Charity Investments Need Transparency and Innovation - Report

One in five charity Chief Executives do not feel qualified to play a role in their organisation’s investment policies, or did not know what their charity’s responsible investment policy was, according to a report by UK charity leaders network, ACEVO.

ACEVO, an association for charity and social enterprise chief executives, senior leaders, chairs and trustees set up a Commission on Ethical and Responsible Charity Investments In December 2014 following a BBC Panorama’s investigation of charity investment policies.

The BBC documentary on charity investments found that the otherwise productive process of investing in companies can pose a number of reputational challenges for mission-driven organisations – especially when those companies’ activities are perceived to be contradictory to that mission.

ACEVO said its Commission report, titled “Good with Money, why charity investments matter”, was a guide for charities on investing in line with their mission.

As part of the ACEVO Commission investigation a survey of charities found:

• 80.2 per cent of charity leaders knew what their investment policy was and could speak to it.

• 49.3 per cent of charity leaders surveyed took an active role in setting investment policy and deciding where money was to be invested.

• 29.9 per cent delegated details to finance teams though knew what the policy was.

• 1 in 5 Chief Executives did not feel qualified to play a role and kept out of conversations about investments, or did not know what their charity’s responsible investment policy was.

• 49 per cent of charity leaders ensured details of their investments appeared in their Annual Report.

• 21.9 per cent don’t report their investments anywhere.

• 1.6 per cent used the press and social media to platform their investment strategy.

The report said UK charity reserves are used to generate an investment income of over £3.5 billion each year. On average, around 6 per cent of charities’ annual income comes from their investment portfolios. 1,990 very large UK charities, with reserves of over £5 million, account for nearly £2 billion of charity investment income

Of those surveyed, 75 per cent of charities had investment portfolios under £1m.

The report was produced in partnership with CCLA and the Social Investment Business.

The report proposes that charities should have a ‘Responsibility to Reflect’ on their investments – where they are made and how they are managed. It also proposes that larger foundations should have a ‘Responsibility to Innovate’, to use their large size and capacity for risk to ‘err on the side of innovation’ with their investment policies.

The proposals include:

1. A Charity’s Investment Policy should be at the heart of its identity. Charity leaders and trustees should consider how investment strategy reflects the charity’s values, objects, long-term direction and campaigning areas. Charity investment policy, based on the charity’s values, should be devised through an organisation-wide conversation.

2. Charities must be Proactively Transparent about their investment policies – all charity trustees and charity leaders should be conscious of and able to speak about their charity’s investment policy, which should be made public and clearly articulated.

3. Charities must come together and forcefully advocate to reduce the barriers – legislative and economic – to enable their money to better match their mission.

4. Charities should adopt a new ‘Responsibility to Reflect’ on the challenge posed by the development of the Responsible and Ethical Investment marketplace. The largest foundations have a further ‘Responsibility to Innovate,’ and take bolder moves to lead the sector to better investment practice.

The ACEVO Commission identified three commonly used approaches in ethical investing:

• Altering a charity’s investment portfolio by refusing to invest in sectors or companies whose core business contradicts the charity’s values (for example, cancer research organisations avoiding investment in tobacco) – or positively identifying sectors that further their charity’s aims.

• Asking a charity’s investment manager to conduct engagement with companies in line with a charity’s mission.

• Investment ‘for impact’ to tackle specific social problems.

The Commission conducted primary research and polling of ACEVO members – around 1500 charity and social enterprise leaders across the UK – and across the networks of each of the Commission’s own members.

The Commission identified several barriers that currently prevent charity leaders from fully understanding, and where applicable, influencing a charity’s approach to investment in this way.

It said appropriate charity governance was key.

“While charities will be keen to ensure that their investment policy and practice is developed by the people with the appropriate knowledge and skills, whatever the size of a charity, it must be careful to create conversation loops within their organisation to ensure that senior staff are aware and can explain their decisions,” the Commission said.

Recommendations made in the report were:

• A charity’s investment policy is part of its identity. Charity trustees, charity leaders and senior charity management should be conscious of and be able to speak to their charity’s investment policy and to be able to explain how the charity’s investment policy relates to its mission.

• Charity leaders should engage their organisation in a conversation as to whether an ethical investment policy is appropriate for the charity.

• Charities should routinely ask their investment manager about their practices and processes in relation to their ethical and/or responsible investment policy. This should start with the investment manager procurement process and continue through the ongoing monitoring of the manager.

• Charities should reappraise their investment policies to ensure they are fit for purpose every year as part of the process of producing their annual report. This should coincide with a whole board ‘check in’ with their investment manager to ensure that the strategy is reflecting the board and the leaders’ policy.

• The full board and Chair must take responsibility for retaining the setting of a charity’s investment policy. They must be further held responsible for working with Chief Executives and ensuring that they have full understanding of the nature of investments being made. Investment strategy may then be delegated to the appropriate committee of experts where applicable.

• Irrespective as to whether they have adopted an ethical investment approach charities should disclose how their approach to investment best fits them as an organisation.

• A charity’s approach to responsible and ethical investment should form an important part of the main investment policy document.

• The published policy should reflect at least in part the decisions made by the trustees and senior charity leadership to invest in none, one or more of the responsible and ethical investment pathways highlighted in this report.

• Charities must come together and advocate to try to reduce the barriers – legislative and economic – to enabling their money to better match their mission.

• The Commission recommends that all trustees and charity leaders recognise financial and investment education as part of their continuing professional development.

• The Commission supports the Law Commission Review Proposals to create a Statutory Power of Social Investment for Charity Trustees.

• Alongside the Law Commission’s proposed powers and changes to guidance in this area, the Commission welcomes the proposed charity tax law changes driven by the Law Commission, which serve to explicitly permit social investment – and urges that they be implemented as soon as possible.

• The Commission has further identified a leading role for 17 major foundations around charity investments, to ‘err on the side of innovation’ with their investment policies. It proposes a Responsibility to Innovate incumbent on.

To find out more visit www.acevo.org.uk