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SMEs, start-ups and ethical funding

Posted: 29 Aug, 2019

Fund raising can be a challenge for SMEs and start-ups but there are signs that many are turning to ethical funds for their money.

This growing trend is particularly pronounced among younger business founders and entrepreneurs, many of whom are reportedly shunning the venture capital routes that focus primarily on forcing them to grow as fast as possible to generate returns.

With the issues of global warming, climate change and damage to the environment being major factors among young people it is no surprise that ideas of sustainable growth and ethical sources of finance should be so appealing.

But are they narrowing their options by focusing on ethical funds and risking their prospects for growth and possibly their business survival.

It would seem not, according to analysts, as there is also a growing movement among investors, particularly retail investors, to search for investment opportunities specifically with ethical funds.

Lisa Ashford, chief executive of Ethex, says: “Venture capital funding can often be about financial performance and short term returns and exit strategies, sometimes to the detriment of the other impact aspirations of an organisation. That's not what our investors are about.”

Ethex was started about ten years ago and works to match ethical businesses with investors that shared their values. It only works with businesses that have a clear social mission and those that conform to very high standards of governance and accountability.

The Guardian last year reported on the growing attraction of ethical investing, which its article argued was becoming more attractive to mainstream investment funds.

Nearly 80% of investors across 30 countries told last year’s Schroders’ Global Investor Study that sustainability had become more important to them over the last five years, increasingly seeing sustainability and profits as intertwined.

According to the website hi.co.uk the term ethical “is often used as a catch-all to describe funds managed with social, environmental, or other responsible criteria in mind”.

It says the main approaches of ethical funds are that they usually avoid companies that do harm to society and instead invest in those that have a positive social impact. But it warns investors to do their research diligently to ensure a fund is consistent with their own views.

From the perspective of the SMEs and start-ups ethical funds may actually benefit them through an alignment of culture, environmentally aware, socially conscious  and ethics despite pursuing a strategy for slower growth. There is no reason to suppose such businesses cannot be sustainable, not least because of the opportunities for positive marketing messages that speak to their clients’ or customers’ own ethical concerns.


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