Outlines legal considerations for ethical investing. (Read CC14)
What is ethical and responsible investing?
Ethical and responsible investing ensures that a charity's investments align with its mission, values, and the expectations of its stakeholders. Ethical investing has gained further prominence due to increased public scrutiny of institutional investments and the growing importance of Environmental, Social, and Governance (ESG) criteria.
The Butler-Sloss ruling (2022) confirmed that trustees could prioritise ethical considerations, even if this meant accepting potentially lower financial returns, as long as the decision aligns with the charity’s objectives.
Why should charities consider Responsible investing?
Alignment with mission and values
- Investing in companies or funds that contradict a charity’s purpose can damage its reputation and erode stakeholder trust.
- Aligning the investments with the values of the Charity ensures that financial decisions reflect the charity’s long-term goals.
Risk management
- Investing in industries with regulatory risks (e.g., fossil fuels, tobacco) can expose charities to financial losses if public sentiment or legislation shifts.
- ESG-focused investments may outperform traditional portfolios over the long term due to their focus on sustainability principals and strong governance.
- Values aligned investments reduce reputational risk.
Regulatory and legal considerations
- The Charity Commission’s CC14 guidance allows trustees to consider ethical factors when making investment decisions.
- The Butler-Sloss ruling provides legal backing for prioritising ethical concerns in charity investment strategies.
Stakeholder expectations
- Donors, beneficiaries, and the public increasingly expect charities to invest responsibly and aligned with the charity’s values.
- Value aligned investment policies can attract new funding from socially conscious donors and grant-making bodies.
Different Approaches to Ethical Investing
Negative screening (exclusionary investing)
- Avoiding investments in industries that conflict with the charity’s values, such as:
- Tobacco
- Gambling
- Fossil fuel extraction
- Armaments
- Human rights violations
- Example: Cancer research charities typically exclude tobacco-related investments.
Positive Screening (Sustainable Investing)
- Actively selecting investments that support positive social or environmental outcomes.
- Common areas include:
- Renewable energy / energy transition
- Fair trade initiatives
- Affordable housing
- Example: A Charity focused on social deprivation may invest in companies with strong policies and practices relating to employment practices and human rights.
Impact investing
- Directing funds towards projects or companies that generate measurable social or environmental benefits alongside financial returns.
- Example: Investing in community finance initiatives that provide loans to social enterprises.
Engagement and shareholder activism
- Investors can use their influence as shareholders to drive positive change. Divestment should be seen as a last resort when it is clear that the company will not engage or plan for change.
- Methods include:
- Voting on shareholder resolutions related to ESG issues.
- Engaging with company boards on ESG concerns.
- Systematic engagements - collaboration for systematic change with e.g. governments
How to implement an ethical investment strategy
- Define Ethical Priorities
- Identify the core ethical values and mission of the charity.
- Consult trustees, staff, and key stakeholders for input.
- Review Existing Investments
- Conduct an audit of current investments to assess alignment with ethical objectives.
- Identify any potential conflicts between investments and the charity’s mission.
- Develop an Ethical Investment Policy
- Clearly outline screening criteria, engagement strategies, and impact investment goals.
- Ensure compliance with legal requirements, including CC14 guidance.
- Choose Ethical Investment Funds or Managers
- Work with financial advisors or fund managers who specialize in responsible investing.
- Consider funds with established ESG ratings from providers like MSCI, Sustainalytics, or Morningstar.
- Monitor and Report on Impact
- Regularly review investment performance against financial and ethical benchmarks.
- Provide transparent reporting to donors, beneficiaries, and trustees.
Resources for ethical investing
UK Sustainable Investment and Finance Association (UKSIF)
Provides insights into responsible investment trends.
Social Investment Business
Assets that behave differently to stock markets during stressed periods
By incorporating ethical investing principles, charities can align their financial strategies with their mission while managing risks and responding to stakeholder expectations.
Explore the next section
Risk management and diversification.