This is the fourth article in a new series from Good With Money: “How To Invest In Renewable Energy,” produced in collaboration with Mint Selection, a renewable energy finance and project development recruitment consultancy.
The renewable energy options available within an Innovative Finance ISA (IFISA) are as broad and far reaching as the IFISA itself, allowing investors to stash their cash with an array of small businesses and community energy projects across the globe. These might include a tidal wave project in Scotland, solar panels for rural farmers in Central Africa or a biomass facility for a pig farm in Cornwall – the range of options really is as varied as investors into them.
Why an IFISA?
As the above might suggest, the type of investments that go into an IFISA are a little different from those you might put into a stocks and shares ISA, many of which we covered in our previous instalment, How to Invest in Renewable Energy Equities. Rather than investing directly into a company in exchange for equity and/or shares, IFISA’s allow you to invest in debt in exchange for a regular coupon, or yield (much like an interest rate).
IFISAs are one option among a growing – and arguably confusing – basket of ISA options that now includes cash ISAs, stocks and shares ISAs, lifetime ISAs and help to buy ISAs. There remains, however, a single savings allowance that must be spread across all of them, which currently stands at £20,000 per year. Gains, however, are not included in this limit and remain tax-free.
This means you can easily mix and match your ISAs from year to year, moving from different providers depending on what you are saving for (see How to Pick a Renewable Energy Investment for more on establishing goals). The IFISA is a great addition to any portfolio for its diversification benefits: the sort of niche, unlisted investments available in this space are uncorrelated to main markets. This means that when the FTSE 100 index is tanking – like right now, for example – the IFISA may provide much needed capital protection.
For a full and thorough explanation of IFISAs, see the Good With Money guide to the Innovative Finance ISA.
Risk vs. reward
IFISA holdings – like all investments – are not covered by the financial services compensation scheme, which covers cash savers up to £85,000 should a bank go bust. As with anything that isn’t cash, IFISA returns are not guaranteed and capital is at risk. The unlisted nature of IFISA holdings, as well as the fact many are in start-up companies and projects, also makes them riskier than traditional bonds or equities. Default rates are typically low, but there have been a few cases of peer lenders going bust, including BeTheLender in 2014 and Collateral last year. In the former case not all investors recovered their money, while Collateral’s collapse is still going through administration.
IFISA investments do, however, typically offer higher returns – sometimes as much as 10 per cent a year for longer-term projects. As such they are attractive to those looking for a regular income from their savings. Not all pay out straight away, though; some bonds in larger infrastructure projects may run for twenty years and won’t start delivering a return until the third year. Be sure to invest in the bond spanning the time period that matches your needs, and read the fine print.
To reduce your risk, you can diversify holdings across a range of different projects. Currently savers can only invest into one IFISA per year, though, so be sure to pick a provider with a good range of investments, at least at first. In your second year you can open a new IFISA with another provider, but you will not be able to put new money into the former. Alternatively, you can transfer your pot to your new provider. You can also transfer existing cash or stocks and shares ISA pots into an IFISA, or save into them at the same time. Your £20,000 annual allowance can be split in any-proportion across the whole ISA range.
Choosing an IFISA
Arguably, the leader in the renewable energy IFISA space is Abundance – a peer-to-peer crowd funder that specialises in financing renewable projects across the UK. Since 2012, £89 million has been ploughed into 36 renewable energy projects through the platform, which has paid out £19 million to investors to date. Current offers include Co Gen, which is proposing to build an advanced facility to turn trash into energy and is offering investors 10 per cent a year over 4 years and 6 months.
Downing Crowd is another strong contender, with current projects including the Populo Solar Bond paying 4 per cent a year over one year for investments into a well-established solar site. This is shorter term than many IFISA bonds and so is good for savers that need their cash back sooner. Triodos also recently launched its own peer-to-peer crowd-funding site, Triodos Crowdfunding, featuring a small selection of eligible renewable investments across the UK through the firm’s IFISA.
Ethex is, arguably, truly grassroots – giving investors the opportunity to invest in projects as concentrated as putting solar panels on the roof of a school in Lancashire. Not all investments on the platform are IFISA eligible though, so again read the small print. Those looking for something further away from home could look at Energise Africa projects through Lendahand, which offers a range of bonds in solar projects in rural African communities. Currently these include the UPOWA Cameroon bond, paying 6.75 per cent per year.
As with any financial decision, investors should do their research before diving headfirst into an IFISA. That said, however, the IFISA is an exciting addition the ISA stable that gives investors the chance to earn higher returns while funding small businesses and projects that might otherwise struggle to get off the ground. This is, perhaps, impact investing at its most accessible.
How I invested in renewables through an IFISA
Izzy Phillips, Recruitment Consultant, 24
I’m relatively new to long term investment and the idea of a project or individual asset that I can fully understand is for me, a nice starting point. When looking at options it needs to be a renewable energy project as I’m very familiar with this area. I also need to see a return that justifies the risk associated with the project.
For me, while the platform is important, the particular project takes priority. At this point in time I want to invest a fair amount into one project and assess it over the next few years. I’m currently considering offers from Abundance and Triodos. LendAHand is also very interesting but I am slightly apprehensive given I cannot easily look into the people, company and projects which is something I’m able to do closer to home.
I’m going to invest £2,500 into the first project. It’s a significant amount of cash savings for me but if the worst happened, I can afford to lose it. For a first dabble, I wouldn’t be comfortable putting in much more. I’ll reasses next year and if I’m happy with this decision and I’m doing well at work, I’d love to fill the full ISA allowance split between a stocks and shares and IFISA.
Dealing with the platforms themselves has been fairly straight forward so far, but perhaps when I make my decision there will be additional hurdles.