Less than half of all charities have ethical investment policies, according to new research by the Charity Finance Directors' Group and the Eiris Foundation.
In a survey of 164 CFDG members, only 46 per cent said they had an ethical investment policy.
Although 60 per cent of charities with more than £1m in investments had such a policy, the figure fell to 25 per cent for those charities with less than £1m invested.
Most charities that did invest ethically said they used their policies only to screen out companies that were in conflict with their goals, with only one in four choosing to invest positively in companies that furthered their own mission.
Charities said they were motivated by conflict with their aims and activities, reputational risk and worries about alienating donors.
Forty per cent of charities said they were worried that ethical investment would lead to lower returns, and 28 per cent were worried about whether it conflicted with their legal duty to maximise returns.
Sam Collin, charity adviser at the Eiris Foundation, which runs a specialist website for charity investors, said several surveys had shown ethical investment did not affect returns.
"It is encouraging to see that many charities now invest in line with their aims," he said. "But there is still much work to do to ensure that all charities are not putting their reputation and stakeholder relationships at risk through their financial decisions.
"The best practice work we are doing with the CFDG should help to dispel some of the myths that exist about ethical investment."
The CFDG will publish guidance for charity finance professionals on the barriers to ethical investment before the end of the year.
Other key findings
- 70 per cent of fundraising charities have ethical investment policies, compared with 59 per cent of grant-makers and 32 per cent of service delivery charities
- 32 per cent of charities that do not have ethical investment policies expect to discuss the subject in the next year
- The areas most avoided were tobacco (85 per cent), followed by pornography (50 per cent), military involvement (48 per cent), alcohol (36 per cent) and gambling (33 per cent)
- The drive for ethical investment comes mainly from trustees (75 per cent), followed by finance directors (45 per cent), chief executives (30 per cent) and supporters (30 per cent).