Feature Article

  [16 September 2010]

Ethical Investing the Way to Go

Investors have been encouraged to turn away from certain companies, dealing especially in polluting manufacturers, as more people become more environmentally aware.

The recent BP oil spill has brought even more attention to this issue, ethical investing.

This form of investing is becoming a more and more popular type of investment today, as climate change and global warming become more and more recognized.

In 2007, over 2.7 trillion dollars are invested in ethical investment portfolios, from 2.16 trillion in 2003. It is estimated that almost 3 trillion will be invested ethically by 2011. Approximately 12% of all shares are currently invested as ethical shares.

Ethical investing is a form of investing where “the investor seeks to maximize both financial return and social good.” In other words, they try to make money while at the same time encourage socially beneficial practices.

Ethical investors try to invest in companies that promote

• Environmentally friendly companies
• Renewable energy

While at the same time avoiding companies which deal in

• Fossil fuels
• Mining
• Non-medicinal drugs
• Weapons

Ethical Investing in Australia

Ethical investing was slow to take off in Australia compared to other developed countries, but in recent years there has been a significant increase as consumers become more environmentally aware. Accordingly, large super companies such as BT and AMP are already adding ethical investment companies to their portfolios.

Ethical Investing and Mainstream Investing

Unfortunately, many people believe that mainstream investing (ordinary investing with no company discretion) is often seen as providing higher returns, and this drives investors away from ethical investing.

Although this is true, the margins between ethical and mainstream investing are very small. According to AMP, ethical investing delivers between 18.8-16.5% of returns per year. In comparison, mainstream funds only deliver 0.7% more than that.

So why not invest in something that will be good for both people and your wallet?

[9 September 2010]

Predators Poaching Economy

The recent GFC has lead to economists speculating on the cause, and before long they began to point the finger at predatory lending.

Out of the many processes that resulted in the downturn of world economy, predatory lending was by far the most vicious and immoral, driving thousands homeless and many, many more jobless. Predatory lending comprises of about 50% of all subprime loans, making it one of the biggest scams in America.

Over 7% of all loans taken out in America are concidered to be predatory, and over one hundred thousand Australians have been affected.

Predatory lending refers to the practice of mortgage brokers taking advantage of a misinformed mortgagor (the person borrowing).

It is normally done in a high pressure environment, i.e. the mortgage broker pressures the mortgagor into reforming, and signing a contract. In this situation, an unwary mortgagor often does not read the contact.

Predatory lending contracts usually involve ridiculously high interest rates, and a large variety of incredibly high fees including:

• Early termination fees.
• Early repayment fees (preventing the mortgagor from escaping)
• Late repayment fees
• Extreme prepayment penalties.
• A balloon repayment scheme – little repayments over a long period of time, then a large lump sum which is designed to overwhelm the mortgagor and push them further in debt.

These extreme fees put more money in the pocket of the mortgage broker, and less in the mortgagor. In some cases the mortgagor has been forced to foreclosure, losing their homes.

The victims of predatory lending are often caught unawares of the fees and the fact that they are being cheated. Steve Green was a victim of predatory lending in 2001.

“He [the mortgage broker] was very pushy in making me sign all the contracts, and kept on insisting that everything was the cheapest plan for me. I didn’t have much of a say to what my contract was to be. Before I knew it I was up to my neck in overdue fees. Only after I told a friend did I learn that I was a victim of predatory lending.”

Steve was threatened with foreclosure and in 2008 was evicted from his home. He sought financial help afterwards and managed to recover from his encounter with predatory lending.

A more shocking example of predatory lending occurred in 2006, when a mortgage broker located in Canberra (whose name will not be mentioned) was found to have written a $360,000 home loan to an unemployed, dyslexic and homeless man. Luckily, he was charged with irresponsible lending and ordered to pay more than $30’000 in compensation to the 20-year old.

John Smith, an economist working at the Bank of Teeve reports "Predatory lending is becomming a bigger problem every year, and the recent GFC is simply an example of this."

Glossary

Mortgagor - the borrower of a home loan.
Mortgage broker - a middle man between the company providing the loan and the mortgagor.
Foreclosure - the leagal process in which the mortgagee (the lender) obtains a court order to reposess the home of the mortgagor.