APOs: how 'Alternative Public Offerings' for ethically minded shareholders are developing in Britain

This article by Andrew Bibby, in a slightly different form, was first published in the Observer, 2003

Over seven million pounds of new ethical money, most of it invested by individuals, is now at work helping two socially-orientated businesses develop. Both the fair trade pioneer Traidcraft and the Ethical Property Company (which provides accommodation for campaigning groups and community businesses) have seen their recent ‘fair share’ issues fully subscribed. Traidcraft now has £3.25m more to invest in stock, warehousing and IT systems, whilst the Ethical Property Company has raised £4m towards new properties in Brighton, London, Leeds, Manchester and Sheffield.

Ethical share issues, where investors are invited to consider the social benefits as much as (or more than) the financial returns, go back at least twenty years. Traidcraft first turned to its supporters for share capital in 1984 and other successful share issues since then have helped provide capital for, among others, the mid-Wales based Centre for Alternative Technology and the Cumbrian windfarm venture Bay Wind. The Ethical Property Company also had an earlier successful share issue, in 1999.

With several new ethical share issues in preparation, there are signs of the trend accelerating. Triodos, the social and environmental bank, is working with Mencap to launch a new ten-year bond later this Spring [2003]. The bond, which will pay 1% over RPI, will be used by Golden Lane Housing, a charity linked to Mencap, to purchase housing for adults with learning difficulties. Golden Lane hopes to raise up to £6m in this way. Triodos is also involved with other prospective share issues, scheduled for later in the year.

Increasingly, therefore, this activity can no longer be dismissed as a quirky little corner of the investment scene. Indeed ethical share issues now glory in a grand new name, Alternative Public Offerings (APOs), a take on the conventional stock market terminology of IPOs (initial public offerings). Significantly, institutional investors are beginning to get interested: for example, both Henderson and Morley bought shares in the recent Ethical Property Co issue on behalf of the socially responsible investment funds they manage. Nick Robins, head of SRI research at Henderson, says his firm is very keen to find more APOs to invest in, provided they meet investment as well as social criteria. “The question is, where is the supply coming from? How do you generate a flow of credible and robust projects which are invest-able?, “ he says.

Jamie Hartzell, director of the Ethical Property Co, is also eager to see more successful APO launches. However he warns that, if they are to meet the needs of cautious institutional investors and of individuals who want to do more than simply make a donation in disguise, APOs will have to address three issues. “Firstly, you’ve got to be paying some sort of dividend. Secondly, there has to be a market, to allow investors to sell when they need to. You’ve also got to be able to have a way of putting a value to the shares,” he says.

His own company tries to fulfil his first condition, having paid a 3% dividend over the past two years. Traidcraft, by contrast, has been a dividend-free zone since 1987, although its current business plan aims for the company to able to pay dividends again from next year. Andy Redfern, Traidcraft’s international director, points out that in any case many Traidcraft shareholders offer to donate dividend payments to charity. But he reinforces Jamie Hartzell’s point about the need for better mechanisms for buying and selling shares. “The illiquidity of shares of this type is a fundamental problem for them,” he says.

In this respect, things are about to get better. Triodos is set to launch an Ethical Exchange (Ethex), the first step in what could become a kind of alternative stock market for APO shares. Initially, the Ethex will cover four APO stocks – its own bank shares, that of the Wind Fund (another Triodos initiative), the Ethical Property Co, and the new Golden Lane bonds. To start with Triodos will only offering a ‘matched bargain’ service – that is, it will provide a forum for would-be buyers and would-be sellers to get in contact with each other, and will then help in organising the mechanics of the share transaction.

However, Triodos’s head of finance Matthew Robinson says that the bank wants to move on to play a much more active role as a market maker in these shares. This step, which requires approval from the FSA, would mean that shareholders could, if necessary, bail out, without having to wait for buyers to be found.

The problem remains that many socially-minded investors want to feel that they are contributing ‘new’ money, and not just picking up second-hand shares. The Ethical Property Co has devised an ingenious extra refinement to get round this difficulty and to give greater liquidity to the company’s matched bargain market. A separately constituted employee benefit trust has the ability to buy from existing shareholders or sell to new shareholders, as necessary to meet demand. In addition, the trust has been given share option rights in the company which can be exercised, if required, to meet extra future demand from new investors - and thus effectively bring in new equity capital. Any profits made from the share trades made by the trust are reserved for the benefit of employees.

Return to my home page