A number of charities that invest in arms companies have been 'named and shamed'. They claim these funds are hard to avoid, but Tania Mason finds chinks are appearing in the barrier to ethical investment.
It's not often that charities dish the dirt on each other, but Campaign Against Arms Trade's attempt to 'clean up' the investment portfolio of the voluntary sector this month saw 63 charities 'named and shamed' as owning shares in arms exporters.
There were some well-known names in there: Cancer Research UK, the MS Society, the RNLI, and CAF. What prompts them to buy shares in arms traders?
Sanjay Shah, the MS Society's deputy finance director, was defensive when tackled about it. "We never made a conscious decision to invest in the arms trade. We simply have a discretionary portfolio which means that our fund managers decide our investments for us. We can't exclude any investment because our constitution doesn't allow us to."
A similar excuse came from CRUK's finance director Lynne Robb: "We don't choose to go down this route. We don't knowingly invest in any shares. Our investment managers manage our portfolio to the returns that we want, but how they invest it is down to them. If we have any shares in arms traders it is only because we were left them in a legacy or a trust, and haven't been able to sell them yet."
But while it may be true that neither of these two charities made a conscious decision to put their money into the likes of BAE Systems or Rolls Royce, they also haven't made a conscious decision not to. Yet their desire to distance themselves from the investment and pass the buck to their fund managers suggests they are acutely aware of the public relations implications of such shareholdings leaking out to supporters and donors.
CAAT spokeswoman Liz Morton spells out the paradox: "Charities exist to enhance quality of life and arms companies sell weapons that are designed to kill."
But not investing in stocks that might be thought 'dirty' by some - like arms, pharmaceuticals, or tobacco - isn't as easy as it sounds.
Charity law obliges trustees, above all else, to strive for the best possible returns on charity investments. In general, such 'dirty' funds have tended, annoyingly, to be very lucrative. Also, only companies whose activities are directly incompatible with a charity's aims can automatically be ruled out of an investment portfolio. For instance, CRUK is permitted to eschew tobacco companies.
Charles Watton, finance director at the RNLI, which owns shareholdings in Rolls Royce, GKN and Cobham, says these requirements put trustees in a difficult position.
"Their obligation is to achieve the best returns available on our reserves, while only excluding investments which are inimical to the objectives of the charity, and not to take a personal view on the ethical appropriateness of individual investments.
"As Charity Commission guidance says, 'trustees are not free to use their investment powers to make moral statements at the expense of their charity'.
"In our context, where our prime objective is to save lives, promote safety and provide relief from disaster at sea, it is difficult to identify investments which are expressly contrary to this objective."
But others argue that chinks have appeared recently in these barriers to ethical investment.
WWF-UK's ethics analyst Diana Brown says last year's Strategy Unit report made it easier for charities to take an ethical stance, by recommending that charities publish an ethical investment policy.
She advises charities to follow WWF's lead: "Draw up a policy that makes a link between your mission and objectives, and the sorts of companies that could potentially undermine these.
"We' re all about moving towards a sustainable future. We need to invest in companies that will be a part of that future."
Even the Charity Commission guidance cited by Watton suggests that it would be good practice for charities to have an ethical investment policy.
In fact, Sophie Chapman, policy and campaigns officer at the Charity Finance Directors' Group, says that since the guidance was updated last year, it offers much more flexibility for trustees to invest ethically.
"The commission now accepts that an ethical investment policy may be entirely consistent with the principle of seeking the best returns," she says.
"For instance, trustees may be of the view that companies that adhere to ethical criteria are less risky, and will perform better in the long term."
The guidance also permits a charity to exclude investments that "might hamper its work by making potential beneficiaries unwilling to be helped because of the source of the charity's money, or by alienating supporters".
Trustees can now even accommodate the views of those who consider an investment morally inappropriate if they are satisfied it would not involve a significant financial risk.
Stephen Lloyd, chairman of the Charity Law Association, agrees that this amounts to a "loosening up" of the commission's interpretation of the law, but says it doesn't go far enough.
"What is needed is a fundamental change in the law, so that even if a particular investment has nothing to do with the core purposes of the charity, trustees could still choose not to invest in it," he says.
But he admits this is unlikely, so the best way to spur on ethical investment is for funds to fight their own corner, and prove they can perform as well as others. There are signs that this is beginning to happen.
According to last year's WM Company Annual Review of Charity Funds, ethical funds are no longer also-rans in the investment race. Over the five years to the end of 2002, charity funds that were constrained by ethical considerations lost 2 per cent of their value. Over the same period, the total charity funds surveyed by WM lost 1.9 per cent of their total value.
The WM Company report concluded: "Ethical concerns can still be addressed without having an adverse impact on relative performance or relative risk."
If nothing else, CAAT wants to make charity boards more aware of the issue. Morton says: "I don't think trustees are malevolent, they are just ignorant or a bit lazy. They don't think enough about the implications of their investment policy, or realise that they can change it."