Is being green worth its weight in gold? Or will moral credit leave you bankrupt?

Sara Benwell 11.03am

Ethical investment is seriously hot right now. Last week was National Ethical Investment Week, the week where everyone is encouraged to put their money in funds that will save the world, or will at least not outright harm it.

There’s a broad range of ethical investments: from those focusing on being environmental, sustainable or just generally socially responsible, to those simply avoiding funds that might be considered ethically dodgy, such as weapons, alcohol, pornography or gambling.

The Government has been pushing social investing over the last two years, supporting 'impact investing', and launching Big Society Capital, an initiative designed to take an estimated £400 million from dormant bank accounts to help develop the social investment market. It is also launching the world’s first Green Investment Bank to provide financing for low carbon investment projects (see Alex’s previous coverage of it here).

It’s not just the Government. There is strong evidence of increasing consumer demand for greener investments. In fact Triodos, a bank specialising in ethical investments, has seen a 78 per cent increase in people wanting to open savings accounts. It has also doubled the money coming into its accounts each year. Furthermore, according to Eurosif, the Brussels-based European Sustainable Investment Forum, the amount of money in the UK invested in a “sustainable and responsible” manner has reached an estimated £275 billion.

The obvious reasons behind these funds are morality-based, but an investment needs to make money too or it’s just a waste of time. Yet can ethical investments offer real returns?

They are somewhat subjective, insofar as they depend on what any particular individual considers to be morally important, and the process is far from straightforward, but that doesn’t mean there’s not money to be made. Ethical investments, bank accounts, pensions and mortgages are now available to most consumers.

However, renewable energy has been a disaster for ethical investors recently, with wind and solar power systems companies being among the worst-performing stocks in the last few years.

For instance, the Guardian reported that Vestas, the Danish wind turbine maker, had cost investors almost 95 per cent of their money. The article also reported that the BlackRock New Energy Investment Trust has fallen 49.9 per cent since 2007. Furthermore, negative screening of so-called ‘sin funds’ mean that investment products are less diversified and there is less recourse to defensive funds, which can lead to volatility. These are just some amongst a multitude of examples, illustrating why many people are wary when it comes to ‘being ethical’ with money.

Nonetheless, there is some evidence that it’s possible to be ethical and still taking care of your money.

One theory is that companies on the right side of the ethics debate are less likely to fall out with regulators, end up in expensive court battles or face strikes or boycotts of their products from consumers. All of these can impact reputation and even share price, so ethical companies should look like good long term prospects.

This is illustrated in the pensions industry, where an increasing number of funds are declaring support for the UN-backed Principles for Responsible Investment (PRI), an institutional investor initiative for ethical investment. The number signed up has jumped by over a quarter in the last two years.

Furthermore, there are those out there who believe a carbon-based economy is unsustainable, for obvious reasons. This too suggests that forward looking ethical investments are likely to do well in the long term.

Another thing to consider is as public opinion shifts, and we care more and more about everything from whether our eggs are free range to whether we invest ethically, it seems likely that the value of companies who can prove to stakeholders that they have sustainable values will rise.

It is important that the Government continues to support ethical investments, and it is encouraging that the public is beginning to demand how their money is made and at whose expense.

However, there must be further support and ambition from both the Government and the financial services industry if ethical investment can be sustainable. Meanwhile the Coalition should be wary about throwing money behind schemes that may leave people worse off, especially in a financial crisis. It’s all well and good being “ethical” but it will backfire if it costs people their pensions.

There are ethical funds that perform well, so perhaps the government should think about putting its money towards education, so that people are equipped with the knowledge to do the right thing – whilst also putting the pennies away for the future.

Follow Sara on Twitter @sarabenwell

American Foreign Policy: how to lose friends and alienate people

Alexander Pannett 4.00pm

Yesterday’s announcement that the New York banking regulator may strip Standard Chartered, a major British Bank, of its New York banking licence for allegedly breaching US sanctions against Iran, demonstrates how myopically un-diplomatic the Americans can be.

Britain has a been a loyal and useful ally in America’s campaign to keep Iran from developing nuclear weapons. However, again we have been treated with blunt disregard for such loyalty.

Standard Chartered may or may not have breached the sanctions against Iran. We will have to see what the results of the investigation are and how material the breach is. However, there must be countless companies around the world that have breached the sanctions with Iran. A breach which stems from a contravention of US foreign policy rather than due to any financial malpractice.

Why did the Americans select a British bank?

This is especially concerning considering our financial services industry is already suffering from a torrid summer of allegations of Libor fixing and money laundering, allegations which originated in the US.

Could there be a hidden agenda to undermine the City of London and re-assert New York as the pre-eminent financial capital of the world? There are already strong reports that US banks are warning clients away from Europe. US regulators have also been openly criticising European regulators. The CFTC has even suggested that it should be the sole global regulator for OTC derivatives.

Such a power grab is alarming and should be resisted by European governments. It also overlooks the fact that the credit crunch started in the US, as did many of the high-risk banking strategies that preceded and exacerbated it. New York is hardly a model of pristine banking. CFTC was the regulator of MF Global and failed to spot the risky abuses at that institution.

I am not defending banking policy that contravenes UK sponsored sanctions merely because a bank may be domiciled in the UK. My main concern is that the US seems to be disproportionately investigating and attacking British banks, whilst American banks appear to be given a soft treatment. This is a passive form of protectionism.

It is particularly dangerous to undermine a global bank for foreign policy concerns at a time when the world is standing on an economic precipice, with the entire banking system close to collapse. Could the US regulators not have picked upon a company that posed less systemic consequences for the global financial system?

The US regulators have also managed to trump Mitt Romney by giving the British government an intense headache during the middle of an incredibly testing Olympics when the eyes of the world are on the UK. I cannot imagine it will have helped Anglo-US relations.  If this allegation had to be made public, could the US not have waited a further week or two to minimise the damage to market confidence in the European banking system?

Sometimes you have to wonder why we even bother supporting the US if this is how we get treated. With friends like these, who needs Iran.

Follow Alexander on Twitter @alpannett

UK economy: Our demons are not deflationary but systemic

Henry Hopwood-Phillips 11.17am

We live in a time in which political correctness handicaps political honesty and a lack of capitalist courage hobbles market transparency. Churchill famously remarked, “when the eagles are still, the parrots begin to jabber”. And Orwell warned us that “to see what is in front of one’s nose needs a constant struggle”.

We are stuck in an economic quagmire because fractional reserve lending, in layman’s terms “unbacked credit”, has created a system funding activities (mostly non-productive) that a free market would never support. Activities that consume and do not produce any real wealth.

This in turn creates an atmosphere in which checks and balances in the capitalist system, e.g. Glass-Steagal Act (repealed 1999), start to seem anachronistic. Attitudes of important offices, e.g. mortgage underwriters, become lax. And collateral values are allowed to decline, as easy credit distorts the market.

In 2007-8, this credit bubble started to rupture. The trigger was US sub-prime mortgage lending but no doubt the day of judgment would have come sooner had the ‘masters of the unvierse’ not chopped and mixed good and bad debts into unfathomable CDSs, CDOs, MBSs and other jargon-heavy “investment vehicles”. Banking talents seemed to lie in obfuscation rather than financial genius. Banking solvency suddenly became an issue as banks were revealed to be over-leveraged and over-exposed.

The solution in the US was the TARP, which hoovered up illiquid “troubled assets” in return for spreadsheet honesty, the conservatorship of Fannie Mae and Freddie Mac, the bailing out of AIG, and Dodd-Frank regulation to ensure mistakes were not repeated.

In contrast, the UK (and Europe to a lesser extent) nationalised bad banks and kept credit spreads fairly opaque, fearing that to allow any of its interconnected clique of megabanks to fail would precipitate a domino effect. Private debt effectively became public debt overnight. Privatised profits and socialised losses united socialists and capitalists in anger against a managerialised system.

As banks all deleveraged at once, a credit crunch ensued. Servicing nationalised debts on already fragile fiscal bases became untenable in the politically undecided and therefore economically rootless eurozone. As market confusion spread over where the buck effectively stopped within EU institutions, debt prices for PIIGS began to rocket and further “stop-gap” bailouts were required.

A fall in money stock, caused by a credit crunch, is usually followed by a fall in prices, i.e. deflation, as stable services and goods chase less money. However, central banks, as Milton Friedman famously said, “are always looking to correct their last mistakes”. Deflation is the spectre that haunts the mistakes made by central banks during the Great Depression. And so the central banks print money. They print money for government bailouts, print money to get banks loaning, print money to increase general liquidity.

The problem with all this is that loose monetary policy caused the mess in the first place. And it is now prompting moral hazard by acting as its own solution. It insincerely pretends to fight off the deflation that would raise the debt burden because in fact central banks don’t want you use their quantitative easing (QE) to pay off debt because that would decrease the money supply (causing deflation); in fact, they want you to increase your debt in order to buy irresponsibly and continue the consumption bubble that would continue the prosperity illusion.

Side effects of deflation, such as a fall in economic activity, might be painful but all the pain is, in reality, the burning away of the inflation that no longer reflected the actual wealth produced. Shattering illusions of prosperity caused by money pumping. Would you rather live in a castle on a cloud or a house on the ground?

The debate on what principles our monetary system should be based upon, whether it be fiduciary, commodity-based or various hybrids, is for another place at another time but what must be clear is that fiat money and fractional reserve banking do not impose a natural limit on the growth of money supply. The current system has failed us and yet no real debate on the essentials seems to be occurring.

Follow Henry on Twitter @TheHolySmoke

What House of Lords reform tells us (encouragingly) about the House of Commons

Richard Ellis 8.27am

For centuries, the House of Commons had been intent on acquiring power. Blood was spilt and lives lost to secure greater authority for MPs. They became the foremost authority in the legislature and the chief seat of the executive.

Recent years have seen a near-total volte face. The House of Commons has been casting away its powers with an unbecoming incontinence. Whether to the European Union, to quangos or to the courts, MPs have hastened to jettison the rights for which their predecessors fought so long and so hard.

Who has the right to stay in this country? Who may vote? For how long can terrorist subjects be imprisoned? These are tricky subjects and they should be the subject of political discussion. The House of Commons should debate these points, have the necessary votes and pass the appropriate laws – and be subject to judgment at the ballot box.

MPs, sadly, have failed to take that line. Now the final decision on these and many other questions are taken miles away from any ballot box and often miles away from our own shores.

It is little short of pathetic that the Labour party should want a judge to hold an inquiry into the banking system. Banking reform is one of the most pressing issues of our time. Not only should the House of Commons be the prime mover, it should be chomping at the bit to be the prime mover. Labour MPs, however, want to sneak away from the fight and ask the wig-and-gown brigade to do the heavy lifting. Feeble.

The debate over the House of Lords, now delayed by yesterday’s decision to withdraw a timetabling motion that the Government knew it would lose, offers MPs the chance to stop this descent into impotent lethargy. Many of those who oppose this reform say that their main concern is the prospect of an elected House of Lords - with the greater legitimacy of a democratic mandate - challenging the supremacy of the House of Commons. It is a rare treat to hear that supremacy championed.

An elected House of Lords would indeed seek to challenge MPs.  It would, moreover, be right to do so; if you have a democratic mandate you are duty-bound to seek to have your way. Hence this Bill, which passed its Second Reading last night despite a Tory rebellion of 91, would lead to constitutional chaos. That is just one reason why it must be thrown out.

Nonetheless, these reforms may have a positive legacy. It can only augur well if the idea of an elected House of Lords has reminded MPs how important any elected chamber (the Commons included) should be.

If the House of Commons has finally woken up and recovered the will to defend and advance its role in our constitution then we may yet owe a debt of gratitude to Nick Clegg. The European Union, the judges, the media, the bankers all have great power over the British state. They have all got much wrong, none are properly accountable and all could provide much work for our newly-active democratic representatives. A reinvigorated Commons could be just what the doctor ordered.

With any luck these reforms could be a footnote in the history of the House of Lords and a turning point in the history of the House of Commons.

Fingers crossed.

House of Lords reform is a risible Lib Dem distraction from getting proper things done

Craig Barrett 10.16am

I wrote last week about how Ed Balls and Ed Miliband have correctly gauged the public mood on bankers and are setting the running on the way in which banks should be investigated.

The Labour party’s amnesia about its past behaviour appears to be contagious, at least as far as the public at large is concerned. That party’s poll ratings continue to soar, yet just one senior figure seems to be trying to take the fight to them.

George Osborne should be commended for his valiant attempts to paint Ed Balls as the villain of this piece, even if it now seems doomed to failure. On Sunday morning, Andrew Marr allowed Mr Balls virtually free rein to give a party political broadcast; more worryingly, Marr’s tendency to savage in the manner of a dead sheep allowed Balls to become almost credible. Perhaps he has digested the results of those opinion polls about why the public dislike him. Not even Mr Balls is financially illiterate enough to fail to understand the logistical nightmare but his simple idea of keeping one’s account number when shifting banks is a neat little soundbite. Gone is the man of “neo-classical endogenous growth theory”, and all credit to him for that. It is vote-winning stuff. But again, George Osborne aside, nobody seems willing to take Labour on..

There exists a worrying complacency in the Government. This is most evident in the unedifying spectacle of House of Lords reform.  After their failure to convince the population at large of the benefits of PR, the Lib Dems seem hell-bent on saving something from the wreckage of their failed flagship policy. Worse, they are attempting to blackmail their Tory colleagues by putting at risk the proper equalisation of parliamentary constituencies.

We are being told to dispose of a system which, despite many obvious faults, has proven time and again to work both in terms of its expertise but also its ability to restrain over-enthusiastic governments. All manner of articles are written about the amazing diversity of background and experience in the Lords but it is surely worth pointing out once again that at a time when there is a general complaint about lack of life-experience in our politicians, surely it is folly to remove from the political system those whose unique position means that their experience is the widest? From the academics to the businessmen, from the disability campaigners to the charity workers, from the “luvvies” to the (yes, indeed) retired politicians and civil servants - the House of Lords is a diversity co-ordinator’s dream.

Yet MPs are being asked to replace them with a majority of seasoned party workers, paid less than their lower house counterparts but elected for longer terms. Never mind that parts of our country already have up to eight layers of elected officials, the Lib Dems seem determined to create more.

Sadly, it is very obvious to all concerned that they are acting less out of a genuine desire to make lasting, sensible change but rather out of a determined self-interest to get PR by the back door. Alan Clark described the Lib Dems as “over-promoted local councillors” – if they get their way on Lords reform, that is what our historic House of Lords shall become.

Back to the economy and banking, the further danger is that at a time of genuine concern about the state of our country, to spend time on a policy that the Prime Minister has categorised “third term” risks perpetuating this image that the Tory party is out of touch with people’s desires.  It is a gift to Labour. I urge all Conservative MPs to do all they can to block this Bill.

Follow Craig on Twitter @mrsteeduk

Gordon Brown and the Labour party are the unashamed architects of this banking balls-up

Craig Barrett 10.08am

It comes as no surprise to me that Ed Miliband is calling for a full public inquiry into what has been going on at Barclays regarding LIBOR.  In the absence of any contrition for the devastating effect that his Labour party’s policies had on the British economy, and in the apparent absence of any serious policy for economic recovery, Mr Miliband and Mr Balls seem to think that a public flaying of hate-figures is the only way to get back to power.

Conveniently, they forget that the phone hacking scandal, for example, actually occurred under their watch; worse still, the Barclays / LIBOR issue arose under a regulatory model of which they were the architects.

The danger is, however, that they are onto something. With nothing but bad news about the economy, there is a pervasive and wider belief that the public seem intent on baying for the blood of anyone who can be deemed culpable of anything.  With journalists, this isn’t the case. Most people, assuming that such things as phone hacking have gone on for years anyway, are uninterested in Murdoch et al, the story being kept alive only by the non-Murdoch press and the increasingly blinkered BBC.

With bankers, on the other hand, the public are very interested. Logic goes out of the window and the Labour party has been able to manipulate matters to the extent that bankers are now deemed up there with paedophiles and sheep rapists in terms of human evil.

The fact is that 99 per cent of bankers aren’t evil and the remaining 1 per cent are probably, at worst, misguided.

Most bankers are simply getting on with their jobs. One-tenth of tax revenues come from banks, while bankers’ bonuses, because of the different rates of corporation tax and income tax, are actually a more efficient way of getting money into the hands of the government.

Yet we see that Stephen Hester has foregone his bonus this year, thanks to an IT glitch for which he cannot have been responsible, but which undoubtedly the Labour party would have demanded regardless. Despite having written his contract, those Labour party figures who remain are conveniently forgetting that an agreement was signed – just how much do they think Mr Hester should be paid? If you want a loss-making business turned around, it’s going to cost more to hire the best.

And now that Bob Diamond has resigned - one suspects for reasons of peace and quiet rather than any admission of guilt or otherwise - it does seem that the Labour party shall not stop until they have hounded out every competent manager in Britain.

This aside, calls for a banking inquiry show that the Labour party is driving the agenda and this Government is on the back foot.  An inquiry will only keep open the wounds and, given that the public associates the City with the Conservative party, will do us no favours at all. It’s doubtful whether it would even get to the bottom of the LIBOR scandal. The inquiry that is to be headed by the fiercely independent chairman of the Treasury Select Committee, Andrew Tyrie, must focus on the dramatic failings of the FSA and the tripartite regulatory system that Gordon Brown and Ed Balls created, because it is entirely clear to me that this is the root of the troubles.

When these issues were debated by the House of Commons in 1997, it was obvious to the Tory benches that Gordon Brown’s regime was not going to keep the City in check.  The new Chancellor’s motivations were less about regulation and more about his obsession with inflicting iconoclastic changes on fully functioning extant systems that he viewed as brimming with enemies.  Mr Brown hated the City and hated the Bank of England, so he sought to transfer powers to a new quango of his choosing.  A couple of choice lines from Peter Lilley, then Shadow Chancellor:

“We know that funding policy is an intrinsic part of monetary policy, and the Bill will leave the Bank as a one-club golfer without even a putter left in the bag. How will the Treasury, the Bank and the new board co-operate to handle monetary policy? If they need to get together, why is it necessary to separate them in the first place?

“The coverage of the FSA will be huge: its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all. Its structure will be as complex as those of the organisations that it replaces, if not more so.”

Like so much of what Mr Brown ‘achieved’, it was borne of the clunking hatred that drives him and his desire to complicate matters to such an extent that the Government becomes all powerful, even if it itself does not itself comprehend its own role.

The FSA, or ‘Fundamentally Supine Authority’ as Private Eye rightly called it, was destined to be a disaster - something foreseen by the Conservative party. The separation of roles was a creation of Gordon Brown’s loathing of an establishment that he perceived as Tory-leaning. The Labour party’s role in the LIBOR scandal becomes all too clear when you realise that it was their system of regulation that failed. It is that which should be the focus of an inquiry, not simply a digging around the files at Barclays bank.

The Labour party cannot be allowed to claim that this is somehow the Tories’ fault. For once, I am prepared to let Gordon Brown have the last words, after a fashion, from two Mansion House speeches, in 2007 and 2004:

I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London … I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created.”

In Budget after Budget I want us to do even more to encourage the risk takers.”

As ever, re-reading his utterances, I find myself wondering what planet the man was on.

Follow Craig on Twitter at @mrsteeduk

Britain does need a banking inquiry

Michael Economou 10.30am

The late historian Ronald Syme wrote, “In all ages, whatever the form and name of government, be it monarchy, republic, or democracy, an oligarchy lurks behind the façade.”

It is difficult to argue that twenty-first century Britain is any different. Recent revelations in public life have begun to unveil a network of power, privilege and wealth that exercises a disturbing control over our country.

Politicians of all parties toady to media moguls and millionaires, trading policies for good stories and donations, while cabals of journalists and bankers abuse the system for profit.

The twisted mask concealing this state of affairs has developed cracks, through which we have glimpsed the true face of institutionalised corruption and an esurient elite. Cash for honours, the parliamentary expenses scandal, phone hacking, endless tax avoidance tales, and now the scandal of rate fixing among our major banks - these are all symptoms of the same disease, an economic and political culture built on cronyism and deceit.

The solution has never been reactionary leftism, anarcho-capitalism or any other sinister ideology pedalled by fringe politicians. The cure is sustained, old-fashioned One Nation conservatism that genuinely tries to end the frightening gap between the rulers and the ruled.

The Government should embrace calls from across the political spectrum for an inquiry into the British banking industry. The Governor of the Bank of England, Mervyn King, has argued against such a step on the grounds that “there must be many people who work in banking today who know that they are honest, hard-working and feel they have been let down by some of their colleagues and indeed their leaders.”

But this is precisely why we need an inquiry. The actions of a few rotten bankers are destroying the reputation of an entire industry. Just this year, banks have been attacked for mis-selling PPI, fixing Libor rates, and mis-selling interest rate swaps to small businesses. It is unlikely to end there.

What should we expect from a banking inquiry? Hopefully enough information for the Government to carry out the sensible reforms needed, rather than the futile and punitive tax rises that the Tories and the Labour party have used to get one over each other, and which act merely as punishment rather than rehabilitation.

Moreover, fish rot from the head down. If we don’t insist on better leadership from those at the top, then Britain shall sink under its own cynicism and disillusionment. Of course, a banking inquiry would only be a relatively small step, but it is necessary for us to fix thoroughly the banking system, build a new conservative consensus, and make sure that the British people don’t turn in their (entirely justified) revulsion to the sort of political movements that can only make things worse. It is time to smoke out the rats and put our economy in order.

Follow Michael on Twitter @MichaelEconomou

The financial and Eurozone crises have changed the face of politics forever

Sara Benwell 6.45am

Economic policy has always been important in politics, and people have always cared about fiscal policies that affect them directly, but not such a long time ago broader economic strategy only made up a small percentage of the issues that mattered when people decided who to vote for.

Essentially, voters cared if their taxes were going up, but when it came to broader economic strategy the issues were sidelined compared to other policies that had more obvious effects on people’s lives. Moreover, much of the banking world and financial terminology remained a complete mystery to the majority of the electorate, so as long as things were going well, economic policy was seen to be less important. Everyone presumed that the government and the bankers knew what they were doing.

Then came recession and the onset of the Eurozone crisis - and everything changed.

Now more people have a better working understanding of finance. Almost everybody I meet has an opinion about Greece, about Spain, about whether the Eurozone will break up and most importantly about whether or not the Government is doing the right thing to deal with the financial crisis or whether now is the right time for a credible plan B, or even C.

People don’t merely care about the areas of policy that effect them; they now care about the broader economic strategy. The space allocated to business and financial news - not just in the broadsheets but also in the tabloids - is increasing and is reflective of a growing public interest. These days it’s rare you’ll see any business stories in the national press that don’t have a direct link to finance and the economic situation; more often the stories will reflect job creation or losses, financial results, or economic indicators.

While the economic crisis is clearly not a good thing, it’s arguable that the increase in public knowledge and awareness has to be the silver lining to the debt crisis cloud. How many people fifteen years ago knew about monetary policy decisions, about inflation and about quantitative easing, let alone had a good working understanding of these terms as well as an opinion on them? Wider comprehension has to be a good thing.

There has also been a shift towards people wanting their financial institutions and their government to be held accountable. Now that everybody has seen the impact of the poor financial policies of the last labour governments and the problems that can arise when the bankers are given a free rein with little or no fear of retribution, there is an increasing focus on making sure that somewhere somebody is held responsible.

This has been reflected by the recent ‘shareholder spring’. While I think this is an exaggeration, and the term is used too widely and too often, there is no denying that the recent spate of chief executives like Sir Martin Sorrell being denied their bonuses would have been unthinkable a few years ago and reflects growing popular demand for more accountability in the business world.

Furthermore, policies like the ring-fencing of the banks, which I have written about here before, illustrate a move by the Government to introduce financial legislation designed to protect the electorate. This policy has recently been watered down, but that doesn’t change the fact that political parties have recognised the importance of bringing in policies to ensure that an increasingly aware voting public are sheltered from having to bail out the banks once more.

One can quite easily argue that the Coalition will stand or fall on the success of its economic policies. And it is increasingly clear that you cannot spend your way out of a recession, despite what the Labour party might claim.

So the question confronting us now is whether the Coalition Government has enough time left for its economic policy to come good, or whether ministers need to be considering a new plan.

Rest assured that whatever the answers to those questions, the British public is no longer ignorant about economics. And if the Coalition partners, particularly the Conservative party, wants to win the next election, they shall need to prove the credibility of their economic strategy.

Follow Sara on Twitter @sarabenwell