`Ethical finance' is commonly used to describe finance which takes into account not only financial returns but also environmental, social and governance (ESG) factors. This reflects an increasing recognition of the importance and value attributed by investors, both institutional and retail, to delivering measurable positive environmental and social impact on a sustainable basis.
Scotland has been at the heart of the ethical and sustainable finance movement since the beginning of the 19th century, when the world's first commercial savings bank was opened in 1810 by the Rev. Henry Duncan, followed by the formation of Scottish Widows, Scotland's first mutual life office, in 1815. The principles of ethical and sustainable financing have continued to the present day, with the launch of the Ethical Finance Hub in Edinburgh in 2016, with the aim of helping SMEs to access ethical finance and more recently the Scottish Government's public commitment to Scotland reducing carbon emissions by 90% by 2050 and becoming a net zero carbon economy as soon as possible.
Ethical finance and investment is growing momentum, globally and nationally, at an exceptional pace. Previously, it was principally the remit of specialist finance providers and investors supporting enterprises with an environmental or social purpose, now it has morphed into the mainstream with an ever-increasing recognition of the importance and value of taking ESG factors and values into account.
It has been estimated by the Global Ethical Finance Forum that there are over $27 trillion worth of assets under management globally on an ethical basis. This reflects a huge and growing market, with more retail and professional investors recognising that ESG factors have a material role to play in determining risk and reward.
As the investment and finance market has developed, ethical principles are increasingly being seen as the new normal, providing essential controls to underpin investment and finance decisions. Increasingly, funds and lenders are being challenged when they are perceived as failing to apply suitable ESG factors in their decision-making processes.
Faith-based finance is closely aligned to wider ethical finance principles, and includes Islamic-based finance, with many of the principles underpinning it being consistent with broader principles applicable to ethical finance. It has been estimated that faith-based investment will rise to $3.5 trillion by 2021, emphasising its importance to wider economic investment.
"Ethical finance and investment is growing momentum globally and nationally, at an exceptional pace."
Officers and investeers in investment companies, charities and finance providers seeking to adhere to ethical principles face potential conflicts between their classic corporate fiduciary duties, particularly to their shareholders and charitable beneficiaries, and adherence to a commitment to compliance with ethical finance principles.
There is also no common industry wide methodology used for identifying whether finance is ethical or sustainable, with a wide variety of principles and measures being used to assess compliance. This leads to risk that the terminology may be used as a label to attract institutional or retail investment. There is also a risk of `ethical washing' of investments to increase attractiveness to ethical finance investors.
Increasingly however, institutional investors and providers of finance are committing to compliance with internationally recognised standards such as the UN Sustainable Goals and as this market develops consistent themes and principles are increasingly emerging.
Traditionally ethical principles have often focused on negative contols with restrictions applying to investment and finance in sectors such as weapons, nuclear, animal testing, the fur industry, pornography, tobacco and alcohol, but increasingly we are now seeing a move to focus on positive impact of finance and investment.
Environmental, social and governance, the positive impact of these factors commonly underpins the assessment of whether finance is ethical.
Finance focused on delivering positive environmental results that are measurable.
Principles for Responsible Investment
A UN-backed initiative comprising a set of six principles that provide a global standard for responsible investing as it relates to ESG factors.
Shariah compliant finance
Finance that is underpinned by Islamic-based principles.
Terminology used commonly in substitution for ethical finance.
"There is no common methodology used for identifying whether finance is ethical or sustainable, with a wide variety of test being used to assess compliance."
UN Global Compact
A voluntary initiative based on CEO commitments to implement ten universal sustainability principles including environmental responsibility, employee relations, human rights, business ethics and anti-bribery and corruption.
UN Sustainable Development Goals (SDGs)
17 key goals published by the United Nations,focused on alleviating poverty, inequality, climate, environmental degradation, prosperity, and peace and justice.