The charity sector has more than £70bn in assets, mostly invested in equities and bonds. That's a tidy sum being deployed in the global economy, all to the commendable end of ensuring the economic viability of charities' diverse agendas. Over the past seven years, successive pieces of legislation, principally in the form of good practice requirements, have compelled charities to ask questions of their investments beyond bottom-line profitability.
This shift in emphasis is featured in both the Statement of Recommended Practice 2005 and the Charity Commission's guidance CC14, Investment of Charitable Funds: Basic Principles. These documents say charities are required to make explicit in writing what ethical criteria apply to their investments. This decision is the trustees' responsibility, who must issue their investment manager with a written mandate.
The legislation is intended to release trustees from the single priority of financial performance, known as fiduciary responsibility, enabling them to consider wider concerns in alignment with their charitable objectives. Sorp 2005 is not corralling trustees into a one-size-fits-all investment position. Rather, it compels a charity to consider whether it wants its values to have a bearing on its investments.
A 2003 survey from Just Pensions, a programme run by the UK Social Investment Forum, found that 60 per cent of top charities have no written socially responsible investment, or SRI, policy. After Sorp 2005 they should be in compliance, even if that means opting for a statement such as "the trustees place no ethical restrictions on our investment".
Such a caveat would be minimally compliant, but it could leave the charity exposed to compromise, hypocritical investment and a breach in stakeholder trust. For charities, trust and donor support are premium assets, yet research by the Association of Certified Chartered Accountants into 197 large charities revealed that only 55 per cent of respondents now have ethical investment policies.
One reason for poor compliance may be the belief that SRI yields poor returns; authoritative voices have debunked this myth. Investment managers often have limited experience in SRI and are dismissive of it. It requires expertise they lack and does not offer them an increased return for the rigour that efficient SRI demands. Another reason why it fails to be implemented in a thorough, monitored way is that both advisers and implementers are the investment managers. This leads to a conflict of interest regarding performance and disclosure.
Trustees who appreciate the spirit of Sorp 2005 but lack the competency or time to deliver the detail thus face a challenge. Nevertheless, if a bespoke ethical investment policy is developed within a wider independent review framework of a fund manager's performance and investment allocation, there are often net gains to be made. Best practice and optimised investment can be part of the same cost-saving exercise.