THREE STEPS CHARITY TRUSTEES CAN TAKE ON RESPONSIBLE INVESTMENT
Howard Pearce, David Russell and Elliot Frankal
First published: Third Sector Online, 11th July 2014
Third sector organisations collectively hold assets worth over £100 billion 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.
That is why the scandal one year ago this month involving the Church of England’s investment in payday lender Wonga has caused sleepless nights for many charity trustees across the UK. More so as it was followed by Panorama’s exposé of Comic Relief’s holdings in tobacco, alcohol and arms firms and Greenpeace’s loss of around £3 million through currency speculation.
These scandals are a wake-up call to trustees that they need to be on top of their organisation’s investment strategy and portfolio to ensure it is not undermining everything else the charity does.
Here are some simple steps that trustees can take to help not only avoid the reputational damage of a similar scandal, but to potentially use their investments for positive social impact. Their investments can help them achieve their charitable goals just as 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 environmental, social and governance (ESG), and other issues they seek to tackle. However these three steps can help trustees to meet best practice:
- Find out what and where exactly your money is invested – including for example the underlying companies, countries, and currencies.
- Assess your portfolio and reputational risks and decide if your investments should be better aligned to your mission – but without compromising your financial aims.
- Implement a responsible investment strategy that best suits your mission and financial goals.
Step 1 – Understand the nooks and crannies of your investments
The essential starting 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 takes 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”, that invested in a US venture capitalist fund which happened to have co-funded the launch of Wonga .
Asking your funds managers and advisers to provide information and explain all the underlying investments in your portfolio is the key first step in your review process.
Step 2 – 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) is that charities must get the best possible risk adjusted return on their investments and 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 can deliver identical or top quartile returns as traditional funds. Also some traditional mainstream funds are now taking into account financially material ESG factors. As demonstrated by the Comic Relief episode, it is no longer a legitimate excuse that investing responsibly will not secure market, or above-market, returns.
Step 3 – 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 – i.e. NOT investing 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’, ‘positive screening’, ‘active ownership’ and ‘ESG integration’.
- 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.
- ESG 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 drive up corporate best practice on access to medicines the Environment Agency’s Pension Fund which uses an ‘environmental overlay’ to ensure financial 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.