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Outperformance through Ethical Lending

by Dan Hird

Triodos has a unique position in banking. Can you explain what it is that is so different about your approach?

Triodos was founded in 1980 as one of the world’s first explicitly ethical banks. We have our head office in the Netherlands and branches in Spain, Germany, Belgium, and the United Kingdom. Our objective from the outset was to make money a force for good. This means that we only lend to clients who can demonstrate that they have both a strong track record and that their main aim is beneficial to either society or the environment. This positions us differently from, say, the Co-operative Bank, which will lend to any company so long as it is not actively breaching one of the Co-op’s ethical criteria, such as being involved in the transfer of armaments to oppressive regimes. That is what we term a negative criterion. We apply a positive criterion whereby you have to be actively involved in doing good in some demonstrable way, not just not doing harm.

We have found that this philosophy resonates well with a number of banks, and this led us to found the Global Alliance for Banking Values. There are currently 21 banks in the Alliance, and the return on assets generated by those banks is better than the mainstream banking sector. The reason for this probably has a lot to do with the way mainstream banks suffered through excessive risk-taking during the run-up to the 2008 crash. If you have a sustainable philosophy, then much of what mainstream investment banks were doing through the boom years wouldn’t wash and you wouldn’t get involved in it.

Now there is pressure on companies across all sectors, not just the financial sector, to clean up their act and to put a lot back into the community or the environment, and what the Global Alliance shows is that putting the trust back into banking pays. This is not just about returns to shareholders, but about giving back in the wider context. For some companies this kind of activity is undoubtedly driven by public relations or marketing, but with our clients a focus on sustainability and social and environmental reinvestment tends to be at the very heart of what they do. Typically, they are into activities such as organic farming, fair trade, renewable power, social enterprise, or something along those lines. In other words, the core part of their mission aligns with that of Triodos. Moreover, what we aim to do is to show that our approach to banking is sustainable and works financially, that it generates good returns for us and our investors at a lower level of risk. As long as we keep doing this, we believe that we can pull mainstream banking a bit more in our direction, which would be good for everyone.

How does your model generate outperformance?

Well, take our banking model for example. In the United Kingdom we have two operations, deposit-taking and lending on the one hand, and corporate finance on the other, where we raise equity and bond instruments for clients. As far as lending is concerned, we lend out some 85% of the deposits that we take in, which gives us a far superior capital ratio to even that demanded by the new Basel III capital adequacy requirements. In many ways this is the tried and tested model of banking, where you retain 15% of all deposits as reserve capital.

The corporate finance side of our business is different as it is an advisory business which we have developed to suit the needs of our clients, many of which are charities and social enterprises. If we take a large charity as an example, it might consider raising a bond—say £5 million to £10 million (which is large for the social market)—from investors. The charity will be expected to offer at least 4% interest on the bond to make sure that it is an attractive commercial offering, but it is also giving the investor the chance to do some good with their capital.

What we see then is that a group of investors might be prepared to take a slightly subcommercial yield in return for the knowledge that their money is achieving a definite social good. On these grounds we may well be able to find sufficient investors who would be getting around 1% less yield on their money than they would get from a listed bond issued by, say, Tesco Bank or Royal Bank of Scotland. A typical duration of an unlisted social bond might be five years. Core investors tend to be charitable trusts and other institutional social investors, many of whom look to recycle their funds back into the social market; hence, they would typically look at a fixed-yield bond for no more than five years and would expect to hold that bond to maturity.

There is really no significant secondary market to speak of at this level, although there has been a matched bargain market—where a broker sets out to match a willing buyer and a willing seller—run by Brewin Dolphin, the wealth manager. Experience has shown that there is no more than about 1–2% liquidity in these kinds of bonds because the vast majority of investors fully expect to hold the bond through to term. Of course, a 4% yield is on the low side (compared to listed corporate bonds), but a large charity with a strong balance sheet and good membership income could attract interest from investors at this level. A smaller social entity with a higher risk profile (perhaps issuing a bond to finance a payment-by-results contract) might have to pay anything up to 10–12% to get its bond issue away. We see it as our job to structure the bond so that it matches the perceived risk profile of the client and so that it is sufficiently attractive to investors.

Before anyone invests in a bond issued by a charity they expect to see an investment memorandum. We would approve and sponsor this for our client using our Financial Services Authority (FSA) authorization. In the document we would explain what the charity does, its aims and objectives, explain where it gets its commercial and noncommercial income (grants, donations, legacies) from, and so on. We would also list other sources of income, such as income from charity shops, centers of disability, and any government contracts it might have. Just as with a commercial bond, the key issue for investors is how the charity will redeem the bond at the end of the term.

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Further reading


  • Chapman, Peter. Jungle Capitalists: A Story of Globalisation, Greed and Revolution. Edinburgh, UK: Canongate Books, 2007.
  • Frank, Thomas. Pity the Billionaire: The Hard-Times Swindle and the Unlikely Comeback of the Right. New York: Picador, 2012.
  • Gilding, Paul. The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World (also subtitled How the Climate Crisis Will Change Everything (For the Better)). New York: Bloomsbury, 2011.


  • Charities Aid Foundation. “Funding good outcomes—Using social investment to support payment by results.” September 2012. Online at:
  • St Mungo’s. “Street Impact designed to help rough sleepers rebuild their lives.” December 14, 2012. Online at:


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