Responsible investment: three steps for trustees

Comic Relief has been criticised for its investment policy
Comic Relief has been criticised for its investment policy
David Russell

According to a new report from State Street, charities collectively invest around £9bn through endowments, reserves, pension funds and other investments - generating financial returns to support their aims. But no matter what they invest in, most trustees know that a charity’s most precious asset is its public reputation.

Howard Pearce

That is why the scandal involving the Church of England’s investment in payday lender Wonga has caused sleepless nights for many charity trustees. This was followed by Panorama’s exposé of Comic Relief’s holdings in tobacco, alcohol and arms firms and Greenpeace’s loss of around £3m through currency speculation.

Trustees need to be on top of their organisation’s investment portfolio to ensure it is not undermining everything else the charity does. However, it is important to remember that investments can also have a positive social impact, helping a charity to achieve its aims in the same way that grants, campaigns or fundraising can.

Three actions for trustees

There is no magic formula to totally avoid all possible investment risks. All charities and investment portfolios differ in size, scope and in the issues they seek to tackle. However, these three steps can help trustees to meet best practice:

Understand the nooks and crannies of your investments

The essential starting point is to understand exactly what is held in your charity’s portfolio. As part of modern asset management, investment advisors and fund managers encourage trustees to diversify their investments into areas such as pooled funds, private equity, infrastructure, hedge funds, debt funds yielding fixed income and other areas that can make a trustees eyes glaze over.

These can help protect long-term returns, but they also take trustees into complex areas where the companies in which investments are made can be hidden by layers of intermediaries. For example, the Church of England’s investment in Wonga was made indirectly via a "fund of funds", which invested in a US venture capitalist fund that happened to have co-funded the launch of Wonga. Asking your fund managers and advisers to explain all the underlying investments in your portfolio is the key first step in your review process.

Find a balance

The second crucial step for charity trustees is to decide the right balance between charitable mission and investment goals. The Charity Commission’s guidance to trustees (CC14) states that charities must get the best possible risk-adjusted return on their investments and that trustees must set clear financial targets and avoid risky investments that may be associated with their charitable mission.

With this in mind, there are now a growing number of social, environmental, ethical, sustainability or stewardship funds on the market that offer a range of responsible investment strategies and that can deliver identical or top quartile returns compared with traditional funds. In addition, some traditional mainstream funds are now taking into account environmental, social and governance factors, provided these are financially material. As demonstrated by the Comic Relief episode, claiming that investing responsibly will not secure market (or above-market) returns is no longer a legitimate excuse for charities.

Tailor your approach

The next step is to decide which responsible investment strategy best fits your organisation. Historically, ethical investment has been understood as being about exclusion; making a decision not to invest in particular companies or sectors. However, this has evolved and there are now four commonly understood ways to put responsible investment into practice:

Negative screening involves avoiding sectors or companies that clash with your charitable ethos.

Positive screening involves selecting and supporting entities that help achieve your charitable mission.

Active ownership involves using your influence (often with other investors) to change negative behaviors of the entities you may be invested in.

Environmental, social and governance integration involves ensuring that financially material ESG issues actively inform investment decision-making.

There are many examples across the sector of charity trustees putting one or more of these strategies into practice. From a housing charity investing in a sustainable property fund, to a health charity driving up corporate best practice on access to medicines to the Environment Agency’s Pension Fund, which uses an ‘environmental overlay’ to ensure financially material green issues are fully factored into all their investments.

Ultimately, money doesn’t perform, people do; and it’s up to charity trustees to take action and implement their preferred investment style.

Howard Pearce is director of consultancy HowEsg and former head of pension fund management at the Environment Agency. David Russell is director of The Social Enterprise and an associate of ESG Communications and former director of the UK charity Survivors Fund


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