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GUEST ARTICLE: Ethical Investing Enters Virtuous Circle

Julian Lewis

9 September 2013

The UK’s first “ethical stock exchange”, Ethex, is creating a high net worth circle, reports Julian Lewis, a freelance banking and finance reporter in the UK. The “circle”, so the article argues, will enable sophisticated HNW investors, family offices and wealth managers to gain early-stage access to “positive investments” like social enterprises that seek to benefit society and the environment while also achieving financial returns.

Many of the high net worth sector’s offerings should benefit from eligibility for significant tax relief under the Enterprise Investment Scheme and Seed Enterprise Investment Scheme. Some may qualify instead under Community Investment Tax Relief.

Inevitably some circle members will want to exit investments as they mature, Ethex’s founder and managing director Jamie Hartzell said recently. He anticipates liquidity being created when proven social enterprises and other organisations move from the circle to Ethex’s less risk-tolerant broader investor base - and draws a parallel with EIS investors’ exits being facilitated by trade sales. “Then they can put money into something else,” Hartzell said.  

Proper market

The HNW circle forms part of a broader effort by not-for-profit Ethex, based in Oxford, to “create a proper market” for socially responsible and sustainable investments, according to Hartzell. For now, the positive investment area is a “pop-up” environment in which “people avail themselves of opportunities and then move on”, he said.

Ethex wants to create a more reliable and transparent market. Its key role in this is to facilitate secondary trading in “positive” debt and equity instruments. Issuers come from areas such as charity, community shops and pubs, fair trade, green transport, organic farming and food, renewable energy, social property and sustainable forestry.

Its trading model is one of “matched bargains”. Buyers and sellers are able to post offers for securities on the Ethex web site (subject to investor appropriateness checks).

Origins

This reflects Ethex’s origins 10 years ago in a share-matching service for holders of social investments operated by Triodos Bank (now one of the platform’s key investment providers, with its depositary receipts, ISAs, savings products and children’s accounts all offered via Ethex). The service was built around four businesses that included the Ethical Property Company, which Hartzell founded in 1998 and ran until stepping down two years ago to develop Ethex. In 2006 the quartet transferred to the broker Brewin Dolphin Securities.

The platform does not yet serve large institutions like pension funds and insurance companies. But it is already working with the rest of the professional investing universe. Its participants include family offices, independent financial advisors, broker-investment managers, trusts and foundations.

Ethex has begun “advising” advisors like IFAs. In cases where they have already established Ethex instruments’ suitability for clients it is able to make recommendations on liquidity and risk. It also offers a dedicated advice service from the ethical IFA Barchester Green.

In addition, it is working with specialist charity and sustainability fund management houses. Its counterparties in this area include Cheviot Asset Management (recently merged with Quilter & Co) and WHEB Asset Management.

This adds up to a more comprehensive infrastructure than ethical investing has mustered in the past. “We’re giving much more accessibility and credibility to these offerings,” Hartzell said. Ethex provides “an element of price discovery” never previously available in positive investments, he argues. 

In its first four months of operation this year Ethex raised GBP0.2m of fresh capital for its listees. Its investors also contributed an undisclosed share of Golden Lane Housing’s £10 million bond (see below).

It is now seeking to serve as a “receiving agent” on future offerings. It is putting technology in place to facilitate this role.

Equity platform

Ethex’s main role is as a platform to supply equity capital to social enterprises and similar organisations, Hartzell said. “There is a strong market need for corporate finance in this area,” he said.

The exchange mostly hosts entities that “can’t or won’t list” due to their legal form and/or stance on operating for maximised profit, Hartzell said. “Ethex is enabling investment in the exciting things going on outside the listed space,” he continued.

The experience of raising finance for EPC showed that “there were lots of people who wanted to make these kinds of investments, but the opportunities just weren’t there” Even when available, they were both opaque and difficult to trade, he said.

Accordingly, “I felt that there needed to be a kind of social stock exchange that would make that kind of thing possible, but on a not-for-profit basis where you’re working for the benefit of society. It wouldn’t be based around the usual ideas of speculation or personal gain.”

Hartzell’s EPC, which develops and runs office space for non-profits and social enterprises, remains one of Ethex’s suite of equity investments. A dividend payer, it recently raised £11 million for a new development in London’s Vauxhall.

Ethex’s newest equity offering is Stockwood, a biodynamic farm and rural business park currently in marketing.

Others include the AIM-listed ‘green’ electricity supplier Good Energy. A further renewable play is Ekopia, creator of Findhorn - an eco-village helping rural regeneration in Scotland.

Ethex’s developing world vehicles include Oikocredit, a microfinance lender with a historical payout ratio of 2 per cent, and Traidcraft, a fair trade company that was the first ethical business to make a public share offering back in 1984 – though it remains unlisted on any formal exchange. Oikocredit’s 700 UK investors have committed over GBP1m to the institution, placing Britain among its top five countries.

Debt & deposits too

The market’s debt products include a recent £10 million bond from Golden Lane Housing, a social enterprise that provides homes for people with learning disabilities. The 5-year issue’s retail tranche reached its £4 million target early, while the institutional offering (purchases of £84,000 and greater) was also oversubscribed.

Abundance, a crowd-funder of investments in environmentally-friendly UK energy projects such as wind turbines and solar panels, recently joined Ethex. It offers ultralong-term debentures of 25 or 20 years.

In addition, Ethex offers ethical savings products, including ISAs and children’s accounts. Entities it connects depositors with include Bristol Credit Union, one of the country’s strongest credit unions, and Charity Bank, the country’s only bank structured as a charity and a major lender to other charities. The two offer rates of up to 2.5 per cent.

Ecology Building Society recently joined the platform too.

This broad range of products enables Ethex to advance the idea of balanced positive investment portfolios )PIPs). Hartzell characterises these as featuring “not at all risky” investments - he cites credit unions - and medium-risk instruments alongside riskier holdings.

Competition questioned

The social investment market recently saw the launch of a second “exchange”, the Social Stock Exchange. High-profile participants include the disability charity Scope and major housing association Places4People.

Hartzell notes, however, that SSE is not an exchange – unlike Ethex. Others in the sector have queried the newcomer’s commitment to ensuring that the organisations it promotes operate ethically and sustainably.

Among Ethex’s issuers, only Good Energy participates on both platforms.