"We want to invest responsibly, but a legal ruling could restrict our freedom"
A recent call for charities to be compelled to align their investments with their objectives has had a mixed response. Cazenove Charities convened a panel of experts to discuss the issues.
04 Jun 2019
Responsible investing has long been of interest to charities, but has become more of a live issue since March this year, writes Ian Allsop of Charity Finance. That was when a group of charities wrote to the Charity Commission seeking urgent clarification on the extent to which their investments should align with their charitable objects. Supported by law firm Bates Wells, charities including RSPB, the Joseph Rowntree Foundation and Nesta asked whether the Commission, with the consent of the attorney general, would refer a question about the operation of charity investment law to the Charity Tribunal.
The fact that there is no regulatory requirement for charities to have a responsible investment policy has led to a debate about whether the law and guidance need updating. Trustees have duties not to make investments that might conflict with their charity’s objects, but they are also required to protect financial returns. So how much should trustees consider wider public benefit when investing?
James Maloney, solicitor at Farrer & Co, summarises the legal position to provide some context for the debate. “There is a widely held view that the law needs updating. The case law goes back to 1992 and the Bishop of Oxford case; this was important as it recognised for the first time that trustees could bring ethical considerations into decisions in certain circumstances. For example, if an investment was contrary to the aims of the charity or if it could hamper their work by alienating beneficiaries, donors or supporters.”
He points to a “vague third area of the ruling where moral considerations can be accommodated if there is no risk of significant financial detriment”. This is helpful because its ambiguity allows trustees to make an interpretation in line with their charity’s circumstances, but it also presents a challenge because trustees must decide how to define the term “significant”. “Where that line should be drawn is key to this whole debate,” he says.
Elsewhere, Maloney highlights some small but significant legislative changes since 1992. For example, the 2006 Companies Act included a duty on directors to promote the success of a company, having regard in doing so to the impact of the company’s operations on the community and the environment. “This is interesting because many charities are themselves incorporated, as are many of the organisations into which they invest.”
He also cites developments in public benefit, and the last wholesale update of the Commission’s CC14 guidance in 2011. “This was innovative at the time but is it now outdated? While it states clearly that charities can decide to invest ethically, it does not provide any clear examples of how charities established for, say, educational purposes can consider the environment or sustainability when investing. A lot has changed since 2011 and there is a pretty widespread view that the guidance needs updating.”
Kate Rogers, head of policy at Cazenove Charities, acknowledges that there are strong opinions both for and against firm requirements being put in place to force charities to invest responsibly. “There is a certain sense of it being black and white in people’s minds. Some say that they don’t want someone else deciding what is ‘ethical’ for their charity. If it is written into law, they fear that decision-making would be taken away from trustees and impact their ability to fulfil their duties.
“But there are also very passionate people who believe incredibly strongly that all charities, as long-term investors, need to consider things like climate change, so need to structure their investments accordingly, no matter what their aims and mission, as it will affect future generations of beneficiaries.”
She thinks that there may in fact be some middle ground between these two positions. “Charities can invest responsibly without prescriptive guidance on ‘right and wrong’. There are ways to future-proof and invest in a way that is consistent with long-term mission and aims without sacrificing returns. The perception that financial returns and public benefit are mutually exclusive is not always accurate.”
Anita Bhatia, investment director at Guy’s and St Thomas’ Charity, says her foundation last year launched an impact investment strategy to build upon its existing use of ESG [environmental, social and governance] criteria to conduct due diligence on funds and managers.
“In seeking health impact, we look not only at investments in the
healthcare or biotech sectors, but also the wider determinants of health, for example housing for the vulnerable, and tackling major social and environmental challenges. Given the relevance we attribute in our endowment to ESG considerations and impact, a tribunal ruling might fetter the flexibility and independence that trustees have in relation to decision-making and progressing their charities mission.”
Bhatia adds that there needs to be clarity around terms such as ESG/ socially responsible investment/impact investing if boards are to make informed investment decisions, and Miranda Richards of the United Westminster and Grey Coat Foundation’s investment committee agrees. “We need clarity of definition. Only then can we move forward.”
Andrew Wimble, who chairs the investment committee at the D’Oyly Carte Charitable Foundation, says: “We like the flexibility so would be uneasy about someone saying from on high that you can’t do something, assuming that thing doesn’t conflict with our mission. How it affects stakeholders is also a consideration. But there is no reason why we can’t be more ethical and still have strong returns.”
He observes that investing in companies with sound ESG practices has become the norm. “Good governance – the G in ESG – is now a given and it hasn’t hit returns. I suspect that in ten years’ time we will be saying the same about impact investing. In some ways ESG is
yesterday’s story, and impact investing is tomorrow’s story. How should you structure investments accordingly?”
Resources director Navjyot Johal says the Cripplegate Foundation has been looking at ways to use its endowment to have greater impact.
“We keep coming back to linking to our aims. If it doesn’t affect Islington [Cripplegate’s area of benefit], do we have to worry about it?”
For place-based foundations, it is a significant challenge to calculate the impact on beneficiaries in a defined geographical area from investments with a wider public benefit, and measure the contribution to mission.
Better board skills
In fact, impact investing as a whole seems to come with a number of challenges that are off-putting for some. How do charities and the fund management industry change negative perceptions?
For Wimble, it is about education. “The professionalisation of trustee boards is vital. There is a huge variation in the quality of debate." Rogers agrees and says it is about using resources to the best effect. “Skills on a trustee board are assets in themselves. Charities should utilise the financial knowledge on their boards to enhance impact through investments. And there is a definite role for the fund management industry to educate.”
Richards observes that the accountancy industry also has a role by providing and encouraging sustainability reporting in trustees’ annual reports, while Johal acknowledges the role of trustee training but thinks that, ultimately, it is about having the appetite to use investments to bring about change.
For Rogers, it also comes back to the Commission’s guidance.
“An update, even if not based on a legal position change, to reflect best practice and current thinking could be really helpful. There has been a definite increase in charities adopting responsible investment policies, with a real evolution in practice since the guidance was last updated.”
Rogers wonders whether some trustees think too narrowly when considering investing responsibly. “We need to broaden the perception in the lay person that RI [responsible investment] is about excluding stuff.”
Maloney observes that CC14 refers to shareholders engaging with investee companies, but asks whether it gives enough confidence to trustees in its current format. And Wimble says it is easier for trustees to exclude than to actively engage. He suggests:“Perhaps they should be investing into companies that they don’t like and being active and engaging to make them better. Running away from the problem is not the best way of fixing it.”
Huge resources from the fund management industry have gone into professionalising the robustness of information gleaned from companies to assess impact from a sustainability point of view, notes Rogers. “The ability to get more than onedimensional financial information from companies is important. If we use it well, we can have a positive impact.”
She thinks that charities could do more to collaborate with other investors and with the fund managers that they invest through. “The power of an individual client to create discussion and promote change is really powerful. Collaborating can increase the chance of successful
engagement. We should see more of it in the charity sector.”
Bhatia questions the effectiveness of divestment. “The investor base is a
diverse and broad spectrum. RI can take on different meanings depending on the nature and type of investor. With so much dry powder in financial markets, one investor’s divestment can be easily filled with another investor’s cash, in which case the desired outcome isn’t fully achieved.
“Other tools such as engagement might be more effective in changing behaviours. Through engagement, we can influence companies to introduce or improve their RI, ESG and impact frameworks.”
Another concern relates to the risk that some companies and fund managers may be greenwashing their products, services or strategies.
Bhatia says: “With global attention on environmental and social challenges, and indeed growing investor demand for investments that are providing sustainable solutions to those challenges, some companies and fund managers are making themselves out to be responsible, sustainable and positively impactful when in reality they are not. The key for investors is to do due diligence and monitor their companies and fund managers in a thorough and robust way so that they support those businesses that are transparent and truly committed to RI, ESG or impact.
Is there a generational aspect to the whole sustainability debate? Wimble comments that when he started in investment management, the “Jeremy Clarkson” school of ethical investment was the only one.
“Some older-style trustees think that impact investing is irrelevant. They say that impact is what we do with the money we spend as a charity. The impact comes from the grant,” he says.
Rogers mentions studies showing that millennials feel more strongly about purpose-led business. “If you are an organisation that relies on good people, you have to take on board these views. But there will be tensions within intergenerational trustee boards.”
Employees are increasingly demanding certain behaviours from their employer, says Richards. “There is evidence that if you segment investors, those who are most interested in sustainable investment are women, millennials and the very rich. If you are a charity, you want to attract these as donors.”
Maloney adds: “Going back to case law, the Bishop of Oxford case looks at the impact of the work of charity being affected by the views of beneficiaries and supporters, which suggests that younger beneficiaries and supporters must be important. Shifts in public opinion on these issues are therefore relevant to how charities approach responsible investment. But the law does see this as a balancing exercise and it affects different charities in different ways.”
In summarising the debate, panellists described two extreme positions. One side of the argument says that the Commission should compel all charities to invest in a sustainable way – or at least provide good reasons not to. After all, it is only by doing something completely radical that things will change.
However, on the other hand, there is a legitimate concern that a specific ruling might cause trustees to become more reserved and cautious because of a fear of reputational risk and of litigation.
What is definitely clear is that all charities need to have thought about this issue. It does not necessarily matter what their RI policy is – they need to be able to demonstrate they have considered the arguments if they are challenged.
This article by Ian Allsop first appeared in Charity Finance in June 2019