The recent BBC current affairs programme Panorama sent shockwaves through the UK charitable sector as it put under the spot-light how some of our best known charities are managing their finances. One issue raised was with Comic Relief, a charity founded in 1985 that raises money through its celebrity-packed television show, with the stated objective creating "a just world, free from poverty". The charity disburses its funds to good causes over a number of years and as a result has a significant amount of money in an investment account. The returns on this investment account are used to cover the operating expenses of the charity and ensure that "every penny raised goes to Good causes".
However, Panorama questioned whether it was appropriate for the investment portfolio of the charity to hold positions in managed funds which in turn held equity positions in companies that were in sectors, such as tobacco and armaments, which are involved in businesses that would appear to directly contradict the charitable objects of the fund.
This debate around Comic Relief and the recent criticism of the Church of England's investment in Wonga, a payday lending firm, reminds us of the importance for any organisation, but particularly for charities and other social or religious groups, to really understand where their money is being invested.
Charities hold a significant pool of investment capital, estimated by NCVO in 2011 at £68.9 billion.
How capital is used and where it is invested makes a difference in the world. Active engagement by shareholders with the companies whose shares they own can (and has) changed corporate behaviour. It does not solve all the world's problems nor ensure that every company will necessarily successfully balance their financial objectives and their moral responsibility as global citizens. But at the margin it can have an important influence.
At a minimum therefore, asset owners should ensure that the investment managers responsible for making investment decisions on their behalf do indeed have an active approach to corporate engagement. The UN Principles for Responsible Investing (UNPRI) have become the benchmark for judging responsible investment. They require asset owners and investment managers to commit to six broad principles which require the incorporation of environmental, governance and social analysis into investment decision making. They also require active engagement and appropriate disclosure. Charities should be asking if the organisations running their money have signed UNPRI, and if not, when they intend to do so. 1,200 global investment firms managing $35 trillion have already done so.
Furthermore charities should be actively considering ethically screened portfolios. For those that are large enough to have separately managed investment accounts it is relatively straightforward to exclude in your investment agreement those sectors, such as tobacco and armaments, that you do not wish to own. For those that are smaller and likely to invest through funds the challenge is more complex but there is currently more than £11 billion in green and ethical funds in the UK, so the options are there. Like any category of fund they can be small, poorly managed and expensive. But there is no conclusive evidence that random portfolios that are ethically screened routinely underperform in the long term those that are not.
Finally an increasing number of charities are considering social or impact investments. These are investments which specifically target social as well as financial return. They also seek primarily to channel funding to social organisations. It would be unrealistic to suggest that social investment offers a full spectrum of investment alternatives to charities today but the options are growing rapidly. Historically they have been relatively small, illiquid and complex. That picture is changing. The launch two weeks ago of the Threadneedle Social Bond fund is an example of an investment product that offers relatively low risk and a reasonable yield. It provides daily liquidity and can even be placed in an ISA.
If charities are to retain the trust of their donors, they must ensure that they impose minimum standards on their portfolios. It is disingenuous to suggest that this must necessarily compromise return. Increasingly, we believe that they will seek to do more than just the minimum and they will begin to embrace a new wave of social investment products which can not only protect and enhance their capital but also boost their reputation and actively address key social issues.