Welcome to our eight-part series on Ethical Finance and Money. We’ll be exploring ethical finance with a focus on investments, AI, Islamic finance and more. If you’re feeling inspired, go out and research further or find out more at the Yielders Blog! This content does not constitute financial or investment advice and should not be read as recommendations to buy or sell any financial products or securities.
Ethical Investing and Property
The Beginnings of Ethical Finance
Rewind the history books back to the early 18th century and you’ll find the first example of ethical investing. Cleric and Methodist founder John Wesley was an energetic preacher on social reform and was one of the first people teaching others to spend their money wisely – and never to harm others with it.
In 1984, insurance company Friends Provident brought socially responsible investing to the masses by launching the Stewardship Mutual Fund. Working to strict ethical standards, the fund avoids investments that harm society, while encouraging shared ownership and dialogue, and benefiting society. These principles are what we now consider as the fundamentals of ESG investing (Environment, Social and Governance considerations in investing).
Ethical Finance and Islam
Religion has played a critical role in the development of ethical finance. Some 1,400 years ago, Shariah law was formed in Islam. The Shariah is a set of laws aiming at comprehensive guidance for living life, there are even rules on how banking can operate within shariah boundaries – attempting to eliminate malpractice and exploitation while encouraging healthy trade.
In Islam, charging interest, or usury, is forbidden and is grouped within a concept called riba. Interest in any form is prohibited as it is considered unearned income and is therefore unjustly gained. Under the Shariah, money is not considered a commodity and therefore can’t be traded as such, having no intrinsic value if it isn’t used to buy tangible goods.
With the development of new technologies and processes, Muslim investors now have more options than ever to invest in a way that’s Shariah compliant, ethical and sustainable. Meanwhile, general public sentiment on ethical investing has skyrocketed – 78 per cent of investors state that sustainable investing has become more important to them.
Ethical Property Investing
Real estate has proven to be an investment opportunity which has the potential to be both ethical and sustainable. It began as early as the 19th century when church schemes pooled investments into the upkeep and maintenance of their buildings, using remaining profits for charitable work.
Nowadays, investment platforms can focus on property investments which promote social change, social cohesion and deliver critical housing demands.
House prices have risen sharply, while the younger generation are finding more than half of their earnings spent on rent with little chance to secure the deposit required to buy their own property. Meanwhile, social housing continues to be a bedrock of the UK’s social welfare programme. Investment platforms working with local housing authorities, like Yielders, can address the under supply of social housing while delivering an effective investment vehicle. UK housing charity Shelter reports that 1.2m homes are needed for younger families who cannot afford to buy increasingly expensive homes or live in insecure, expensive private rental properties.
By pre-funding properties with pre-agreed, long-term tenancy agreements, tenants can feel more secure in their housing situation – while maximising investor returns and mitigating risks through insurance and high covenant contracts where possible.
Banks don’t need to be involved when properties are pre-funded. By paying for properties in full, mortgages aren’t required – removing the prospect of interest, unexpected interest rate rises, and the property being repossessed.
The New Generation
For millennials, needs and values are changing when it comes to investment options. A 2016 Morgan Stanley report shows how millennial investors are now nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes, whilst 29 per cent of investors in their 20s and 30s are now searching for financial advice that provides values-based options.
Modern investors also want transparency when investing – it’s important to know where our money is going, and how much we’ll be paying to invest. The UK’s financial regulator, the FCA, recently revealed how 29 per cent of investment service users still don’t know whether they pay investment charges or think they don’t pay any whatsoever.
Being clear about how fees are applied, and what they are used for, is an increasing focus for investment platforms and fintech companies which value ethical business. At Yielders, fees are clearly outlined, and no hidden charges are applied. This fee structure is designed to maximise yields and fees are only applied at the end of the investment cycle. We recently lowered our secondary market fees after consulting investor feedback, which we were pleased to deliver based on the amount invested.
A Global Outlook
In Europe, responsible investment strategies grew by 11 per cent from 2016 to 2018. The Global Sustainable Investment Alliance 2018 report shows that sustainable investing assets were worth $30.7tn – a 34 per cent increase since 2016 – specifically assets which consider the ESG factors in portfolio selection and management.
Islamic Finance is also going through a period of unprecedented growth. Total sharia-compliant assets are expected to grow by 10-12% over 2021-22. Yielders received its certification of sharia compliance in 2017, after extensive review of its platform, business model, procedures, terms and conditions. This certification confirms that Yielders is consistent with sharia principles and rules – enabling Muslim and non-Muslim investors all over the world to invest with confidence in its ethical returns. Our platform also undergoes a yearly Shariah audit to ensure that we are up to scratch.
Responsible, ethical investing can deliver consistent returns, and a better world. Find out more at Yielders. Invest, Grow, Yield.