UK Chatrity organisations slow with adopting responsible investment

Many charities have been slow to adopt socially responsible investment, but pressure is growing, reports Simon Birch.

Cancer charities with shares in tobacco companies and environmental groups putting their money behind controversial dam projects are just two of the more embarrassing revelations about charity investments in recent years. People have been prompted to question whether they should donate to charities at all.

Given the bad publicity attached to these cases, it is surprising to discover that more than half of Britain’s largest charities and foundations still have no written policies on socially responsible investment (SRI). "I was shocked by just how many were not even at the stage of writing down their SRI policy," says Duncan Green, author of a report out today examining the issue.

"Fundraising charities’ most important asset is their reputation. There’s a real danger that without effective SRI policies in place, charities could run foul of bad press about an inappropriate investment. This reputational damage can last a long time and have a huge impact on a charity’s credibility."

At its most basic, SRI involves what is known as "negative screening" – excluding companies from a charity’s investment portfolio where there is an evident incompatibility. The children’s charity Barnardo’s is identified in the report, Do UK Charities Invest Responsibly?, as having a comprehensive and coherent screening policy that bans companies "whose activities are considered to be to the detriment of children and where we believe donor support might be adversely affected". The list includes child exploitation, arms manufacturers and powdered milk producers.

A survey of 100 charities and foundations was carried out jointly for the report by Just Pensions, a consortium set up by the charities War on Want and Traidcraft, the Charities Aid Foundation and Eiris (the Ethical Investment Research Service).

Of the 40% of charities found to have a written SRI policy, the overwhelming majority took this "negative screening" approach. Only a handful had policies that attempted to influence a company’s actions by engaging in an active dialogue, and fewer still were using "positive screening" – investing part of their funds in companies whose activities were in line with the charity’s core aims.

WWF (formerly the World Wide Fund for Nature) is one of the few charities taking this more ambitious approach, combining an SRI policy with a broader environmental campaign agenda. Buying shares in BP enabled it to ask questions at shareholders’ meetings. At last year’s annual meeting, WWF put down a motion questioning the oil company’s environmental policy and attracted 12% of the shareholders’ votes. "By pursuing this engagement policy, WWF was able to punch above its weight by attracting negative publicity for BP’s environmental record, particularly with respect to its activities in the Arctic," says Les Jones, WWF-UK finance director.

The charity also invests in companies making a positive contribution to the environment. Jones says the importance of WWF’s reputation is a driving force behind SRI. "Charities live by their reputation and our major risk is that people would simply stop giving us money if they found out we were investing in companies that were destroying the environment."

Given this, why has the charity sector been so slow in adopting SRI for the £47bn it invests largely in equities and bonds? Compared with pension funds, charities have not been required to report their stance on SRI. This is now set to change, with the government’s strategy unit proposing that large charities follow the pension fund example. Similarly, the charity commission is encouraging charities to adopt SRI policies.

One of the few campaign groups to highlight charities’ ethical record is the Campaign Against the Arms Trade (Caat), which has been running its Clean Investment Campaign for 10 years. Currently, more than 50 charities have investments in the British arms industry, according to Caat, including the St Bartholomew’s and the Royal London Charitable Foundation. "Set against other sectors, charities have been the slowest in divesting from arms companies, which we find disappointing," says a Caat spokesman. "We believe that organisations that ostensibly promote a social good shouldn’t make money through the sales of weapons."

The foundation’s chief executive, John Dennis, sees nothing wrong with its approach. "It is the role of our trustees to maximise the fund for the benefit of patients and health," he says.

A commonly held misconception among trustees is that ethical portfolios make less money, says Green, and this is the main barrier to SRI identified in the report. "What these trustees seem to have missed out on is the debate that suggests that the financial impact of an SRI policy makes a neutral impact on returns."

Yet Green predicts rapid change over the next few years. "There’s increasing pressure now from government, the charity commission and the public," he says. "There are very clear reasons why charities should take this issue seriously."

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