Last December's Panorama investigation of charities and their investments exposed how donations the public expected to be spent on the needy were actually being invested in funds with shares in tobacco, alcohol and arms companies.
The programme found that between 2007 and 2009 the charity Comic Relief held investments amounting to millions of pounds in companies that appeared to contradict several of its core aims. The investigation came only months after the Church Commissioners was found to have an indirect investment of £80,000 in the payday lender Wonga, which the Archbishop of Canterbury, Justin Welby, had earlier said he wanted to put out of business.
These two stories show how difficult it can be for charities to balance the tensions between getting the best possible return and investing in a portfolio that doesn't clash with their charitable objectives.
Helen Wildsmith (left), head of ethical and responsible investment at the investment manager CCLA, believes the stories have been a wake-up call for charities. "Since the stories broke, more and more trustees I've met have wanted to know what is under the bonnet of their pooled or indirect fund investments," she says.
One of the issues raised at the time of the Panorama broadcast was whether charities and investment managers were clear about the rules on ethical investment and what they could and could not do.
The guidelines are set by the Charity Commission and published in its CC14 document Charities and Investment Matters: a guide for trustees. A spokeswoman for the commission says the guidance on ethical investment has not changed since the 1992 Bishop of Oxford case, which ruled that charities must get the best possible return on their investments, but could invest ethically as long as the financial returns were not compromised.
But while the guidance has not changed, the spokeswoman adds that public perception of charities might have evolved since 1992. "The Bishop of Oxford case envisaged that there would be rare situations when a charity, depending on donations, would need to avoid certain investments that were likely to alienate their donors," she says. "It may be that now there is more of an expectation from the public that ethical investment is a good thing and they are more likely to support charities taking such an approach." The commission currently has no plans to review the guidance, however.
Some in the sector argue that more clarity is needed about what charities should be doing and how they can communicate their decisions to the public. The charity chief executives association Acevo announced earlier this month that it was setting up a commission to look at these issues, and that it would examine the need for voluntary organisations to understand their investment policies at all levels and communicate them to the public.
Asheem Singh, director of public policy at Acevo, says: "Our sector needs clear advice on the responsible and ethical investment market and what our relationship to it should be."
Part of the problem is that, in today's globalised economy, it can be difficult to know exactly where money is invested, especially if it is held in a pooled fund. In the recent Church Commissioners case, for example, it was invested in a "fund of funds", which means it was put into a fund that was invested in another fund, which had investments in Wonga.
Neville White (left), head of socially responsible investment at Ecclesiastical Investment Management, says that the Church Commissioners and Comic Relief cases show the importance of charities carrying out due diligence on where their money will go.
It is also important, says White, that all trustees of a charity are aware of its investment policy, even if decisions have been delegated to an investment sub-committee. "The full board should be aware of the investment strategy and what kind of ethical policy is in place, so that if someone challenges the charity the trustees are fully accountable," he says.
Acevo's Singh echoes the need for some accountability. "You can't delegate decisions about the ethics of your charity's investment," he says. "It's something the whole organisation needs to be mindful of."
A further complication is establishing whether ethical investments perform better or worse than mainstream ones. Last autumn, Terry Smith, a leading fund manager, told the Institute of Directors that pension funds should avoid ethical funds, partly because of their poor performance. The claim has been fiercely contested by ethical fund managers.
CCLA's Wildsmith says that ethical investments should not be judged on their financial performance alone. She advises trustees to imagine they are holding a pair of scales. On one side they are asked to think of the financial returns from an investment they are planning, and on the other the reputational risks that could be associated with that investment. "Then they can tease out which investments, if any, might be more trouble than they are worth," says Wildsmith.
Ethical investment should not be restricted to talking about which investments to exclude, she adds: positive engagement, in which investors seek to influence positive behaviour by the companies they invest in, can also be an important component of an ethical policy, she says.
Ringing the changes at Comic Relief
The furore that followed the Panorama investigation into Comic Relief led the charity to announce a review of its investment policy last December.
At the time of the Panorama programme, the charity had an investment portfolio of £155m and chief executive Kevin Cahill disclosed that up to 5 per cent of this was invested in controversial areas including alcohol, arms and tobacco companies.
He said that the charity had previously confirmed with the Charity Commission that the investment policy was acceptable, but added that it was crucial for the charity to maintain the trust of its donors and supporters.
In February, the charity announced that the investment review panel would comprise three existing trustees and two independent members: John Kingston, chair of the Association of Charitable Foundations, and Andrew Hind, the former chief executive of the Charity Commission. Kingston was appointed chair of the panel.
It also confirmed that the charity had withdrawn funds from the sections of the investment portfolio that had caused concern, pending the conclusion of the review. It said that the panel aimed to publish its findings within eight weeks, which have now elapsed.
A spokeswoman said the panel had now made its recommendations "for the principles and framework for a new investment policy and its levels of transparency", and these were being considered by the Comic Relief board.
She added the outcome of the review would be announced shortly.