With shifting expectations and a change in the public mood, Alice Farrer, one of our charity investment managers discusses how charities can align their investments with their purpose and values.
When the whistle blew on the investment strategies of high-profile charities, such as the Church of England, the National Trust and Comic Relief, charities had to take note:
- The Church of England tightened investment restrictions following its controversial indirect investment in the payday lender, Wonga;
- Following heavy criticism in a Panorama documentary, Comic Relief decided to exclude investments in companies that, ‘manufacture armaments or tobacco products or whose primary business is the manufacture of alcohol products’; and
- The National Trust is now approaching the end of a three-year programme of divestment in fossil fuel companies from its investment portfolio.
This alignment of a charity’s investments with their purpose and core values can be defined as investing responsibly. It is not a new phenomenon. The notion of responsible investment originated from religious movements promoting avoidance of sinful business activities and it has been around for years1 . However, of late, there have been some significant developments in our ability to analyse investments from a responsible standpoint and we are seeing rising interest in this area from charities as they become more aware of their choices and their ability to take a stance on such issues through their investment strategy.
Responsible investment can be a confusing topic. Indeed, the Charity Commission for England and Wales is currently consulting on clearer guidance around this area. There are all sorts of technical terms and acronyms, the most common of which are:
- ESG – environmental, social and governance.
- UNPRI – United Nations Principles for Responsible Investment – a set of investment principles that offers a menu of possible actions for incorporating environmental, social and governance issues into best practice.
- Responsible investment defined by the Charity Commission as, ‘demonstrating that you have thought about your charity’s purpose as well as your investment duties when making investment decisions’2.
- Ethical investment defined by the Charity Commission as, ‘investing in a way that reflects a charity’s values and ethos and does not run counter to its aims’3.
- Sustainable investment – at Brewin Dolphin we define this as, ‘investments that create value from sustainable activities and positive ESG criteria’
THERE ARE DIFFERENT APPROACHES TO RESPONSIBLE INVESTING
MAXIMISING PERFORMANCE AND MANAGING RISK
One of the biggest barriers to responsible investing has been the argument that by investing in this way you risk underperforming the broader market. Although the exclusion of specific sectors or companies from the investable universe can mean that performance differs from the benchmark, there is growing evidence that financial returns need not be compromised when investing responsibly4. At Brewin Dolphin, we believe that high-quality companies which manage environmental, social and governance risks and opportunities well make attractive long-term investments.
RESPONSIBLE INVESTMENT IN PRACTICE
The analysis of ESG risks and opportunities is embedded in our investment process. These factors are considered when we conduct our investment research, be it in a direct holding or a pooled fund. Furthermore, as responsible investors and active owners, we regularly engage with company management teams and fund managers and this is often on ESG themes. This does not mean that we consider a company or fund to be a bad investment or poorly governed. It is more that we want to make them even better and to create long term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. This is a core part of what we do.
Many of our charity clients have additional ethical requirements. They may avoid certain areas of investment (negative ethical exclusions) and / or choose to favour others (positive ethical criteria). We recognise that every charity is different and so we craft bespoke portfolios for each of our charity clients to suit their particular ethical needs. A mental health charity may decide to exclude companies generating revenues from alcohol, cannabis, gambling, tobacco, pornography and high interest lending, all social issues that could be contributory factors in mental health, whereas an environmental charity may avoid investment in companies that have a poor environmental record, fossil fuel industries, oil and gas companies and favour renewable energy investment.
First and foremost, we encourage our charity clients to refer to CC14, the Charity Commission’s guidance on ‘Charities and investment matters: a guide for trustees’5 and any subsequent revisions following the current consultation. This includes some useful guidance on how to approach responsible investment. In Scotland, guidance is provided in Charity Investments: Guidance and Good practice6, published by the Office of the Scottish Charity Regulator in 2018. We encourage trustees to consider their charity’s values and the purposes for which the charity was set up to achieve and whether their charity’s investments are consistent with these. We recommend that the charity’s approach to responsible investment is explained and documented within its investment policy statement including the types of investments the charity wants to make or avoid, where relevant. As investment managers we are here to help these discussions and stimulate debate.
With a growing focus on climate change, sustainability, social issues and corporate governance together with rising interest in how a charity behaves, not just what it achieves, consideration of this area is vital for driving trust, maintaining support and ensuring a charity’s long-term sustainability.
Engagement with Compass Group
During the first quarter of 2021 we engaged with Compass Group, who, through their subsidiary Chartwells, provided food parcels for children learning at home in place of their free school meals. In some cases these parcels fell below the standards expected. We engaged with the management of Compass Group who acknowledged the problem and took measures to improve their quality controls. We welcomed the news that the CEO took charge and spoke directly to the impacted schools as a mark of how seriously the company took the issue. We do not believe the incident was symptomatic of poor behaviour by Compass Group as a whole, more a result of some short-sighted behaviour from some of Chartwell’s management exacerbated by very short notice and stringent requirements by the Department for Education.
London charity team
1 – In the US, the first ethical Unit Trust, the Pax Fund, is said to have been launched in 1971 while in the UK the Stewardship Unit Trusts were developed in 1970s and 1980s.
2 – ‘How do charities approach investing in line with their purpose and values? We want to know, and we want to help’, Charity Commission Blog 15 January 2020
3 – ‘Charities and investment matters: a guide for trustees’, Section 3.3
4 – Eg Over the period from 1 January 2013 to 31 December 2020, the MSCI World SRI (Socially Responsible Investment) Index rose by 163.1% which compares to the MSCI AC World Index which rose by 132.3% over the same period (Source: Thomson Reuters Eikon (Refinitiv), Total Return Price
5 – https://www.gov.uk/government/publications/charities-and-investment-matters-a-guide-for-trustees-cc14/charities-and-investment-matters-a-guide-for-trustees
6 – https://www.oscr.org.uk/guidance-and-forms/charity-investments-guidance-and-good-practice/
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All information within this publication is for illustrative purposes only and is not intended as investment advice; no investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us or your financial adviser.
Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
The opinions expressed in this document are not necessarily the views held through Brewin Dolphin.
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