Crowdfunding and peer to peer lending grew out of the banking crisis of 2008. According to the European Central Bank, the availability of bank loans to SMEs declined 23 percent immediately following the crash, causing a devastating impact on the economy.

The crowdfunding revolution that sprung up as a result of this credit crunch (along side the rise of the internet) may not have completely filled this funding gap, but has led to what some call the democratisation of capital, allowing people to invest with greater ease directly into projects of their choice. What’s more some you can invest as little as £5 in some of the projects making investing in green projects more accessible than ever before.

These crowd funding platforms also allow organisations to raise finance at reduced interest rates, and breaks down some of the power once held by larger financial institutions and even governments that had something of a monopoly on finance.  This has been great news for environmentally focused projects that have often found it hard to raise funds through the mainstream banking sector.

The rise of crowd funding

There are now more than 65 crowdfunding platforms, many of which enable investors to take out Innovative Finance ISAs (IF ISAs) and some of which specifically support environmentally focused projects and businesses.

An IF ISA is essentially a way to invest in projects and businesses via a crowdfunding platform. IF ISAs are a relatively new savings product introduced in 2016 to offer investors an alternative to the traditional Cash ISA and Stocks and Shares ISA.

IF ISAs are a great option for those looking for transparent investments that can help tackle climate change. The most ethical platforms support investors to create a portfolio of projects aligned to their principles; cutting out the traditional middleman or fund manager, that will often also invest your savings in environmentally damaging sectors.

At the moment IF ISA’s still account for less than one percent of the UK ISA market, but with £290 million invested in only the second full tax year of their existence (2017/18), eight times more than the 2016/17 figure of £36 million, IF ISAs are rapidly growing in popularity.

How and where you invest your money is an area ripe for change, the Ethical Consumer Markets Report showed a 6.3% growth in spend related to ethical investments between 2016-17 alone.

Making up for government mistakes and market failure

The growth of crowd funding platforms marks a real shift in power at a time when government failures around the management of our power sector are becoming increasingly clear. Yet even with public sentiment and support shifting towards renewable energy, our Ethical Consumer Markets report revealed earlier in the year how new government rules had a hugely negative impact on the solar sector.

Sales of solar panels fell by 87.4 percent in 2017 after the government reduced support for at-home solar energy generation.  In 2016, the government cut incentives for solar panels known as Feed-in Tariffs (FITs) by 65 percent and, in 2017, it ended subsidies for solar thermal schemes. The market has been declining ever since and, in 2017, it was less than a quarter of its 2010 size, when FITs were first introduced.

Meanwhile is also a growing mistrust in large banks and financial institutions as they continue to finance industries with a high climate impact such as fracking or palm oil.

The most ethical investment platforms

Of the more than 65 crowdfunding platforms Ethical Consumer has awarded four Best Buy status in our new guide to Ethical IF ISAs; they are Abundance, Energise Africa, Ethex and Triodos.
Each of these platforms arrange crowdfunding for projects that all have social and environmental goals. Perhaps equally important with the option to invest as little as £5 into some of the projects it makes a people’s revolution in green finance a real possibility.

• Abundance has allowed customers to invest even very small amounts, from £5, in different projects. It only funds what it calls ‘socially useful’ projects. These have largely been green energy in the form of wind turbines and solar farms, but have also affordable housing.
• Energise Africa is designed to provide working capital to projects that install and sell solar home systems in sub-Saharan Africa. The aim is to provide more than 111,000 rural families access to renewable energy over the next three years. Home systems tend to provide simple electric lighting and phone charging facilities.
• Ethex recently funded the Solar for Schools Community Benefit Society (CBS) that was set-up in 2016 to enable schools in England and Wales to derive some financial and environmental benefit from solar panels.
• Triodos is the first UK bank to launch its own crowdfunding platform. Since its launch the Triodos crowdfunding platform has raised £20 million for eight pioneering organisations delivering positive change. An example is the £1.8 million bond that was successfully raised for Mendip Renewables in 2018, which owns and operates a 5MW community solar scheme and uses its retained profits to support charities in Somerset.

Investing sensibly

Whilst only Financial Conduct Authority (FCA)-regulated platforms can offer an Innovative Finance ISA, they come with no other protection. IF ISAs don’t qualify for the savings element of the Financial Services Compensation Scheme (FSCS) that protects up to £85,000 should a firm go bust.

Neither do they get the FSCS investing element that covers up to £50,000 in case your investing platform goes bust and hasn’t done what it is meant to with your money.

Some platforms have “reserve funds” that they claim can cover you in the event of defaults with loans or businesses failing. However they are under no obligation to use these funds and it is at the discretion of the platform.

It is also more difficult to access your money with an IF ISA. Most of the assets (or loans) will be fixed term, making instant access impossible.

You should, therefore, take into account the length of time the asset is held for when making a decision about what projects to invest in.

Time to invest for a greener future?

That said you can limit your risk by investing in these Best Buy options. They work closely with projects on their platforms to ensure that they succeed and by investing small amounts of money into a number of projects spreading your risks.

If you can afford to take a risk with a small amount of your hard earned cash then these platforms provide consumers the opportunity to invest directly into projects that have tangible positive environmental impacts and could help pave the way for a revolution in clean, green energy financing.

This Author

Tim Hunt is a director at Ethical Consumer magazine.