offer charity-linked cards. Three US banks, MBNA, Beneficial and People’s Bank of Connecticut, jointly issue affinity cards with charities. Co-op Bank cards support among others Amnesty International, Greenpeace, Help the Aged, Save the Children, Oxfam and the RSPB. Beneficial Bank has several cards which benefit animal welfare charities as well as the Wildlife and Wetlands Trust, English Heritage and Unicef. Frizzell supports the Cancer Research Campaign, while People’s Bank has cards for Comic Relief and the Vegetarian Society. The Bank of Scotland also has several to choose from.

Co-operative Bank has been researching alternatives to PVC for its credit and debit cards and hopes to make a biodegradable plastic known as polyethylene teraphthalate, completely free of hazardous chemicals. No other UK card issuers seem to have followed their lead.

ETHICAL INSURANCE

Choosing insurance companies is rather like a lottery. They may be offering the best deal today but who knows what will happen in the future? Companies keep merging and taking each other over and sometimes we can hardly tell their names apart. One way to keep ahead of the main companies is to look at their ethical policies and to ask questions about the companies that their managers like to invest in.

A key question for ethical consumers is: ‘In which shares is the money invested?’ As Friends of the Earth puts it: ‘The fate of the global environment is in large part under [institutional investors’] control, and yours too – because it is your money and you are their client.’ But according to the Ethical Money partnership: ‘No insurer has an “ethical investment” policy whereby they avoid investing in particular types of company.’ Campaigners have become increasingly impatient over unethical corporate activities and they are learning how to put pressure on insurance companies as shareholders. One way to make this pressure work is to keep consumers aware of what their insurers are investing in. Campaigners ask the insurance companies to use their own power as shareholders to vote or create pressure for more ethical or environmentally sound behaviour by the target company.

As share prices plummeted in 2001 and 2002, many insurance companies went through a difficult time and saw their assets devalued, as their own investments in stocks, shares and property markets began to mark up losses. Premiums started to rise and companies became much more careful about the risks they were prepared to cover. In the UK, flood cover was withdrawn from a lot of homes that were deemed to be at risk.

So-called natural disasters have required insurers to make huge pay-outs, the rate of which has been doubling every decade. One report in 2002 warned that more frequent natural disasters in future could bring insurers, re-insurers and banks ‘to the point of impaired viability or even insolvency.’ The insurance companies usually offset their potential liabilities by trading some of the premium (like a bookie ‘off-setting’ a large bet with another bookie) with a re-insurance company. Many of these companies have now become involved in the UN Environment Programme’s Insurance Industry Initiative, which commits them to working together to address issues like pollution reduction, efficient use of resources and climate change – or in other words to try to work out more sustainable development policies around the world.

The UNEP finance initiatives have three working groups: environmental management and reporting (EM&R), climate change and asset management. The EM&R Working Group aims to develop international guidelines on reporting for the financial sector and its 16 members have been working with accountants PriceWaterhouseCoopers. It aims to produce guidelines on environmental management and reporting at present, with a view to expanding this to encompass social issues in the future. The Climate Change Working Group has twelve members, including Aviva and Prudential. As well as taking steps to manage the effects of climate change, the group wants to reduce ‘greenhouse gas emissions now.’ The Asset Management Working Group has 16 members: its purpose is to extend the understanding (which has seen renewable energy emerge as a new area for investment) ‘further into the mainstream investment community’. Choose from the greener ones and source the best insurance deals with GOOSHING

ETHICAL MORTGAGES

Ten years ago, most mortgages were taken out with building societies, but since de-mutualisation about four out of five mortgages are now provided by either a bank, a life insurer or a specialist mortgage lender. This section covers a few of the remaining building societies, some of the major bank lenders and some of the ethical mortgage lenders. All of the companies in the report offer standard ‘repayment’ mortgages.

Mortgages are likely to be one of the single biggest outlays for many people. However, monthly repayments could be contributing to loans for animal testing laboratories or investment in companies involved in other unethical activities. Consequently, the mortgage company’s lending policies are as important as the kind of mortgage on offer. Although all the banks/building societies covered in this report were asked about their approach to lending, the only ones to offer comprehensive ethical lending policies were the Ecology Building Society and the Co-operative Bank. The Ecology lends primarily to ‘green’ housing and the Co-op excludes companies involved in a range of activities like animal testing and arms exports to oppressive regimes. For companies which have not offered specific information, it is probably correct to assume that building societies are less likely than banks to be involved in what ECRA describes as ‘questionable’ corporate lending.

Homes are one of the largest sources of carbon dioxide emissions in the UK. While most mortgage lenders offer valuation surveys as part of the mortgage deal, relatively few at this stage are offering specialised environmental surveys. These environmental surveys assess how energy efficient the house we want to buy is, and give advice on energy savings measures. Currently, the Co-op Bank offers this kind of survey free with its green mortgage, as do the Norwich & Peterborough and the Ethical Mortgage Service.

All the banks and building societies in this report were asked for their latest environmental reports. Although the situation has improved since EC last covered banks, few of the companies had any environmental report that would receive ECRA’s clean rating. The Co-operative Bank continues to be a leader in this sector.

The Ecology Building Society currently lends only on properties that give ‘ecological payback’. This translates as being houses which it considers energy-saving – such as back-to-backs, derelict houses which would otherwise have been abandoned, etc. This strict lending policy means that it won’t be suitable to every person seeking a mortgage. The Norwich & Peterborough offers a carbon-neutral mortgage. For the first five years of each of its Green Mortgages, it will plant eight trees a year. Its leaflet claims that the trees will absorb carbon dioxide to the equivalent of the estimated emissions of the property. It also offers a ‘brown’ mortgage scheme which aims to encourage the renovation and restoration of buildings for residential use. The Co-operative Bank’s green mortgage will ‘pay Climate Care to offset around 20 per cent of an average home’s carbon dioxide production for every mortgage we grant.’ It claims over a 20-year mortgage, just under a fifth of an acre of forest would be planted. The Ethical Mortgage Service is a collaboration between the Ethical Investment Co-operative (a group of Independent Financial Advisors) and consultants called Thirdwave. It offers advice on mortgages from a panel of lenders that it has ethically screened. This panel includes the Skipton, Scottish and Yorkshire Building Societies. For the purposes of this April/May 2001 report ECRA included the ratings for these building societies in the rating on the table for the Ethical Mortgage Service. On the table, amber circles appear where the bank is an investor or service provider to companies criticised for particular activities.

ETHICAL INVESTMENT

One of the most effective ways you can put ethical consumerism into practice is with your investments. With the growth in awareness on the part of companies as well as investors of the benefits of ethical investment, it is becoming easier to put your money where your mouth is…

The roots of ethical investment can be traced to the religious movements of the nineteenth century, such as the Quakers and Methodists, whose concerns included issues such as temperance and fair employment conditions. At the beginning of the 1900s, the Methodist Church began investing in the stock market, consciously avoiding companies involved in alcohol and gambling. During the twentieth century, more churches, charities and individuals began to take account of ethical criteria when making investment choices. An ethical investment ideology began to develop in the US as controversy over American involvement in the Vietnam War led to the founding of the Pax World Fund in 1971, which aimed to avoid investments associated with the war. In the 1980s, the apartheid regime in South Africa was the focal point for ethical investment and, indeed, its success as a tool of protest there accelerated its acceptance and growth round the world.

In 1983 the Ethical Investment Research Service (EIRIS) was established as the UK's first independent research service in ethical investment, providing the underlying research into companies' social, environmental and ethical performance needed by investors to make informed and socially responsible investment decisions. The UK's first ethically screened unit trust – the Stewardship Fund – was launched by Friends Provident a year later. Now there are over 60 ethical retail funds in the UK market, with an estimated value of £3.8 billion. This growth in SRI (socially responsible investment) has been reflected globally, for example the Asia-Pacific region has seen the launch of several SRI funds in places like Japan, Australia and Singapore. In Europe there were 170 ethical funds in 1999, by the end of 2001 the number had grown to over 280. Ethical or socially responsible investment describes any area of the financial sector where the principles of the investor inform where they place their money. Companies large and small have an increasingly large impact upon the world around them. How they conduct their business can affect all manner of things beyond the actual product or service they provide.

There is a growing awareness that, alongside simply choosing to buy or not to buy their products, those of us who invest our spare money can also influence companies towards better social and environmental behaviour. With any standard unit trust, investment trust, ISA or pension you may find your money going to companies which you would not wish to support. An ardent anti-smoker, for example would be dismayed to discover that their savings were invested in a tobacco company. Whether your investments are limited to a pension fund or if you're more involved in the stockmarket, knowing as much as you can about the ethics of the financial companies you're investing in can be as important as choosing an environmentally sound washing-up liquid. In fact, as the recent War on Want campaign to encourage the 10 million people who are occupational pension scheme members to find out where their money is invested shows, you can use your influence no matter how small your investments might seem.

The first step towards positive investing is to identify what social, environmental and other ethical issues are most important to you. Areas of concern can be wide ranging, from animal testing to gambling, from human rights to nuclear power, from environmental enhancement to community involvement. Surveys by EIRIS have shown that the most prominent areas of concern were: operations in oppressive regimes, breaking environmental regulations and testing products on animals. The companies that respondents most liked their pension fund to favour over others when making investments were those with good records on environmental issues and employment conditions. Identifying these areas will reflect the type of companies you want to invest in or to avoid.

It is important, however, to remember that there is no such thing as a perfect company. All are involved in activities that someone somewhere will object to and none go far enough in terms of positive social and environmental contribution to satisfy all of the people all of the time. Ethical investment is about compromising and prioritising.

Once you've worked out your individual criteria, there are a diverse range of ethical funds available and different funds suit different investors. Some funds select a set of criteria which they believe will appeal to the widest range of investors. Others take a precisely focused approach, designed to appeal to a particular market. It is therefore very important to look behind the 'green' or 'ethical' label to what the fund is actually investing in before deciding to invest.

Ask:

• How the fund researches the activities of the companies in which it invests.
• Is there an ethical committee or advisory board that is independent of the investment process, to make sure the fund adheres to its published ethical policy?
• How good is the fund's communication with investors, e.g. does it have mechanisms in place to allow investors to voice their concerns?
• How active is the fund in engaging or communicating with companies? Does it encourage companies to improve their social and environmental performance?

Ethical investing works two ways:

• by using their power as a shareholder to influence corporate behaviour;
• by choosing to invest only in companies who behave in a socially responsible manner

One method of shareholder influence, which is as useful as much for the publicity it often receives, is the practice of posting shareholder resolutions which companies then have to consider in public at their annual general meetings. Campaigners say that the rules governing who can put forward a shareholder resolution are more restrictive in the UK than in the US. Nonetheless, a recent UK example is the resolution placed before BP's spring 2002 AGM – filed by the global environment network WWF, together with an international coalition of ethical investors – on its drilling activities in environmentally and culturally sensitive areas. This is one part of the campaign to prevent BP and others from drilling for oil in places such as the Alaskan Arctic National Wildlife Refuge, which is one of the last pristine areas left in the US and currently off-limits to oil and gas exploration and development.

Ethical investment is not confined to shares traded in stock exchanges. Many investors prefer to back individual projects or causes. Such directed investment is known by a variety of terms including, alternative investment, mission-based investment and socially directed investment. Examples of cause-based investment include regeneration projects in Birmingham (through the Aston Reinvestment Trust), and the support of projects in developing countries (through the co-operative lending society, Shared Interest). The cause-based investment sector is currently dominated by financial institutions such as Triodos Bank and the Ecology Building Society, although it also includes ethical companies who raise money directly from stakeholders by selling ‘ethical shares’. Such companies include Traidcraft and the Centre for Alternative Technology.

There are three main strategies that funds can adopt to implement their ethical investment policies.

• Engagement
  No companies are excluded but areas are identified in which companies can improve their environmental, social and ethical performance. The fund managers then 'engage' with the companies to encourage them to make such improvements.

• Preference
  The funds adopt social, environmental or other ethical guidelines which they prefer companies to meet. These guidelines are applied where all other things are equal (e.g. financial performance).

• Screening
  An ‘acceptable list’ of companies is created based on chosen positive and/or negative criteria (e.g. avoid companies involved in the arms trade, include companies with good environmental performance and so on). Funds are invested only in those companies on the list.

You don't need to worry that concentrating on ethical investments will make your financial performance suffer. Research by EIRIS and others indicates that investing according to ethical criteria may make little difference to overall financial performance, depending on the ethical policy applied. Five ethical indexes created by EIRIS produced financial returns roughly equivalent to the returns from the FTSE All-Share Index. For example, the total return of the Charities' Avoidance Index, which excludes the vast majority of companies involved in tobacco, gambling, alcohol, military sales and pornography, was 0.38 per cent greater than the All-Share. And companies, too, can benefit. Over £3 billion is already invested in companies screened for good social, environmental and ethical practice by retail investors. Many churches and charities, pension schemes and local authorities are also investing according to socially responsible investment policies. That means money is being consciously diverted from companies that cannot demonstrate this good practice. And many investors are engaging with companies which they invest in or are considering investing in to persuade them to improve their policies and practices.

You can get further information by contacting the organisations listed below:

EIRIS's Guide to Ethical Funds covers the ethical retail funds (such as unit trusts, OEICs, investment trusts) available to the UK investor, giving a summary of each fund's ethical policy, top ten holdings and outlining what products (pension, ISA, etc.) are available with that fund.

EIRIS was established in 1983 by a group of churches and charities, today it is one of the leading providers of independent corporate research for socially responsible investors. EIRIS has a wealth of information for people who want to apply their principles to their investments and finances. EIRIS can provide a directory of financial advisors who have expertise in advising on ethical investments (available from www.eiris.org ).

EIRIS,
80-84 Bondway
London
SW8 1SF

Tel: 020 7840 5700
Email: ethics@eiris.org

The UK Social Investment Forum is a membership network that promotes and encourages socially responsible investment in the UK including shareholder activism, social banking and community finance, www.uksif.org tel. 020 7749 4880)

The European Sustainable and Responsible Investment Forum (Eurosif) is a non-profit organisation promoting the concept, practice and development of responsible and sustainable investment, www.eurosif.info.