Jay Kennedy: Is your charity's money where your mouth is?

18 Mar 2020 Voices

With the deadline to respond to the Charity Commission's consultation on new guidance approaching, Jay Kennedy from DSC looks at the issues

The way that charities invest their money and other assets has been in and out of the news, for example when the BBC Panorama programme revealed that Comic Relief was invested in stock market funds that held shares in armaments and tobacco. Now it’s on the Charity Commission’s radar again, with a consultation on the topic closing at the end of March

Regardless of what the Commission eventually does, I don’t see this issue going away. Yet it’s one of those old chestnuts which never seems to receive enough sustained attention to move past some key misunderstandings and lack of clarity. 

What are the risks of your charity’s investment strategy and portfolio?

Aside from whether it’s making you any money, there are a few complex arguments at play here. Probably the most superficial one – which ironically, I think gets the most attention – is around scandals and associated reputational risk.

In Comic Relief’s example, the charity divested from certain assets quickly in the midst of the PR crisis, and according to them this hurt their future investment returns. At the same time, they later claimed there was little evidence of long-term damage to their reputation. Was it worth it? I don’t think you can answer that without looking at the bigger picture.

Higher expectations

Younger generations in particular are more conscious of the behaviour of companies (even if their actual purchasing behaviour is complex or doesn’t necessarily follow suit) and have higher expectations of corporate social responsibility. That’s not likely to go into reverse.

Charities are connected to company behaviour when they choose how to invest their financial assets in the market. The potential shift towards people putting less stock (heh heh) in the particular legal form of an organisation and being more influenced by how it demonstrates social responsibility and lives up to its own values in the round has a bearing here too.

To take an extreme example: if you’re an environmental grantmaker or a charity fighting for climate justice, particularly for Gen Z and Millennials it’s a pretty terrible look for your stock portfolio to be chock full of oil companies (unless you’ve explicitly invested those purely to try and influence the industry). No matter how much money gets generated from those investments to support the environmental good causes, this will increasingly look like collusion with or active participation in greenwashing. 

It’s not necessarily just that you’ll be ‘called out’ and have a media crisis to deal with. The dissonance goes deeper – by conflicting so clearly with the charity’s values and purposes, such investments appear as morally wrong, unethical, even socially irresponsible. This has the potential to undermine the faith and trust of the charity’s current and potential core supporters and donors longer-term (rather than just ‘the public’, which may quickly forget).

Driving positive change

But ultimately, these are negative drivers. One big risk in this conversation is that we lose sight of the real prize: that charities could use their assets as another way to drive positive social change – as one of the tools they can use to support their objects individually and collectively.

Given that the charity sector has over £100bn in investment assets, how they are invested is a massive opportunity to change the world. Foundations and larger charities with big balance sheets in particular should be looking at this as a strategic opportunity. The branding and supporter narrative should flow from that, not the other way around, in my view.

The myth about the the rules 

But we can’t do that, the Charity Commission says we can’t, right?!

The traditional argument that you’ll hear from some trustees (or whomever they entrust their investment portfolio to) when these debates come up is that there’s a binary choice between earning the maximum return and investing in a socially responsible manner. Investing ethically or responsibly risks compromising your returns, meaning less money for the charity or for grants, so the argument goes. But increasingly, this is a myth. 

Indeed, there is a sense that this myth has been historically reinforced by charity law and Charity Commission guidance (CC14) which emphasises avoiding "significant detriment to financial return". However, using this guidance to avoid ethical investment decisions is in my opinion too often an excuse.

Ethically invested funds can perform competitively and may even outperform others which are not. Such investments may also be less risky too – for example, if the investment approach is focused on building long-term value rather than cashing in on short term booms and busts. Like any investment, much depends on doing your homework and getting good advice.

Despite the confusion, there are organisations like the EIRIS Foundation  that exist to advise charities on these matters. 

It’s also worth remembering that whilst ethical or responsible investment can seem to be a new debate or development, elements of it have been around for years. Many religious organisations and charities traditionally avoided or banned investment in for example ‘sin stocks’ like gambling, tobacco, or weapons, usually because these things were against their faith.

So this isn’t actually a new thing. Did the Quakers ever get in trouble with the regulator for not investing in armaments because their portfolio might have been a bit less profitable as a result? I highly doubt it!

Intentional Investing

Several years, ago, the Association of Charitable Foundations published a report called Intentional Investing, which explored the complexities and evidence around this topic. According to them, Intentional Investing is where "trustees have thought about the management and use of their charity’s assets so that their approach supports the delivery of their charitable aims".

This helpful report clarifies for us four common approaches, as well as some key principles for ethical or responsible investment. The approaches, roughly in order of prevalence, are:

  1. Screening out investments in certain industries like tobacco, alcohol and firearms, or increasingly, fossil fuels (as noted above, this approach has a long track-record, particularly with charities associated with certain religions or denominations thereof).
  2. Positively selecting companies for example with good environmental records, positive social purposes, sound employee welfare and equality practice, or good customer care (this aims to make individual companies and markets more socially responsible – I’ve been invested in a fund which does this since the early 1990s).
  3. Investing in public companies to acquire shareholder voting rights, with the intention of using these to influence company behaviour (probably a newer, less common approach, which involves trying to exert more direct influence – even perhaps by buying shares in ‘bad’ companies to reform them).
  4. Using the investment explicitly for social purposes – so called ‘social’ or ‘mission-related’ investment. For example, a housing charity using its financial capital to invest in social housing stock, which in turn provides revenue from low-cost rents to replenish the capital (this has been branded as a new approach and is fashionable in policy circles, but core elements of the concept aren’t that new).

The Intentional Investing paper outlines some key facts and principles that are really helpful to think about. Building on the law and Charity Commission guidance, these make clear that: "Charity trustees are not obliged to pursue investment returns at the expense of their charitable mission, their organisation’s reputation, or in ways that could alienate donors or beneficiaries."

And also that: "Removing certain industries or companies from your charity’s investment portfolio needn’t significantly impact on financial returns…Positive action to target or enhance sustainable business practice can also be financially rewarding."
So the next time your board is considering your investment strategy, or even when you have your next strategic review or board awayday, why not set aside some agenda time to consider: is your money where your mouth is? If not, plan to get some good advice and start changing the world in another way.

Links and resources

Jay Kennedy is director of policy and research at the Directory of Social Change

The Charity Finance Responsible Investment Conference takes place later this year. This one-day, multi-streamed conference will be a one-stop-shop for you to get to grips with the investment options and opportunities that are available without compromising on financial returns. Find out more here.


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