Show me the money – the great debate on wonga

Professor David Hillier from Strathclyde Business School’s Department of Accounting and Finance explores the recent debate around pay-day-lenders…

Ethical investment is something more companies are coming to see as an important way of promoting their core brand to the wider world. And yet to invest ethically is something that’s harder to do than you might think. Take the Church of England for example. The Archbishop of Canterbury, The Most Rev Justin Welby recently spoke out about pay-day-lenders, saying the Church would move to compete with organisations through new credit unions, which operate with much lower levels of interest. Fast forward a few hours and it emerged that the Church had indirectly invested in Wonga.com through its investment company, Accel Partners, which had raised funds for Wonga in 2009.

Embarrassing? Certainly – but whether this was avoidable is much harder to say. The Church of England had an ethical investment policy in place which recommended against investment in companies which made 25% of their income from companies such as pay-day-lenders – a figure they now say is probably too high. The problem with ethical investment is that everyone’s standards are different and while it’s easy to opt out of investing in funds which deal in international arms or vivisection for example, it will be much harder to pinpoint a company which may have raised money for a pay-day-lender when it’s engaged in a wide variety of sectors. In the end all investment funds will have to realise growth for investors so the area will be a grey one for many organisations.

And yet there is undoubted interest in ethical investment. Perhaps this can partly be explained through the apparently endless negative headlines about ‘greedy bankers’ but it would seem the area is most certainly in the ascendency. The latest figures from the sustainable investment organisation, EIRIS, suggest the amount of money being invested rose from £4bn in 2002 to £11bn last year. And while the figure may just be a drop in the ocean when compared to the overall total it is not an insignificant sum.

So how can organisations guard against being linked to companies they publicly denounce as unethical? The truth is that this will be hard to do but if your company is serious they will have to dig deep to uncover backgrounds and clients of the investment company you use. The horsemeat scandal earlier this year highlighted that while supply chains can be taken for granted, if stringent checks are not enforced you may live to rue the consequences. This is also true of financial investment. While there are more ethical investment companies coming into being it might be harder for you to realise the same level of return. And so when your company sets out its requirements for pension funds or investment priorities the hard question will have to be asked: do I want to uphold my organisations ethics or realise the highest level of return?

What do you think about ethical investment? Are companies doing enough to find out as much as possible about the firms they invest with, or is this something that should not concern us in 2013? Let us know in the comments below…

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About David Hillier

David Hillier is Executive Dean and Professor of Finance at the University of Strathclyde Business School. He is the author of the largest franchise of Finance textbooks outside of the US and his specialist areas include insider trading, corporate governance, corporate finance and pensions.