29 March 2018
ISAs For Good
Turning charity into investment.
By Frank O’Nomics
As we approach the end of the tax year, most of us once again have left the utilisation of our ISA allowance to the last minute. One of the reasons for being dilatory lies in the difficulty in choosing from the mind-boggling (and numbing) range of opportunities. Should be put our (up to) £20,000 in a Cash ISA, a Lifetime ISA, an Innovative Finance ISA or just a plain ISA? A lot will depend on your appetite for risk, age, potential future use of the capital and of course your view of future investment returns. Far be it from me to make things even more complicated, but there is a further consideration – that of the potential to do some social good.
Before we get into the specifics of ISAs it is worth contemplating the potential of social investment. Muhammad Yunus, the creator of the microfinance Grameen Bank, in his latest book A World of Three Zeroes, talks about creating a global environment of zero poverty, zero unemployment and zero carbon emissions. He cites a vast area of the world that is not on any electricity grid and uses huge volumes of kerosene for light and heat. This is not only expensive but also very bad for the environment with additional risks to health. One solution is for a charity to buy and supply solar panels to villages so that they can wean themselves off kerosene. Ultimately this sounds like the perfect solution to all of the issues, but the fundamental problem is that it is not sufficiently scalable. Suppose that instead of giving the panels to the villages, you sell them instead? The villagers then repay the cost of the panels over time with the money that they would have otherwise spent on kerosene. Once the loan is repaid they will finish with a source of power that will be free in the future, and more importantly their repayments will allow the process to be repeated elsewhere. Using this method, instead of pure charity, has allowed Grameen Shakti to supply solar power to over 1.8 million homes in Bangladesh.
So what has all of this got to do with ISAs? Within the list outlined above sits the relatively new Innovative Finance ISA. For the most part this product has allowed relatively sophisticated investors to get involved in p2p lending. This a way of generating a rate of interest well above that offered by banks by engaging in activity that is traditionally the province of banks – that of lending money. You could argue that such lending fulfills a social purpose, in helping individuals or small and medium-sized businesses to source funds at better rates than those offered by banks, thereby helping employment and general prosperity. However, there are some products that go further by providing loans to charities and social enterprises. Here are a couple of examples currently being offered by the bank Triodos within an ISA wrapper. The Thera Trust is a charity that exists to help people with learning disabilities to live a more normal life. Set up twenty years ago to support 5 people in the Cambridge area, they now help over 3,000 across the UK. They are currently looking to raise up to £5mn in a bond issue, that pays interest of 5.5% per annum for 6 years, so that they can buy (or lease) and convert properties to help more people live independently. Another offer is from Mendip Renewables, who are looking for £1.8mn to fund a solar energy scheme via a 17-year bond that pays 5% (inflation linked) per annum. The company is set up as a community benefit society and distributes its profits to charities in the Somerset area (the first to benefit has been Key4Life who work to rehabilitate young offenders). They plan to pay £1.4mn into the benefit fund over the life of the bond.
These investments obviously carry more than the normal amount of risk, and payment of interest and capital is not guaranteed. Further, they will not be easily realisable until maturity, are unsecured and are not covered by the Financial Services Compensation Scheme. However, if you regard the money given as a kind of “renewable charity” then that additional risk looks more attractive. In the first instance you are helping a charity, but when (and if) you receive interest and a repayment you have the scope to use this money to further help a charity, or alternatively, use it yourself. There will be those who are not comfortable about making money from charities, but if the investment is leveraging the opportunity to do good, and the interest is recycled to charities, this is not a valid criticism.
Such investments are probably best for sums of money that you can afford to lose. Fortunately they are usually structured so that relatively small sums can be invested; for Mendip Renewables the minimum is £500 and for Thera Trust it is only £100. Investing modest sums here can mean that you still have scope to invest the majority of your ISA money more conventionally. There is a facility to invest outside of an ISA, which means that you don’t have to eat into your ISA allowance at all, but the beauty of ISAs is that the income received will be tax free – which means you will either receive more or will be able to recycle more to other charities.
