How to invest like a charity

Written by Lisa Stanley Mann on 28th Sep 2015

A giant polar bear walking the streets of the City of London led by Emma Thompson; Charlotte Church singing outside Shell’s HQ and Vivienne Westwood atop a white tank outside Cameron’s house to protest about fracking.

Celebrities are pretty good at attention-grabbing stunts for climate action.

Don’t have a white tank handy? There’s another way to join their gang and it has to do with where you put your cash. For while Charlotte is great at creating photo opportunities for the cause, she is equally active with her investments and is a self-proclaimed ethical investor.

This is not just an exercise in smug. The responsible investment movement is gaining traction outside of the so-called green niche for lots of reasons. Besides commitment to the climate cause, there can be financial benefits too, for example, pulling your cash out of fossil fuels (avoiding oil volatility for one) and putting it into social enterprises (social enterprise investment tax relief).

Charities have been at the forefront of this movement – slowly awakening to a duty to have their profits invested in something that matches their values, because weirdly, it was not ever thus. And now they are realising that they can still profit from principles, positive investing seems like a bit of a no-brainer.

Charity investment scandals, such as the Church of England’s Wonga investments or Comic Relief’s misplaced investments in tobacco, arms and alcohol, mean that charities are increasingly having to reconsider how their portfolios are invested. They have some of the largest endowments in the country, so their investment example is a significant one, partly because the fund managers that act on behalf of charities also manage money for other businesses.

With a new mandate from charities to be holy as well as profitable, these fund managers might be encouraged to do the same with other portfolios, which include some of our money too. It’s a kind of positive snowball effect that we are keeping our fingers crossed for, anyway.

To understand more about what UK charities are doing with their cash and how we might follow their lead personally with our own cash, Lisa – one of the good money girls – spoke to James England, Head of Charity and Corporate Business Development at Standard Life Wealth.

James England High Res

Standard Life is one of the largest investors for charities in the UK and has a dedicated responsible investment team. This team works closely with the companies it invests in, promoting best practice standards.

Lisa: Do you think a growing number of charities are asking about Socially Responsible Investing (SRI) and Environmental and Social Governance (ESG)?

James: Definitely. There is a real focus on SRI / ESG in the charity sector at the moment and it is high on trustees’ agenda. Trustees are asking their managers about their SRI/ ESG policies and how these are delivered through to their portfolios. Charities putting their investment mandates out to tender are asking specific questions around these areas and using the responses to refine who they might want to engage with.

Lisa: Why is this?

James: I think recent high profile attention in the press where charities may have been investing in areas that contradict their missions has brought trustees’ responsibility in this area into focus. I also think trustees genuinely want to invest their assets or a proportion of their assets in SRI areas to increase the impact their charities can have on society for the better.

Lisa: You mention that several charities have recently reviewed their portfolios against ESG and / or SRI criteria. What was their motivation for doing so?

James: They wanted to explore and document the Standard Life approach to SRI/ ethical investing as a company when managing their assets. This is important both in terms of protecting the charity’s reputation against potential criticism and also trying to increase the positive impact their charity can have.

Lisa: How would you go about shifting their portfolio?

James: It depends what they are trying to achieve and also it’s about balancing the impact of any decisions on the pure investment goals of the portfolio. If the charity wants an ethically screened portfolio, for example excluding certain stocks or sectors, such as tobacco, this can be done – but usually only through a bespoke portfolio of single stocks. It is very difficult to achieve this accurately through collective funds. This of course can have an impact on diversification and therefore risk exposure.

There is no perfect answer and it’s about prioritising and balancing the charity’s various objectives. At Standard Life, like other investment houses, we operate an overriding SRI policy, and a lot of work goes into researching the companies we invest in on behalf of our clients to ensure they meet our guidelines in respect of environmental and social impact.

Lisa: At Standard Life do you take a positive or negative screening approach?

James: We can do either. Historically charities have wanted to exclude certain investments that may contradict what their charity is trying to achieve. What we are seeing now is more focus on investing positively. It is fairly easy to exclude certain companies or sectors, but finding companies that operate in a way that may further the charity’s aims (depending on what the charity is all about) as well as meeting financial criteria that would justify investing in them can be more of a challenge and often requires more research. We would not invest in companies that do not meet our global SRI policies, so there is an overriding policy from which charities can get comfort. It depends on how specific they want to be, however.

Lisa: Do you see this as a developing trend?

James: I hope so. Charities wield substantial investment clout, and harnessing this in a positive way can only be good for society. The challenge is ensuring the investments still do what the charities need them to do in terms of supporting their own charitable objectives. Making sure the charity can still operate in an efficient way, which often goes hand in hand with the performance of the investments, has to be the primary objective. An overriding SRI policy should be the “norm” and business as usual for any investment house.

Lisa: Why do you think it’s a growing trend?

James: As trustees focus on this area more, investment firms will need to adapt and innovate to meet this market need. This should increase the research, choice and efficiency in this area and, in turn, improve how it is delivered.

Lisa: In your experience what are the simplest steps investors could make to their own investment portfolios to mirror the direction of their favourite charities?

James: Either give some of their money to the charity or seek the advice of a professional investment manager. This is a complex area and the risks and impacts of such decisions need to be well understood.

Lisa: Is it already possible for people to ‘invest like a charity’ in this way?

James: Absolutely. There are many options out there for individuals to pursue an ethically invested SRI portfolio. Ultimately the size of the portfolio will have a bearing on what can be done. People can access ethical and SRI investing from a wide range of ethical ‘funds’ from a number of investment houses. Although for a truly bespoke, ethically-screened portfolio, discretionary fund managers often need in excess of £1m in order to make this viable.

If you would like to review your investments now and start to invest like a charity, contact us for a good money makeover – Our experts will run the rule over your portfolio for free. You can also check out the investments section of GWM.