Features

Matching Ethos with Strategy

While some charities are putting sustainability at the heart of their investment policies, others have fallen behind.

The ethos of all charities is to make a positive difference by delivering public good. For many, benefits start flowing only with the disbursement of the capital raised. This is beginning to change.

By investing responsibly, charities can make a positive difference while simultaneously generating sustainably sourced financial returns that can then be used to support their values and targets. This requires a shift in strategy.

“Policies should include requirements of asset managers, including shareholder voting and active stewardship, and include specific commitments to use influence to affect change on priority issues,” says Colin Baines, Investment Engagement Manager for the Friends Provident Foundation.

“They could also include areas of investment the charity particularly favours, perhaps allocating capital to impact investments. Once a good policy is in place, charities are better able to engage asset managers, seek new managers and investments, undertake shareholder engagement, and so on.”

The EIRIS Foundation recently updated its responsible investment policy in order to better reflect its mission, values and commitment to driving positive change by investing in sustainable solutions. The updated policy focuses on negative screening, public benefit, high impact social investments, engagement and stewardship, and ESG integration, says Lisa Stonestreet, Head of Charity impact at the EIRIS Foundation.

The foundation is a UK-based charity working to increase the impact of responsible investment and business through its publicly available research and analysis that identifies gaps, barriers and opportunities in responsible investing.

The EIRIS Foundation has always invested responsibly, but until recently it has not been in a position to invest at scale. Having raised £1 million in funding earlier this year, the foundation called for investment managers to submit proposals for how they would invest this capital in line with its new responsible investment policy. The mandate was awarded to Castlefield Investment Partners and Snowball Impact Management.

This follows the ESG Investing Olympics, launched by the Friends Provident Foundation, Blagrave Trust and Joffe Charitable Trust last year. After reviewing around 60 submissions, the £33.5 million responsible investing mandate was awarded to Cazenove Capital, which then launched its resulting Sustainable Growth Fund, with the three charities serving as anchor investors.

“We want to help other charities to not only adopt responsible investment policies but contribute to best practice and have an influence on the financial system,” Stonestreet tells ESG Investor.

Incremental change

But a number of charities are still not integrating ESG risks and opportunities into their investment policies and strategies. And, unlike the EIRIS Foundation, they are not sufficiently challenging investment managers to demonstrate how they will invest sustainably.

Charities cite a number of reasons for this, such as a lack of in-house expertise and fear of sacrificing financial returns.

The majority of charities do use negative screening to exclude firms involved in tobacco, armaments and gambling, according to the 2021 Newton Charity Investment Survey, featuring 82 UK charities managing a combined £8.8 billion in assets.

ESG-related issues are increasingly on charities’ radars, the report noted. Around 48% of charities’ policies now exclude fossil fuels, up from 36% in 2020. Further, 85% of charities said that ESG factors are either ‘very important’ or ‘quite important’ in the management of their portfolios, representing a small annual rise.

The pace of change is not fast enough, says Emma Robertson, Investment Engagement Manager for NGO ShareAction.

“We’ve seen a shift into funds with ESG labels, but we’re not seeing much active ownership, such as allocating assets into investments that will have a positive impact on the wider economy and engaging with investee companies,” she says.

Experience isn’t everything

Limited investment experience need not be a barrier to responsible investing, argues ShareAction’s Robertson.

“Charities can find it difficult to give their asset managers sufficient scrutiny and challenge on responsible investment,” Robertson acknowledges. “For staff and trustees without an investment background, it can feel challenging to know what to ask. We encourage them to start from the charity’s purpose and values, and find out how their asset manager engages with these themes.”

Shortlisted candidates for the EIRIS Foundation mandate were required to present their investment proposals to trustees in a webinar which was also open to other charities, to help improve their understanding of the market and responsible investing options. This exercise provided the foundation with assurance that the selected managers’ proposals aligned with its new policy and would have “maximum impact”, says Stonestreet.

The EIRIS Foundation noted that Castlefield is an “open and transparent manager”, with a clear commitment to human rights and awareness of conflict risks, says Stonestreet. As an investment manager focused on responsible investing, Castlefield has adopted a holistic approach to assessing potential investments, also known as the ‘B.E.S.T’ approach. It considers the business and financial implications, the environment, social factors and the transparency of the company or fund in question.

Snowball presented a “particularly impact investment-focused solution”, she adds, which the foundation felt was a strategy that aligned with the charity’s overall values and would generate more long-term financial returns. Launched in 2017 by Panahpur and the Golden Bottle Trust, Snowball focuses on high-impact social and environmental investments. Shortly after launch, the Friends Provident Foundation became its third partner.

“We decided to split the mandate between them because we felt that this would allow us to diversify our approach. Snowball offered a longer-term investment strategy compared to Castlefield, meaning that we will hopefully see financial returns in both the short and long term,” she tells ESG Investor.

But engaging with asset managers in this way goes a step beyond what a number of charities are currently doing, she points out. “A number of charities have implemented exclusion criteria of sin stocks and think that’s enough,” Stonestreet says.

Baines adds that charities do not need to become investment experts overnight, or even secure in-house expertise if that is not an option.

“Networks can also be joined where experience, best practice guidance, and asset manager assessments are shared,” he says.

For example, the World Benchmarking Alliance’s (WBA) Corporate Human Rights Benchmark provides an overview of corporates’ performances in relation to human rights, labour standards, and diversity and inclusion. As well as the EIRIS Foundation, the benchmark is funded and supported by Joseph Rowntree Charitable Trust and Aviva Investors.

Charities can also track the ESG-related performance of their asset managers, Robertson adds, highlighting ShareAction’s ‘Point of No Returns’ report. It surveyed 75 global asset managers across a number of core themes, including climate change, biodiversity and responsible investment governance.

“Concerning and persistent misperception”

The EIRIS Foundation issues guidance to other charities looking to be more responsible investors. Stonestreet points to the foundation’s recent report on responsible investment in charity pooled funds.

“They can use it to double check that their investments and screening policies really reflect their mission and values as a charity,” she says.

The report indicated that nearly 20% of charity pooled funds (which make up 17.5% of all charity investments in the UK) do not have a screening policy, meaning some of the top 10 holdings still include large arms, tobacco and fossil fuel companies.

“Despite the growth in the number of charities adopting and debating fossil-free exclusions, the proportion of funds that take this approach is low. Only half of funds have some kind of explicit climate change-related exclusion and this rarely entails a completely fossil-free approach,” the report added.

As well as this, many charities are continuing to view their investments only as a method of driving financial returns, rather than an avenue for “charitable impact”, says Robertson.

“Charity boards often become concerned that there are financial implications when shifting to ESG investing,” Stonestreet agrees. “It’s a concerning and persistent misperception.”

This debate rages beyond the charitable sector, despite multiple academic studies, including research by the New York University Stern School of Business’s Center for Sustainable Business, which showed that incorporating ESG themes and targets into investment strategies strongly correlates with higher long-term financial returns, according to its meta-analysis of over 1,000 studies conducted between 2015-2020.

Unclear guidance

Responsible investing falls under a charity’s fiduciary duty in the UK, according to regulatory guidance.

The Charities (Protection and Social Investment) Act 2016 introduced an explicit statutory power which permits both incorporated and unincorporated charities to make social investments. These are defined as investments furthering the charity’s overarching values and goals while achieving a financial return. This means that a charity is within its rights to invest directly in companies promoting human rights, for example.

However, the UK Charity Commission has recognised the need for further guidance in how responsible investing fits into the legal framework under which charities must operate.

In August, it published a summary of responses to its public consultation on this topic. The draft highlighted that charities can choose to generate money which can then be spent on their goals through financial investment or they can achieve this more directly though responsible investing.

Around 84% of the 173 charities that responded said they were now confident that adopting a responsible investing approach is a “valid option”.

However, 28% said they remained confused about the definition of ‘responsible investment’ and 17% said the “perceived implication” in the draft guidance update is that a responsible investment approach will generate lower returns. A further 19% said they were concerned about the complexity of managing such investments.

The EIRIS Foundation also responded to the consultation, welcoming the Commission’s attempts to clarify the legal parameters of responsible investing. But it said proposed changes “do not adequately reflect” current examples of best practice, societal expectations on issues such as climate change, the need for forward-looking guidance, and the recent evolution of responsible investment and ESG.

The Commission has a lot more work to do if charities are to catch up with progress made by pension schemes, says Robertson.

“It has been striking to see pensions guidance and regulation move dramatically ahead of that provided by the Commission, especially around managing the systemic risk of climate change. The result of this is that the pensions space is feeling the pressure to invest sustainably, whereas the charity sector is not,” she says.

Awaiting judgement 

The Commission’s finalised guidance has been delayed, following two charities bringing cases relating to responsible investments to the High Court in April.

“The two charities seek further clarification of the law, and we expect that there will be a court hearing later this year,” the Commission said.

As the court’s decision may affect the Commission’s final guidance, further steps will be taken only when the court has given its judgement.

In the interim, charities need to learn how to be more hands-on with sustainability-related concerns, understanding how they may be contributing to ESG-related issues and identifying the investment opportunities that will allow them to make a difference, experts say.

“It all starts with their investment policies,” says Stonestreet. “If it clearly runs counter to the charity’s mission and ethos then why not change it?”

To Top
Newsletter SignupReceive all the latest stories from the ESG Investor editorial team

Subscribe to our free weekly newsletter below and never miss a story.

Share via
Copy link
Powered by Social Snap