A charity’s ethical investment policy forms an important part of the wider investment policy. But where to start when writing it? Isobel Fraser from Waverton Investment Management shares five top tips for trustees.
With new generations of trustees joining the ranks and an increased spotlight on ethical investing, continued education remains as important now as it ever has been. Charities are facing increased scrutiny and reputation is important.
Here are our top five tips:
1. What does the Charity Commission say?
The Charity Commission’s guide for trustees on investment matters, also referred to as CC14, sets out the legal and good practice framework for the investment of charity funds. CC14 states that trustees can decide to invest ethically for the following three reasons:
- a particular investment conflicts with the aims of the charity; or
- the charity might lose supporters or beneficiaries if it does not invest ethically; or
- there is no significant financial detriment.
Trustees can adopt any ethical investment policy they reasonably believe will provide the best balance of risk and reward for their charity, but they should ensure that they outline their justification for the ethical policy; in particular why they consider it in the charity’s best interest to invest in this particular way.
2. What is your objective for the policy?
With the Charity Commission’s guidance in mind, trustees should outline what they consider to be ethical in line with their charity’s aims and objects. Linking mission to investments is not always clear and simple, so consider the following questions:
- Why do you want to invest ethically?
- What are you trying to achieve/say with your policy?
You can also consider the different approaches to ethical investing, which include; negative - screening and avoidance of particular issues; positive - reflective of the charity’s values or a best-in-sector approach; shareholder activism - exercising voting rights.
3. Start developing an outline of your policy
Each charity’s policy, and the structure of it, will differ depending on their objectives. This process will take time and careful consideration.
Remember that trustees are not free to use their investment powers to make moral statements at the expense of their charity, so be careful to keep personal ethics off the table and ensure that you document your process and the decisions you have made, referring back to CC14 where necessary.
4. What are the potential impacts of the policy on your investments?
Charities are operating in an increasingly demanding and accountable environment, therefore it can be important to consider whether or not the policy relates to direct and/or indirect investments.
Trustees need to evaluate the possible effects (both positive and negative) that the implementation of an ethical investment policy might have on investments and investment targets. It might be appropriate to take some advice at this stage, particularly if you have existing investments to allow you to assess whether or not your investment manager can accommodate or implement your policy.
“If trustees have considered the relevant issues, taken advice where appropriate and reached a reasonable decision
they are unlikely to be criticised for their decisions or adopting a particular policy.” - Charity Commission, CC14.
5. Implement, monitor and review
Communicate with your investment manager and ensure that you both have an understanding of the definitions underpinning your policy. Once you have reached a decision, write it down and set out both the aims and any exclusions, which will demonstrate that it has been clearly thought through.
In our experience, this process takes time and careful consideration to ensure it is clear, consistent and understood. Do not be afraid to start small and regardless of how you decide to start, ensure that you review the policy on a regular basis.
Weighing up these risks and considering this process can seem daunting, but with the right support you will be able to achieve the outcome you are working towards.