The 2005 act says trustees should consider diversification of their investments and whether they need to obtain appropriate advice. From a charity's perspective, an ethical stance could obviate criticism and conflict between its investment stance and its charitable purposes; but many trustees will be concerned that this area of the market is not available to them if they are to discharge their legal and fiduciary duties.
This may be based on the impression that the exclusion of certain sectors of the market will reduce diversity, increase risk and affect the maximising of financial resources. Alternatively, it may simply be because this is a complex area of the market and they do not feel equipped to make the required decisions.
Clearly, taking an ethical stance limits the universe in which trustees can invest. But this does not mean that investing ethically automatically carries more risk. Ethical investments need not be any more risky than non-ethical ones, especially if trustees take a balanced approach and hold a spread of investments across a range of countries, industries and asset classes.
What is essential is that the investment adviser and trustees assess and agree what are the short, medium and long-term objectives for the money. Trustees can decide what rate of return is acceptable and how much income, if any, is needed. Once this has been discussed and agreed, a portfolio can be constructed that takes into account the trustees' ethical beliefs, capital and income requirements and attitude to risk. Then an appropriate benchmark can be applied. This will allow the trustees to judge whether or not the investments are performing well.
A charity that is considering such investments must address the various issues very carefully in order to ensure that they can comply with their statutory duties and obligations. With specialist legal and financial advice, charity trustees can make investment decisions that are in line with their charitable purposes and discharge their legal and fiduciary duties.
- Gregor Munro is a financial adviser at HBJ Gateley Wareing