The law surrounding ethical investment can leave charities unsure of how to proceed, writes Mathew Little.
Ethical investment presents an uncomfortable dilemma for charities.
The public expects it and the Government insists they are open about it, but when they try to practise it they soon become entangled in the rigid precedents of case law and the unresolved arguments of lawyers.
This month Geraldine Peacock, free-thinking chair of the Charity Commission, appeared to offer a chink of light. Ethical investment does not have to be mission-related, she said, just in the best interests of the charity.
So an animal charity, for example, is free to choose not to invest in tobacco companies.
But before trustees start drawing up hit-lists of corporate malfeasants, the commission is keen to point out that the situation is not as simple as Peacock was suggesting. Yes, charities have more latitude to invest ethically than many think, but they cannot override judicial decisions that have come to determine the law in this area.
The defining precedent affecting charities' freedom to invest ethically is the 1991 Bishop of Oxford case. The bishop wanted the Church of England to stop investing in companies that worked in apartheid South Africa, but the church's asset committee refused because its members believed it would damage the diversification of the church's investments.
The judge, Donald Nicholls, ruled that charity trustees' main duty was to obtain the maximum return on their investment. But they were free to rule out investments that competed with their goals. He also conceded that non-mission-related investments could alienate supporters.
In this scenario, trustees have to balance the likely financial loss from supporters if they pressed ahead with the investment against the risk of financial detriment from excluding the investment.
On issues where supporters or beneficiaries cannot agree whether an investment should be excluded on moral grounds, the court offered scant guidance.
"There is no identifiable yardstick that can be applied to a set of facts so as to yield an answer that can be seen as right and the other wrong," the judge pronounced.
Thus, current Charity Commission guidance on ethical investment, which in the main derives from the Bishop of Oxford case, leaves charities in an ambiguous situation.
Mission-related exclusions - the familiar cancer research charity and the cigarette manufacturer case - are given the green light no matter what the financial implications. Non-mission-related exclusions - the hypothetical animal charity and arms manufacturer - require a more arduous process of justification.
"If something was not in conflict with a charity's objects but might alienate supporters, you would need to do a balancing exercise," says Rosie Chapman, director of policy at the Charity Commission.
But she adds that the commission does not expect a crude comparison of the estimated loss of donor support resulting from undertaking a controversial investment with the financial penalty of ruling it out. "As long as trustees can demonstrate that they have done what would reasonably be expected in the circumstances, then it's for each charity to decide," she says.
"It's not for us to tell them how."
But because it is such an inexact science, many charity trustees prefer to remain on the firmer ground of strict mission-related exclusions.
Helen Verney, finance director of Jewish Care, was finance director at the MS Society when it considered a tobacco-free investment policy. But because no link was found between MS and smoking, the decision was taken not to exclude tobacco firms.
"I'm not against ethical investment," she says. "But you are investing donors' money and you're supposed to be getting the maximum out of it.
I'm not in favour of trustees taking a limiting ethical stance because of moral feelings they have that go beyond the mission of the charity."
For charities that don't want to enter the legal minefield of ethical investment there is a less fraught alternative. Socially responsible investment (SRI) has grown in popularity because it doesn't entail excluding whole areas of investment that could conflict with case law. Instead, investors favour the 'best in class', such as BP over Exxon Mobil, or engage with companies to improve their performance.
Professor Paul Palmer of the Centre for Charity Effectiveness at Cass Business School says there are now many SRI initiatives suitable for charities.
"SRI is not as pure as ethical investment," he concedes. "But for a charity that doesn't have any particular hang-ups, and still wants to improve society, it makes sense."