Ethical investment: why it might be right for your charity

September 28, 2012 at 13:48

One highlight of  this year’s CFG investment Conference for me was hearing Edward Mason, Secretary of the Church of England Ethical Investment Advisory Group, give a fascinating talk on ethical investment. Ethical (or socially responsible) investment (EI) is that which takes social, environmental or governance issues into consideration in investment decisions. A growing number of charities have adopted some form of EI policy in recent years, yet many others have not.

Although I’ve interned and volunteered in charities for a number of years, I’m still relatively new to working in the sector and this was an aspect of charity that I had never fully considered before. In fact, I was quite surprised to learn that more charities don’t invest ethically - a  survey carried out by CFG and EIRIS Foundation in 2009 showed that only 46% of charities have ethical investment policies. Perhaps I’m applying my personal bias to the issue, and assumed investing ethically was the norm for the sector, but I discovered at the conference that a number of myths and barriers prevent this from being the case.  So what are they, why should charities have an EI policy and what are the key considerations in taking an EI policy forwards?

I like the idea of ethical investment, but…

… doesn’t ethical investment contradict charity law on investment?

Trustees are legally bound to invest in the best interests of the charity, and this has historically been seen to mean maximising financial return. However, it has been widely shown that an EI policy can be entirely consistent with this duty. Full details can be seen in our guide: Unlocking Socially Responsible Investment, but in essence, the law leaves trustees a great deal of flexibility, so long as they can justify that it is in the best interests of their charity. Trustees can accept the risk of a lower than best rate of return on their investments, and thus make ethical investments, if a particular investment conflicts with the aims of their charity, risks alienating their beneficiaries or donors or won’t result in significant financial detriment.

… won’t ethical investment result in lower returns on our investments?

There is no one answer to this, and different case studies show different results, depending largely on the extent and nature of restrictions in place. However, the Church of England, the second ethical investor charity in the UK and one with a stringent exclusion policy, has reported that over 3, 15 and 20 year periods, that they have beaten their annual long-term target return of RPI +5%. Moreover, though such financial benefits are difficult to quantify, it seems almost certain that the CoE’s well-known policy has resulted in increased public support.

… isn’t my charity too small to operate an ethical investment policy?

Whilst initially developing an EI policy requires time, a Statement of Investment Principles need not be excessively long, and once this has been handed to your investment manager it is their responsibility to research where your funds would be best invested. From this point forward all that is required are periodic reviews and meetings with your investment manager. What’s more, though minimum levels of investment for a segregated fund may be set prohibitively high for some charities by investment managers, pooled fund investment can be achieved with as little as £1000.

… is it all about negative screening?

Whilst negative screening (avoiding investments that do not meet the social, environmental or ethical standards which your charity has set) could be a hugely worthwhile first step for many charities, there are many other forms of EI available as well, including positive screening (actively seeking out companies to invest in, in line with your aims and priorities), and direct or indirect (through your investment manager) shareholder engagement.

… would it really matter to our beneficiaries and donors anyway?

Charities rely on public trust and confidence to carry out their work, and this is largely based on their reputations. As value-driven organisations charities are widely expected to hold and demonstrate high ethical standards and further their mission in all aspects of their work, including their investments – a 2011 survey by the EIRIS Foundation and Holly Hill Trust found that 78% of the general public said that they would think better of a charity that had funds invested in socially and environmentally positive products and services.

OK, so what are the key considerations when developing an ethical investment policy?

Find out more: There are plenty of sources of information on EI, including CFG’s guide: Unlocking Socially Responsible Investment, the Charity Commission’s CC14 guidance, the UN Principles of Responsible Investment (UNPRI), and publications by the EIRIS Foundation and UKSIF.

Know your aims: The diversity of options available means that developing an ethical investment policy is all about finding what works for your organisation. It is essential that the board decides on the aims, values and philosophy of their investment policy, and establishes how these support those of organisation. An EI policy provides a means of ensuring that a charity’s aims, assets and activities are working efficiently together in service of the charity’s beneficiaries.

Identify a suitable investment manager: This is a crucial part of the implementation of any EI policy; asking key questions of potential investment managers is vital, for example regarding their EI expertise, their views on issues important to you, their experience proactively engaging with companies and their membership of responsible investment networks or initiatives, e.g. UKSIF and UNPRI. Remember, you’re the consumer, so it’s in an investment manager’s interest to accommodate your wishes.

Look to the long term: Ethical investments are grounded in long term sustainability; whilst not always delivering instant financial returns, they have consistently been shown to perform reliably and competitively over time scales of several years or more. Your policy should be regularly reviewed in light of changing circumstances, both internal and external to your charity.

Finally, remember to see both sides of the coin – in the early stages of developing an EI policy it’s very easy to get caught up in thinking only of the potential risks, but don’t lose sight of the lasting benefits your policy should bring, tangible and intangible, to both your own organisational and others.

October 14th – 20th is National Ethical Investment Week. As part of the week CFG are carrying out a survey into ethical investment in the charity sector. We’re looking for responses from all charities, including those both with and without ethical investment policies, and we’d really appreciate you taking a few minutes to complete the short survey.

We’re also putting on a free breakfast debate on October 18th, 8:30-10:00am, entitled “In the age of austerity, is ethical investment still relevant for charities”. We have a line-up of speakers, and we’d be delighted if you could join us, please visit our website to book your place.

Douglas Hull    Post by Douglas Hull, policy and membership officer at CFG