The Academies Financial Handbook is updated annually by the Department for Education and the Education and Skills Funding Agency; it contains a number of governance requirements for academy trusts.
In the first of our two-part series of e-briefings exploring ethical investing, Natalie Barbosa looks at how charities can reflect their values in their investment strategy.
Keep an eye out for the second part of this mini-series, where we will look at the other side of the coin: how organisations can use Environmental, Social and Governance (ESG) wrappers to diversify their funding sources.
The far-reaching social benefits of the work of charities are clear but are they missing an opportunity to further their positive contribution to society through their investment strategy?
Charities have long weighed up the ethical dilemma of whether to invest surplus funds in a way that maximises financial returns to reinvest in furthering the charity’s mission or whether to invest in organisations that pursue other ethical goals. David Palmer of Epworth Investment Management, a specialist investment manager for churches, suggests that they can do both, leveraging their financial might to force positive change. The Church of England, for example, has a clear policy that it will not invest in companies that have significant involvement in gambling, defence, the production and sale of alcohol, tobacco, or high-interest-rate lending. Last year the Church voted in favour of a pledge to divest their investment backing in companies that fail to meet the terms of the Paris Agreement by 2023.
The concept of responsible investment is not new, but the public’s growing social awareness and appetite for a more responsible, sustainable and ethical world are pushing more and more organisations to utilise their investment power to effect global change. In just two decades, between 1996 to 2016, the number of signatories to the UN Principles of Responsible Investment (UN PRI) rose from 63 to 1,714. The number of signatories today is around 2,700; organisations with a combined $80 trillion across their entire portfolios of invested assets.
Whether it be opting to invest in environmentally responsible companies rather than those that contribute heavily to carbon emissions, or in retailers that pay a fair wage to factory workers instead of extorting their supply chain, responsible investment is not just a philanthropic exercise: it can also make financial sense. BlackRock, one of the largest fund managers in the world, reportedly made £73 billion in losses as a result of investing in companies operating in the fossil fuel industry over the past decade. The returns of sustainable, green and ethical investment can be rewarding; both financially and socially.
A responsible investment strategy is particularly pertinent to pension board trustees, who last year were reminded that pension funds should already be using ESG factors in assessing their financial risk profile. The reality is, however, that many are not. The guidance could prompt pension funds to look to invest in ESG-focussed organisations once more. If they were to, they would join a global market of more than $22 trillion in funds, which are said to be invested with ESG considerations.
It sounds simple in principle, but the reality is that selecting an ethical or sustainable investment can be complex, time-intensive and, frankly, subjective. Financial analysts can make alarmingly accurate predictions about the long-term financial returns of shares, but few can conclusively measure the real social value that they achieve. Research has found that quantifying the relative ‘social value’ of something largely depends on the epistemic beliefs of the individual measuring it. This makes it even more difficult for charity trustees to choose where to invest, or not to invest, surplus funds. Furthermore, growth in the market can itself bring additional issues, such as the ‘greenwashing’ of funds. Some funds, for example, have been found to have exposure to stocks across industries including tobacco, alcohol, gambling and defence, despite those funds being marketed with ESG labels. As with any investment, caution should be exercised and expert investment advice sought. There is a seemingly ever-increasing number of advisors able to help charities to navigate an active ESG investment market and capitalise on the opportunities it can offer.
Whilst some trustees might not associate charitable purpose with investment activity, the rising profile of responsible investing could well change their minds. Many charities are highly sophisticated organisations, some managing substantial portfolios of investments; a strategy necessitated by the need to grow their assets in order to finance their charitable objectives. This is an opportunity for profit and purpose to drive one another: for charities to integrate their values in an investment strategy that is sustainable both for their finances and for society.
For more information
Please contact Natalie Barbosa.
 David Palmer: Faith Charities Forum - making a difference
 The Church of England - Pensions Board Investments
 The Guardian - Justin Welby - Investors must pressure firms to act on climate crisis
 KPMG - Responsible investing - a pension scheme member perspective
 Principles of responsible investment
 Rathbones - Why sustainable investing is here to stay
 The Guardian - BlackRoch lost $90bn investing in fossil fuel companies, report finds
 IPE - DWP drops statement on member views requirement from ESG rules
 “2016 Global Sustainable Investment Review,” Global Sustainable Investment Alliance, 2017
 Hall, N., Millo, Y. and Barman, E. ‘Who and what really counts? Stakeholder prioritisation and accounting for social value.’ (2015)
 Portfolio advertiser - FCA urged to take action as investment industry shamed for greenwashing
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