Bridgit Richards: Trustees should get to grips with ESG investments

03 Apr 2020 Expert insight

Responsible investments can deliver returns, while remaining consistent with a charity’s mission and core values.

What does responsible investment mean to charities?

It’s hard to ignore the growing noise about Environmental, Social and Governance (ESG) factors in investments. As charities, we naturally always want to do the right thing in our investment decisions – the right thing for our mission, the right thing for those we support and the right thing to give us good returns for the future. Deciding how we invest charitable funds is a central role for many trustees and defines how we see the future.

The term “responsible” can cause confusion. Is it the same as ethical, sustainable, impact, carbon offset and ESG? The Investment Association’s recent work on definitions is a great starting point for charity leaders.

The Charity Commission, in its CC14 guidance to trustees on investments, states that charity leaders should seek to maximise returns from investments, while maintaining an appropriate level of risk. But the Commission has also spoken recently about the ways in which charities can invest to support their mission. In the past, the choice to invest in so-called ethical investment products was often seen as coming at the expense of investment performance. However, recent research findings have challenged this, with some responsible investments delivering results that meet or exceed their benchmarks or conventional equivalents.

What do trustees need to think about?

Trustees have a duty to ensure their investments are prudent, appropriately managed and have the right level of risk for their organisation to produce the required level of returns. They have the flexibility to restrict or include those investments that might conflict with their mission or further it.

They are also able to take a view on what their beneficiaries and donors might expect them to do. Common examples are health charities screening out tobacco stocks or environmental charities removing fossil fuel investment.

Climate change is a key topic as it affects everyone, so trustees may want to think about whether their supporters might reasonably expect them to exclude damaging industries from their portfolios. It is important to take a reasoned decision, based on the information available, and record it in an investment policy. This can be helped by seeking the advice of an investment adviser or similar professional, although potentially at a cost.

Is responsible investing a fad or is it here to stay?

Responsible investing reaches far deeper than just opportunities for profit. It is about how companies and governments treat people, the environment and trade so the profits they generate are obtained in a fair way with as little as possible, or no, collateral damage.

Rising public recognition and strong opinions, especially among younger generations, will influence how companies and governments behave in the future. Recent comments by Mark Carney, former governor of the Bank of England, have introduced the idea of stranded assets – assets that have a value now but may become isolated as investors shun them in favour of more responsible alternatives. Crude oil and coal are examples.

When comments such as these are commonplace, there is a sea change in the way the investment industry operates and that may, in turn, have a significant impact on company behaviour. Good companies with strong, responsible policies and evidence of positive impact will likely attract more sustainable business.

How should charities approach responsible investing?

The key is to decide on a policy for your charity. Even when the merits of a specific approach are agreed, it will be difficult to implement, unless a charity has the skills or the assets to create a portfolio tailored to their requirements. Most investors will need to look to funds that support a responsible investment approach. The charity, or their adviser, needs to identify a fund that adopts a close fit to their requirements, while still providing good financial return potential.

With funds, a pragmatic approach by both managers and investors has to be adopted. Until common definitions are agreed, it is going to remain challenging to adopt a purist approach to exclusion.

Charities should also be wary of investment solutions that are only responsible in name but not in substance, often called “greenwashed” products.

Responsible investing has been well established for many years and is moving from a niche role into the mainstream. Charities need to take the time and effort to understand the fundamentals of any investment opportunity, and look at the detail below the responsible label to see if it is consistent with their values and mission.

What we do

Charities Aid Foundation (CAF) has been helping charities manage their investments for over 30 years. And because we are a charity too, we understand the way charities work, the challenges they face and the vital role that good governance plays in charities’ success. Fast Facts

  • CAF Financial Solutions Limited (CFSL) offers a range of investment solutions. These include socially responsible funds, a managed portfolio service and a charity investment platform.
  •  It also offers deposit products, developed specifically for charities with selected financial services partners.
  • To find out more, visit www.cafonline.org/charities

Bridgit Richards is Director of product and marketing – CAF

This content has been supplied by a commercial partner. CFSL is a subsidiary of Charities Aid Foundation (registered charity number 268369). CFSL is authorised and regulated by the Financial Conduct Authority under registration number 189450. CFS’s registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA. Registered under number 2771873.

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