Tips for charity trustees adopting an ethical investment policy

Nicola Barber, Partner, Head of Charities
Nicola Barber, Partner, Head of Charities, James Hambro & Partners

Nicola Barber, Head of Charities

Many charity trustees are keen for investments to be managed ethically. These questions and tips should help you think about what that means for your organisation.

We believe that all money should be invested ‘sustainably’ or ‘responsibly’. You will often see the acronym ‘ESG’ used to describe investing money by these principles. It means incorporating issues about the environment (how a company limits its contribution to global warming and pollution), social impact (employees, customers, suppliers and neighbours) and governance (how transparent, fair and well-run a company is).

PDF downloadTaking these factors seriously helps ensure the companies you own are in step with where society is heading and can reduce investment risk. That should be good for society and good for your long-term returns.

Ethical or sustainable?

You might call this ethical investing. But ‘ethical’ can go further than sustainability. A drinks manufacturer could meet the highest ESG standards but if your charity helps recovering alcoholics then companies in this sector may be unacceptable for investment. Ask yourself:

  • How exposed would the charity be if its investment actions were found not to align with its ethical principles or conflicted directly with its mission?
  • What ethical criteria is important to the charity and what would be important to their beneficiaries and supporters, too? Summarise and score these independently, if necessary, to encourage informed debate.
  • Do you want to screen stocks negatively (screening out ‘sin’ stocks such as tobacco and high interest rate lending, for instance) or positively (deliberately targeting specific types of company for their contribution to society)? Or do you want to be an activist investor (challenging firms on certain policies)?
  • How far do you want to take your principles? If you decide not to invest in tobacco, for instance, you might think that means avoiding companies that make cigarettes. But what about supermarkets that sell them?
  • Are you using the investment portfolio for return only or to support your mission – or both? Does this increase the importance of investing ethically?

Pragmatism

Accept you may have to be pragmatic – a zero-tolerance approach to the negative screening of stocks can significantly reduce your investment universe. This can affect returns and the level of risk you have to take, which may jeopardise your mission. If you do produce an ethical investment policy then review it every few years to ensure it is still appropriate.

The Charity Commission offers a helpful guide for trustees on investments in general – known as CC14. It is worth exploring.

If putting a tender together for investment managers, shape questions around what matters most to you – make sure you find out how a manager might adhere to your ethical policy and how the manager incorporates ESG into their own business. Look for someone who can support you in creating it and who is really engaged with your concerns.

Here to help

The charities we look after tend to have £1 million or more to invest. We are happy to act as an informed friend for charities if trustees want to talk through issues raised here.

Nicola Barber is Head of Charities at investment manager James Hambro & Partners

She can be contacted at NBarber@jameshambro.com

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