Aligning your investment strategy with your supporters’ ethics
With increasing competition for finite resources charities need to ensure that their donors are comfortable with the way that reserves are invested. But not all donors share the same ethical values, and at the same time trustees are expected to maximise the return on a charity’s investments. Quite a balancing act!
Reputation
Whether your main sources of charitable income are ad hoc donations by members of the public, corporate sponsorship, supporters’ standing orders, or grants from charitable foundations, your charity’s reputation is of paramount importance. Imagine the consequences if some campaigning newspaper discovered that an organisation that provided rehabilitation for recovering alcoholics had indirectly, maybe inadvertently, invested in a brewery. This kind of faux pas can and does happen. Devising an investment strategy that does not offend the ethics, beliefs and preferences of a wide range of donors and supporters whilst at the same time maintaining an acceptable rate of return can be problematic.
Sustainability
Public awareness of the ethical element of investing is growing and environmental sustainability has become an important criterion. Schroders Global Investors Study revealed that 54% of UK investors have increased their allocation in sustainable investments over the last 5 years, but attitudes towards the environment and sustainability vary widely according to age. Millennials are particularly interested in climate change, resource scarcity and growing populations. In fact, 86% of them regard sustainable investment as important. 79% of 36-50 year olds, and only 69% of 51-69 year olds share this opinion. This is borne out by a trend of divestment in industries such as coal, oil and gas. Since no charity can please everyone all of the time, perhaps the first step is to understand your target donor profile.
Social responsibility
As well as the environment donors are also interested in themes of social responsibility, diversity and equality. They may enquire if your charity invests, directly or indirectly, in organisations that have ethical employment practices, allow trades union membership, and promote equal opportunities for women or ethnic minorities. Even more likely is that they will ask how a charity ensures that its funds are not invested in tobacco, armaments, animal exploitation, oppressive political regimes, environmental damage, gambling or pornography. The list is long and the issue is by no means clear cut. Not everyone holds a moral objection to armaments, for example, as many argue that they are necessary for defence and that their manufacture provides employment; and these days few would advocate investment in companies that process tobacco, but some with a more extreme position might even object to investing in any company that is involved in the distribution or retailing of the product.
Ethical Funds
Ethical investment funds are fortunately not difficult to find, and the choice has been increasing since 1953 when Friends Provident established what is claimed to be the first. Most fund managers now clearly state their investment policies, including the sectors in which they will or will not invest. There are many funds that incorporate specific ethical values into their constitutions, and that actively screen companies to detect even indirect connections with ‘undesirable’ activities such as weapons, tobacco or alcohol. Even if the investment activity only involves bank deposits some banks have a better reputation for ethical investment than others.
Commonly referred to as ESG (Environmental, Social and Governance) integration is a growing trend, and represents 45% of assets under management (AUM) according to a 2019 report by the Responsible Investment Association Australia. Such methods of asset management do actually seem to be coming more mainstream.
Performance
Financial return has always to remain a key factor, given trustees’ duties to ‘take special care when investing’ and ‘not to take inappropriate risks with the charity’s assets’. Nevertheless, it is possible to achieve good growth or income streams while still maintaining an ethical stance. There is evidence that ethical funds perform at least as well as non-ethical funds. A study carried out by the RIAA found that ethical funds performed slightly better in a three-year average than multisector funds, with a growth of 4.75% over 4.39% respectively. What was noteworthy was the difference in negative growth over the last year, where Australia Fund Multisector growth was double that of the responsible investment funds sampled (-2.26% versus -1.13%).
Finally and obviously, it is essential to communicate your investment policy with supporters and potential donors. The annual report is a good place to start, but any detailed publication aimed at raising funds should at the very least mention the fact that your organisation has an ethical investment policy.
If you would like further advice on investment strategies or any other aspect of managing a charity please contact one of our NFP and charity experts. Alternatively, you can read more about the services we provide to charities.
Article adapted from original by Roland Givans.
Darren Laarhoven: D.Laarhoven@uhyhnseq.com.au
Reece Jory: R.Jory@uhyhnseq.com.au
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This content has been prepared to provide you with general information only and has not taken into account your personal objectives, financial situation or needs. It does not contain and it is not to be taken to contain Personal Financial Advice. Before making any financial or investment decisions, you should seek advice from an appropriately licenced or authorised financial advisor.
The content was prepared by UHY Haines Norton. AFS Licence No. 483056
