How charities are positioning a portfolio for climate change

04 Apr 2022 In-depth

Charity Finance convened a panel of charity representatives at different stages of the journey and Ian Allsop plotted their progress.

The importance of considering climate change in charitable activities has accelerated over the last two years, and COP26 has brought an even sharper focus. The degree to which charities have a duty to consider the wider impact of everything they do, including that of the money they invest, has also come to the fore.

As Paul Fleming, Mercer’s head of investment for UK endowments and foundations, says: “Responsible investment (RI) is no longer a nice to have, but essential”. And climate change is one of the most important aspects of RI. This is recognised by many charities, but as the range of experience of those in the room demonstrates, organisations are at different points of their journey.

Matthew Whittell is head of finance and resources at the John Ellerman Foundation, which has a £150m endowment, and gives away around 4.5% a year in grants to organisations in arts, social action and the environment. He has been in post for six years and says the charity has accelerated the alignment of the way in which it invests with its charitable mission. “The board has completely bought in to the idea that we can’t be schizophrenic about trying to cure the ills of the world with grant giving while being responsible in a small way for those ills in our investment portfolio.”

The Wates Foundation has a £25m portfolio, and is very much family influenced. Felicity Mallam, director, explains: “Grants are brought forward by family members, which leads to a broad remit of grantmaking. There is very active family engagement, and our 2020 strategy review with almost 100 family members revealed that younger members wanted a stronger environmental focus in both grantmaking and investment. In addition to the survey, the trustees agreed a RI policy to guide our investments. We are becoming more active in developing our portfolio and investment approach, and see this as an ongoing journey.”

Lisa Stonestreet, head of communications and charity impact at the EIRIS Foundation, views this from two angles. “We went through a process of assessing proposals for managing our £1m growth portfolio, so we are interested in what our asset managers are up to. But from another perspective, one of our objectives is to help other charities with RI, so we want to help and empower charities on their journey.”

Power to Change was created in 2015 with a £150m endowment from the National Lottery Community Fund. Samantha da Soller, director of finance and operations, only joined in September 2021 and says that while the trust is coming to the end of its initially envisaged seven-year life period, it has secured further funding for a second stretch covering another five years. “Therefore, we have no investments currently but will very likely have to make these decisions again in the future, and we want to make sure these themes are embedded in everything we do.”

Adrian Warburton, director of finance at WWF for 12 years, says it has investments of around £27m. “Because of our mission, we have extensive exclusions, of around 40% of the investment universe. The focus is on not making any investments that contradict with our mission but in reality, is that possible? Some will always have some indirect environmental impact, however small. But we are still not where I would like to be. We made a decision a year ago to review our investment policy and try to get something cutting edge from a responsible investment perspective, but it is fair to say that this is not a short process as it involves a lot of research and discussion. Nevertheless, the policy is vital in ensuring that our approach to our investments is aligned with our mission and that we are happy with our terms of reference for our asset managers. The reality is that you are never finished, and need to constantly review your investment policy and approach. The world of responsible investment is constantly changing.”


World Habitat is a charity which aims for everyone to have access to safe and secure housing. Joanne Kovach, head of finances and resources, says it has £36m invested and has just gone through the process of implementing an RI policy and moving all of its money to two new funds. “There has been a big shift in the last 12-18 months. Housing undoubtedly contributes to climate change. It was therefore disappointing at COP26 how few housing organisations were committed to net-zero.”

Ross Holland, finance manager at Cloudesley, a charitable trust supporting communities in Islington, London also refers to a journey over the last 18 months in terms of its £60m portfolio. “We have looked at the carbon footprint of portfolios, but haven’t mentioned net-zero yet. Are we behind the curve?”

Gareth Donegan, director at Mercer, says that net-zero has become much more prominent but accepts that there is a different pace and trajectory for different organisations. “The challenge is that while you can say that you are going to adopt net-zero, how do you influence the fund managers? Everyone around the table has to do that to add pressure in order to have a wider range of options. We all need to scrutinise and ask the difficult questions, and put pressure on the underlying companies as well. Because until every company has a clearly defined net-zero target we aren’t going to get anywhere, as there are laggards.”

For Whittell, the current high profile around net-zero is the single most important thing in the fight against climate change. “The net-zero approach is such a super rapier-like way of getting to the point to where we want to get to. We have struggled with carbon footprinting. You get the data and it’s apples and pears. You can look for the direction of travel, but it isn’t always useful.”

Stonestreet recognises that, as a term, net-zero has been more widely used since COP26. “On the scrutiny aspect, there is the asset-owner climate expectations of asset management declaration – eight minimum standards on climate-related issues expected from fund managers [co-ordinated by Friends Provident Foundation in partnership with the Charities Responsible Investment Network (CRIN)], to which around 30 asset owners have signed up. We were happy to sign it and we use it in the conversations we have been having. It provides a rigorous framework compared to some of the more non-specific initiatives, which can be problematic.”

She encourages charities to engage with their fund managers. “What matters to us with our humble amount of money is to encourage scrutiny about investing in climate solutions. Yes, you can have a negative screen on fossil fuel, for example, but by encouraging those positive solutions screens become secondary.”

Pooled funds

Da Soller wonders about indirect investment and pooled funds. “How does it work? How do you evaluate them? Fund managers themselves seem to use external organisations to measure the E in ESG. But what can be challenging about pooled funds is having transparency on this. There can be a level of opacity, but it isn’t necessarily coming from a lack of willingness to be transparent.”

Donegan responds by saying that certainly, 18-24 months ago, it was difficult to get reliable data. “It still is not perfect, and carbon data, for example, is variable. A lot of fund managers are finding that saying it is too hard to do, doesn’t fly anymore, and investors want a greater level of transparency. Fund managers are increasingly reporting under international disclosures such as the Taskforce for Climate Related Financial Disclosures (TCFD), so they are aware of the requirement for good data and providing that data to their investors. It is still a journey, and some are better than others. Some need prodding. But the data is starting to become available, and the investor with a pooled approach can get some of that look through.”

Additionally, there are more available funds that suit this approach (a focus on carbon and the climate). “The difficulty is finding the manager who will undertake an engagement policy above that – not just exclude, but drive the agenda forward.”

“We have been through this,” says Kovach. “We were initially told we couldn’t get what we wanted from pooled funds, and would have to go down the bespoke route. But strategies have changed and are more aligned to what we want.”


Da Soller suggests the possibility of developing international standards around RI. “Perhaps we should be trying to reach a consensus on global benchmarks. Once this is established, people may be more comfortable.”

Stonestreet points out that it needs to be qualitative as well. “We have to be careful about uniform presentation. Sometimes, worrying about perfectly consistent data can be a hindrance to positive action, when we are in an emergency and don’t have time.”

Mallam raises the emergence of article 8 and 9 funds through the EU’s sustainable finance disclosure regulation (SFDR), which may give investors reassurances. Article 9 funds are those that specifically have sustainable goals as their objective, while article 8 funds promote E or S characteristics but do not have them as the overarching objective.

Holland says that on a basic level, having separate managers can help comparisons. “We accept that there are vast differences between managers. But there are interesting things you can assess, for example, by asking them to show how they vote on climate issues compared to other firms.”


For Whittell, the discussion so far brings starkly into focus the scale of the problem. “We are struggling to find funds that are even becoming Paris-aligned, and only a fraction of the investable universe is even considering it. Yet everything has to be Paris-aligned to have a hope of hitting targets. The nice bit about the E in ESG is that there are sums you can do, data you can use to report and rank. However, lazy managers can use this to tick a box. Quality engagement is missing, so there is an onus on asset owners to grasp the nettle and hold those managers to account and say that this isn’t good enough. It needs to be public, with robust naming and shaming, to force a virtuous cycle. This is on the cusp of happening but we then need to beware unintended consequences. E funds are basically tech funds – it is easy to have a low carbon footprint and they do OK. And yet, what about Meta? Can you meet S if you invest in a firm that has a low carbon footprint but sows discord in the world?”

He continues: “The superpower of the sector is that we help each other, share best practice and learn from each other. Things like CRIN and ShareAction do great work, so we don’t have to do it all ourselves.”

Trustee engagement

For Mallam, while it rings true that you don’t always have to rely on standardisation of data, she recognises there is often a reticence and fear among trustees to diverge from the standard investment model pathway. Trustees, as stewards of the charity’s finances, need to know they can do things differently without increasing risk. Often, they look for a tried and tested model. “Ideally, you should allow an element of leniency when exploring how you can adapt your investment approach. Engaging in conversations with advisers and fund managers is important but it often feels difficult to ask fund managers to engage with you in this way. It is an unknown. Will their fees go up? For those boards without specialist expertise, it can be unnerving to say ‘let’s put ourselves in this position without knowing we are right’, but this can’t hold you back.”

Warburton says that you need to have the right people on your board to hold those conversations. “Investment committees can be conservative and worry about their fiduciary duty. This is right, of course, but they can sometimes have an exaggerated impression of the financial risks involved. We now have an ESG specialist on our investment committee, which has increased confidence that we are considering ESG aspects of our investments sufficiently and challenging our asset manager where necessary.”

Kovach says: “We have a board of eight trustees, including an investment expert. That is useful but when we started talking about RI and climate change, there was a lack of knowledge and a misconception about losing income. We realised we needed to give the trustees the proper training to enable them to have all the information to make a decision on our investments.”

Fleming says: “Speaking about financial markets alone can be terrifying for trustees. Taking it further to apply an ESG overlay, means trustees can find it easier to sit back and let the investment manager take the lead, and so they defer to them. But it is becoming easier to have conversations at board level. Sharing knowledge and borrowing ideas is critical.”

The key question for Mallam is whether fiduciary duty extends beyond financial return. “If you have an affirmative answer to that question, you are halfway there in addressing whether or not you should adopt a RI policy. Asking this question of your board is a clear way of framing it.”

Engagement or exclusion

Da Soller states that while intuitively the concept of engagement seems like a no-brainer, how do we make sure we have an active ownership? “How can an individual charity, as a relatively small shareholder, put pressure on fund managers to vote at AGMs and engage with corporates to act more responsibly?”

Whittell thinks that if you have delegated responsibility to the fund manager, you have also delegated voting responsibility. “But you can say that we expect you to vote and be aligned to our objectives or explain why not. And this can be another way of starting a conversation.”

Kovach says World Habitat considered exclusion and engagement, and decided that engagement was not sufficient. “We need to live our values, so disinvestment from certain areas was important. Engagement can be really powerful but it is not always enough.”

“We are having conversations about this,” says Warburton. “Clearly there would be a huge reputational risk to WWF if we didn’t exclude certain things. Different organisations will have different circumstances and approaches. But exclusions alone are not enough, and engagement is an important aspect of RI, which we will be considering how to develop further.”


Whittell talks about the importance of the investment policy. “It doesn’t need to be perfect. We were institutionally constrained by it needing to be. But just making a start, and knowing it can evolve, can be cathartic.”

Mallam agrees that the investment policy is crucial as an agreed articulation of ambition, with board weight behind it. “But it is the questions you ask regularly at meetings and of your advisers and fund managers that develop this ambition. Our committees are made up of family members. They don’t all have investment expertise, so we rely on a combined responsibility, inquisitiveness combined with outside expertise from advisers. Exclusions can make you lazy in your understanding of your portfolio. By asking, for example, for the top and bottom five contributors to each fund, against an ESG metric, the board can begin to better understand the composition of each fund which enables more informed conversations with managers and advisers. You don’t necessarily need huge financial knowledge, just an understanding that starts a dialogue.”

Warburton thinks that it is sometimes good to be the layman. “Ask the simple question and worry if you don’t get a simple answer.”

Whittell reiterates that it matters that “large managers are offering titbits that capture the zeitgeist around RI, while holding large holdings elsewhere that aren’t responsible”. So what is the role of consultants?"

Donegan responds: “There are some managers that we just wouldn’t put forward. You can go in with strong views about what is off limits, but it isn’t always black and white. For example, we came across a pooled fund with an investment in an educational establishment offering online tutoring. Everyone would agree that this is for greater good. However, it was also found that the platform had inadvertently enabled cheating.”

Fleming summarises that what is apparent is that there is a divergence of opinion not only in the charity space, representing philanthropic assets, but also on the financial and investment side, among those that manage those assets.

“The old-hat conversation on RI meaning sacrificing return has fallen by the wayside through education, and it is even in things like the business sections of the Sunday papers. But some fund managers are telling charities that this isn’t possible and that there aren’t solutions available. We advise clients to look at what angle they are coming from, compared to that of the managers. Put bluntly, if they move away to a strategy they can’t support because they don’t have a solution, they will lose income. We are going through a period of change in charity investment management and advice, which in some ways the pension industry has already been through. There is a move away from the traditional approach and having assets with one manager. Charities need to start questioning the levels of fees being charged and the rationale behind the advice being given. Is it truly independent or a biased version of a broad set of topics?”

Stonestreet says that having read a lot of information over her career from fund managers it is easy to come away and think “that all sounds good” and wonder why the world is in any trouble over ESG. “No one should feel tentative or feel it is their fault about judging what is good and bad. Even taking away a value judgment about the environment, any organisation not thinking about it is problematic in investment terms. It should be obvious for charities in that their long-term aim is to improve the world.”

She concludes by considering all the different ways that charities can have an influence on the financial sector. “We alliteratively talk about portfolio and products, pensions, people, and partnerships. If all charities were considering climate change in all of these areas then the impact would be huge.”

With thanks to Mercer for its support with this feature 

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