Sustainable investment IF ISAs could convince the critics

Sustainable investment IF ISAs might be the solution to the bad press the product and peer to peer lending often gets. Stephanie Spicer examines the IF ISA ethical offer

Innovative finance ISAs (IF ISAs) were introduced to allow investors to get tax breaks investing in peer-to-peer (P2P) loans (lending to businesses) and crowdfunding debentures (investing by buying the debt of a business).

The product continues to be dogged however by concerns about the risks of the underlying investments. Could more green and sustainable business opportunities from the market’s key players help to turn the tide of resistance to investments seen as too risky and tainting to the ISA brand?

Perception problems
IF ISAs often tout high target returns compared to what one might get from a bank deposit account. If not quite a case of “if it looks too good to be true…” it is nevertheless, in another well worn phrase, akin to comparing apples and oranges.

According to Jason Hollands, managing director, business development and communications at Tilney Investment Management: “It does concern me that IF ISAs are universally promoted in this way. Unlike a bank account, these schemes are not covered by the Financial Services Compensation Scheme (FSCS).

“P2P loans, including those to property developers, should only be considered by those who understand their true nature, not those who think this is a just an alternative to a bank account but offering stellar yields.”

Hollands added: “The IF ISA market is tiny overall and P2P may have peaked, so I am dubious that we are going to see a wave of product innovation. If anything, there are signs of consolidation.”

Sustainable offers Investors who want to pursue a more sustainable investment agenda with their IF ISA and or through the P2P sector do have to hunt around. Ethical investment platform Ethex said it offers an IF ISA designed with the same tax-free benefits of a traditional Cash or Stocks & Shares ISA but enables investment into crowdfunded bonds issued by projects which are helping to tackle climate change, promote social equality and build resilient communities.

This, it said: “Gives investors the freedom to use their money to help ethical businesses and organisations to grow while balancing the risk of this kind of investment with the tax-free returns on any interest earned within your IF ISA.

The Ethex IF ISA offers investment in Energise Africa Bonds, issued by solar companies bringing solar energy access to families in sub-Saharan Africa. The return ranging from 5-7% gross/AER variable.

Another option, Abundance, is an investment platform that aims to create opportunities for people to invest in green and social infrastructure, such as green energy and social housing. It offers the Abundance Innovative Finance ISA.

Mike Bristow, CEO and cofounder of P2P lending platform Crowd Property said that there are sustainable investing opportunities within the property sector.

Crowd Property, purports to support SME property professionals that traditional sources of funding have failed; and offers investors the opportunity to do so through its IF ISA.

“One specific example of where housebuilding industry innovation can materially contribute to the green and sustainable agenda is through modular housing, or modern methods of construction,” said Bristow.

“There are huge benefits in terms of time, waste and emissions reductions, but traditional lenders have not embraced the funding of this type of construction, in particular amongst smaller developers, because it is complex to structure.

“We have worked hard to work out how to bring funding products to this segment of the market for modular, resulting in funding projects that may not have happened otherwise – ie funding more green and sustainable construction.”

Do your homework
Some research is key for any investing and especially for going the IF ISA route and seeking sustainable investment options.

Caroline Gill, head of marketing at Crowd2Fund, said: “P2P lending rarely allows you to invest in large infrastructure projects, such as renewable energy, but it is a great way to invest in businesses with an ecofriendly mission.

“It is important the platform you use allows you to actively assess and choose the businesses you invest in. Some platforms use a pooled-fund system, which means investors do not know where their money is invested, how it is used by a business and they cannot decide for themselves how sustainable a business is.

“One person’s standard for sustainability will be different for another person’s, which is why Crowd2Fund provides so much information about each investment, so our investors can make their own decisions.”

Critical view IF ISAs and the P2P market have some sustainable actions of their own to address if critics are to be pacified.

Dr Roger Gewolb, founder and executive chairman of lending comparison platform has real concerns over the P2P market and has argued that the sector should be regulated by the Bank of England.

“The FCA has been put in the position of upholding and perpetrating the ‘myth’ that was started a decade ago that people who put money into P2P lending platforms instead of banks are investors and not depositors,” he said.

“P2P lending platforms are simply unlicensed deposit takers and it is an absolute fiction to consider that they are taking in investments, or that the people putting their money into them regard them as investments.

“The Bank of England must now take over and regulate this area and subject these firms to proper deposit taking inspection, regulation and supervision. Otherwise, more catastrophes are sure to happen, including big ones, and one day investors could run for the hills and the industry will shrink or disappear altogether, and we will be left once again with only the traditional banks, which will not be a good thing.”

While leading players Funding Circle, RateSetter, Zopa, Lending Works and CrowdProperty have founded the 36H Group, now part of Innovate Finance, an independent industry body that represents and advances the UK’s FinTech community, the problems of self-regulation remain, according to Gewolb, but he expressed hope that: “Under the umbrella of financial technology at Innovate Finance, the industry can begin to clean up its up act and regain its reputation.

“Consumers need P2P lending to be a real, reputable challenger for the traditional high street banks, and I hope, for the good of the sector, that Innovate Finance succeeds in its aim of bringing P2P back up to scratch with other proper lenders and lending practices.”

Regenerating reputation
The opportunity to invest in smaller businesses which may ordinarily struggle to attract funds and the opportunity of higher returns from higher risk arguably have a very real place in the market – provided investors fully understand what they are getting into.

Hollands, however, still called for health warnings on IF ISA investments, for example: “This should have a massive health warning slapped all over it. Lending money to property developers is not remotely comparable in risk to a cash savings account covered by the FSCS.

“In my view, [former chancellor] George Osborne made a big mistake in extending the ISA family to include P2P loans, a market that has yet to be truly tested in stressed conditions.”

Offering them more ethical and sustainable options could help the IF ISA to regenerate its reputation. But investors should be advised that green and sustainable does not mean that the returns you get or the money you invest are always sustainable.

Crowdfunding ethical businesses

Green and sustainable businesses raising funds on Crowd2Fund.include:
• Planks Clothing, which has gone to great lengths to reduce its environmental impact, such as using materials made from recycled plastic bottles;

• Goldfinger Factory, a social enterprise and design, build and teaching platform centred around upcycling to create bespoke furniture and interiors; and

• Marine conservation and community awareness operation Barefoot Conservation.Crowd Cube, although it only offers EIS and SEIS tax wrapper options has recently fund raised for the following:

• Antaco which has developed a renewable energy solution turning organic waste into carbon-neutral biofuel.

• Small Robert Company which makes lightweight, smart machines to replace tractors, kinder to soil and the environment, to enable farmers to be more efficient, precise and productive; and

• Symmetrical Power which is developing a solution addressing the issue of energy wastage and is in the process of creating the “Intelligent Distribution Board” which aims to meet the challenges of peak demand whilst saving on energy bills.