The fallout from the BBC Panorama investigation into Comic Relief's investments has highlighted the ongoing confusion in the sector over the Charity Commission's CC14 guidance.

Comic Relief (pictured) has today pledged  to review its investment policy in the wake of last night's Panorama programme, which reported that in 2009, through managed funds, Comic Relief had more than £300,000 invested in shares in the alcohol industry, £630,000 invested in shares in BAE Systems and £3m invested in shares in three different tobacco companies. In 2009, Comic Relief had an investment portfolio worth £97m.

Kevin Cahill, Comic Relief's chief executive, admitted that the charity still had up to 5 per cent of its assets in "any of those particular areas". The Charity Commission has assessed Comic Relief’s approach to investment and has found no grounds for regulatory concern.

Sir Stephen Bubb, chief executive of Acevo, called the programme a “wake-up call”: “While thin in places, the Panorama programme shows we need more people in the sector looking seriously at ethically managed funds.”

Dilemma between reputation and return

However, a number of sector commentators have advised that the Commission's guidance on investments, CC14, remains confusing for trustees despite a comprehensive rewrite a year ago which aimed to clarify the rules on mixed-purpose investing.

Tomas Carruthers, the new chief executive of the Social Stock Exchange, said the guidance issued by the Charity Commission was very clear that charities could include an ethical screening in investment portfolios, and that charities could consider if certain investments could deter donors and supporters. 

But Kate Sayer, partner at Sayer Vincent, said: “Contrary to popular belief, a charity may not choose an ethical investment policy if this will have a detrimental effect on the financial returns.”

And Seb Elsworth, director of partnerships and communications at Social Investment Business, said there seemed to be no consensus in the sector on the permissions in CC14. "This is making it hard for charities to move forward," he warned. 

Kate Sayer added: “The trustees of Comic Relief have an investment policy which aims to maximise the return from the portfolio. Charity Commission guidance in CC14 requires charity trustees to manage risk by diversifying the investment portfolio and assessing individual investments for risk.

“The use of managed funds is the most economic and realistic way for charities to achieve the objectives of maximising the financial return and minimising risk. However, the huge downside risk of such funds is that you have little choice over the company shares purchased by the fund manager.

“Consequently, charities face an enormous dilemma: do they worry more about the potential damage to their reputation in the event of scrutiny such as the Panorama investigation, or about breaching their obligations to maximise the charity’s financial return?”

Charity Commission guidance states that charities can choose to adopt an ethical policy, provided that there is no significant financial detriment to the charity in terms of its financial return.

Edward Finch, a partner at Buzzacott, said he thought Comic Relief's position is "out of sync" with the spirit of the Charity Commission's guidance.

"While they are well within the law, it has long been established, and included in CC14, that negative screening on mission-related grounds is acceptable regardless of impact on returns. Acceptable, but not required of course."

Ethical funds outperform mainstream ones

Tomas Carruthers added that it was a misconception that ethical investment did not perform well financially compared with mainstream funds.

“The FTSEforGood Index has been tracked over ten years and it has outperformed the FTSE 100.”

Nick O’Donohoe, chief executive of Big Society Capital, added that there was a strong case for ethical screening of investments for any investor. “It’s a minimum standard,” he said. “When we at Big Society Capital invest our treasury we preclude tobacco and arms.”

Commenting on Comic Relief, O'Donohoe said the story illustrated the importance of a charity considering where its money was going and the impact it was creating. “You should make sure the people managing your money are actively engaged on environmental, social and governance issues and you should be encouraging your investment managers to sign the United Nations Principles for Responsible Investment. ”

He also agreed that ethical investing did not necessarily provide detrimental returns. “Look at the evidence base. There is no concrete evidence that ethical investment means lower returns. Typically, dedicated ethical funds are small, have more junior managers so it’s hard to compare with mainstream funds. You need to compare an ethical investment index against a mainstream index – where in some cases the ethical one outperforms.”

Charities should invest in other charities

As well as ethical investment, there have been calls today from the Social Economy Alliance, a coalition of 22 social organisations, for charities to consider social investment. 

Jonathan Jenkins, chief executive of the Social Investment Business Group and spokesperson for the Alliance, said:
“The growing social investment market provides opportunities for charities, like other investors, to invest for positive social impact as well as financial return. This could be through investing in a social enterprise that supports ex-offenders back into work in the UK, or a business with social aims providing sanitation in India.

However, while O’Donohoe, also said charities should consider the emerging opportunity from social investment, he added it would not be an immediate answer for charities like Comic Relief. “It’s an emerging market and social investment is still somewhat limited. Some parts could work for charities, such as the new Threadneedle fund, which provides a liquid bond investment opportunity. So trustees should be actively considering the social investment market.”

Elsworth from Social Investment Business added that it was a journey for charities. "Charities will not be able currently to invest 100 per cent in social investment as part of its portfolio."

But, he added that there was not one "one-size-fits all social investment product". "Risk can be managed, not all social investment products deliver sub-market returns ad there are a variety of products to consider," he said. 

He also said more data on social investment would help. 

Edward Finch added that although the Commission's guidance on social investment is much expanded, the principles governing financial and programme-related investments are not changed by CC14 and maintains the primary distinction between purely financial and purely programme-related investments.

He says the decision-making process recommended by the guidance realting to social investment and specifically to mixed-motive investments "would deter almost any trustee body from proceeding further".

"The problem is that much of this decision-making relies upon judgments supported by evaluation techniques that are in their infancy at best," Finch said.

Editor's note:  This story has been changed since it was first published yesterday in order to clarify the comments from Edward Finch.