It has long been accepted that charities can choose their investments to make sure they are ethically compatible with their purposes and the interests of their beneficiaries.
The proposal that cancer charities, for example, should exclude tobacco, or that rehabilitation charities should avoid alcohol, is straightforward, although it may not be easy to decide between negative screening and positive engagement with companies.
Two years ago, however, the Charity Commission's outgoing chair, Geraldine Peacock, said she thought charities would eventually be allowed to expand their ethical policies to categories that were not directly connected to their missions.
Her view seemed to be that the loss of donor support that could result from unethical investment in a general sense was more damaging to charities than investment policies that strayed from their explicit aims.
The commission's guidance on ethical investment acknowledges that there may be times when trustees make investment decisions on general moral grounds. But it includes a proviso: "In these cases, the trustees must be clear that their decisions will not place the charity at risk of significant financial detriment due to underperformance by the preferred investments."
Such advice forces trustees into a moral maze. If they choose to make investments that are not mission-specific in order to fit the views of donors and beneficiaries, they must also be able to guarantee that their ethical investment decisions will not result in financial losses.
There is also the problem of working out how best to canvass stakeholders' opinions. A commission spokeswoman said it was up to trustees to decide how best to assess what would cause alienation or a fall in donor support. This puts even more pressure on trustees to manage the process of finding out what stakeholders think, selecting the common themes and constructing an investment policy that ties it all together.
One employee from a large UK charity, who asked not to be named, says it was difficult to balance a cacophony of different messages from donors, beneficiaries and staff. He says donors' wishes often conflict with the campaign team's priorities, and that the campaign team is liable to put out public statements about the charity's ethical actions that the finance department cannot match to its planned investment strategy.
Victoria Woodbridge, senior client relationship manager at ethical investment advisory service Eiris, says there have been significant improvements in the ability of charities to assess donors' ethical concerns.
"Some have asked their members if they would be less likely to retain membership if the organisation made certain investments," she says. "It's a lot more sophisticated than it used to be."
But Woodbridge says this sort of research is of little use if trustees are not able to turn their donors' input into action. "The whole thing is underpinned by the fiduciary duty of the trustees to make a judgement only on investments that are directly linked to their mission statements," she says. "If an environmental charity has polled its members and found out that they are anti-smoking, it would be difficult to do something about it in practice."
Penny Shepherd, chief executive of the UK Social Investment Forum, advises trustees not to feel too daunted. "The integration of social and environmental issues into investment decision-making isn't rocket science," she said. "It's about asking sensible questions."
Shepherd is also keen for sector groups to follow the examples of Oxfam and WWF, which are embracing ethical investment as part of a campaigns strategy. "If charities are looking at socially responsible investment purely from the risk-management perspective of protecting their reputations, they are missing an opportunity to advance their charitable aims more widely," she says.
A FAREWELL TO ARMS INVESTMENTS
In terms of arms investments, the third sector has been pressurised by donor opinion into dumping so-called 'sin stocks'. Much of the impetus came from Campaign Against Arms Trade, whose annual list of organisations that own arms stocks has named and shamed guilty charities into selling offending shares.
In 2004, crime-reduction charity Nacro offloaded shares in British Aerospace after appearing in the list. Two years later, Cancer Research UK followed suit, shedding its BAe and Rolls Royce stocks.
According to Ian Pritchard, research coordinator at CAAT, arms investments by charities had fallen so far by the time the pressure group was compiling its 2007 list that he made the decision to focus on universities and leave voluntary organisations off altogether.
"Charities have got better over the past decade, and there are now very few notable names with any arms investments - all we had was the RNLI and a few local charities," Pritchard says. "Far fewer of the bigger charity names are involved now, and those with the most to lose have been very careful of the investments they make. They don't want to be on the front page of a newspaper with a piece about their investments."