Earlier this week, Comic Relief faced accusations on a BBC Panorama programme that it had invested millions of pounds in companies that produced arms, alcohol and tobacco – all things it has funded charities to campaign against.
In the light of public condemnation, Kevin Cahill, chief executive of Comic Relief, has promised a "full review" of its investment policy, and has admitted that up to 15 per cent of its funds – up to £23m – could be invested in alcohol, arms and tobacco.
Initially Comic Relief was unrepentant in the face of criticism, saying it was not able to ethically screen its investments while maintaining the level of risk and return that it wanted to achieve.
But this suggestion is not supported by the figures. Tomas Carruthers, chief executive of the Social Stock Exchange, yesterday told BBC Radio 4’s World at One that ethical funds have outperformed normal ones over the past 10 years. This is in part because companies that are run along ethical lines have been shown to focus on long-term performance and face fewer PR disasters.
Peter Bennett-Jones, chair of Comic Relief, also claimed in The Guardian newspaper that it was the fiduciary duty of the trustees to "invest for the best possible financial returns".
But this argument too is not correct, legal analysis suggests. The issue was first tested in the Bishop of Oxford case in 1991, which made it clear in law that a charity was allowed to invest for both reputation and ethical considerations. The Charity Commission guidance on investment also takes this into account, and states clearly that a charity can consider these issues in their investment decisions.
"This still seems to be a common misconception among charity trustees," says Helen Wildsmith, head of ethical and responsible investment at the investment firm CCLA. "Many generalist advisers – lawyers and fund managers – have also not kept up with the guidance."
Despite the lack of legal or financial impediments, Comic Relief is far from the only large organisation to have no ethical investment policy.
Panorama researchers told Third Sector they suspected that other major charities had similar ethical issues but had found it difficult to gather enough data to pursue them. And two polls conducted among members of the Charity Finance Group in 2009 and 2012 found that only about half of all charities have a policy of any sort.
The poll shows that larger charities are more likely to have a policy, with about three quarters of them doing so. But most of those who have a policy use only "negative screening" – excluding a small number of the worst offenders.
Even the ethical investment policies that do exist are often relatively weak, the data shows.
The majority involve only "negative screening" – avoiding those organisations that operate in a way contrary to the charity’s direct objectives. As a result, it is likely that even charities with an ethical policies could still be investing in organisations that, for example, use banned chemicals, slave labour or practise animal evisceration.
The Church Commissioners, which has assets of about £5.5bn and is the second-largest charitable investor behind the Wellcome Trust, believes it is possible to invest ethically without compromising risk and return over the long term. But it has also shown it is difficult to keep control of where cash is invested, after it was embarrassed earlier this year when it discovered that it owned shares in the payday lender Wonga.
Edward Mason, secretary of the Church of England Ethical Investment Advisory Group, says that the key thing is for a charity to think about what it stands for and make sure its investments are in line with those objectives.
There is cost and effort involved in ethical investment, he says. It might require more up-front investment in screening structures and selecting the correct fund managers, and it is difficult to screen out all companies with ethical issues.
"You can’t have a 100 per cent perfect investment portfolio," says Mason. "The world is a complicated place and you just need to try to reflect your mission as best you can. You have to put something into it but you get a lot out of it. You generate value for your cause and support from your beneficiaries."
Investors must focus not only on the type of product a company makes, but also its behaviour, experts indicate.
For example, a company might sell perfectly acceptable retail products such as clothes or makeup, but still test on animals, pollute the environment or have poor human rights and employment records.
"We use an engage and exclude technique," says Wildsmith. "We speak to the company about the environmental, social and governance issues we’re concerned about and, if it doesn’t change, we remove it from our portfolio."
The risk of having no ethical investment policy is twofold, says Raj Singh, programme director at Uksif, the membership network for sustainable and responsible financial services. First, a charity might find it is compromising its mission by funding its direct opponents. And second, it might compromise its reputation.
"You are likely to find that your investments are not in line with your underlying mission," he says. "Charities that haven’t really spelled out their investment policy aren’t taking it very seriously, and are probably exposing themselves to real reputational problems. Those could blow up in their face in the media."