A matter of conscience
October 2009
Kate Hand provides an update on the CFDG/EIRIS ethical investment survey
As the public becomes increasingly interested in the impact of financial investment, charities increasingly have to consider the relationship between their investments and their mission. CFDG is working on best practice guidance in this area, and as a first step we undertook a survey of our members, alongside the Ethical Investment Research Service (EIRIS) [1]. The survey examined the internal and external barriers, drivers and assistance to adopting an ethical investment policy. There were 164 responses from charities with incomes from under £100,000 to over £10m, and a relatively even spread of investments from under £100,000 to over £50m. Only 46 per cent of respondents had an ethical investment policy, but this rose to 60 per cent for charities investing over £1m.
The survey found that the major barriers to developing an ethical investment policy are concerns over the potential financial returns (40 per cent), which contributes to a concern over the legality of such investments (28 per cent), and resource and technical constraints, such as complexity, lack of resources, and (perceived) lack of investment options. Of course these overlap with more generalised concerns about the use of any ethical investment criteria within charities.
Approaches
For charities with ethical investment policies, how are they being tailored within individual organisations? The vast majority, 88 per cent, use negative screening (avoiding investments that do not meet your criteria). Principally, they are avoiding traditional ‘sin stocks’: tobacco (85 per cent), pornography (50 per cent), military involvement (48 per cent(which includes manufacturing arms), alcohol (36 per cent), gambling (33 per cent) and human rights (24 per cent). Other areas included the environment, nuclear power, animal testing, intensive farming, genetic engineering and supply chains.
Twenty-five per cent of respondents reported using positive screening, where investors look for companies with a commitment to responsible businesses practices. This is often seen as a more proactive technique, since it can actively further the charities’ objectives. There was perhaps less variety in the issues identified here, which suggests that only a relatively narrow segment of charities are using investment as a campaigning tool. These can be grouped into social issues (fairtrade, human rights, community involvement and treatment of stakeholders) and environmental issues (energy and resource conservation, renewable energy, green transport, sustainable forestry and waste management). In addition, 15 per cent of respondents reported positive screening for companies involved with microfinance, and 10 per cent were looking at supply chains.
Interestingly, human rights and supply chains are issues subject to both positive and negative screening. This really demonstrates how complex the issues are, and the increasing sophistication of charity investment. Reflecting that, a number of respondents told us that they had identified specific issues related to their particular charitable missions to screen. For example, Islamic Relief Worldwide does not invest in interest-based transactions, in compliance with the tenets of Islamic finance, and the Nuffield Foundation specifically considers science and its proper use in their positive screening.
Drivers
Over 75 per cent of respondents said that the drive for ethical investment had come from their trustees. A further 45 per cent specified their finance director, and both chief executives and supporters came in around 30 per cent. A further 30 per cent identified general staff’s views as a driver, which links to one of the ‘issues’ drivers: a number of charities feel that ethical investment is simply integral to their work and their mission. The most important drivers were reputational risk and avoiding conflicts with the charity’s aims and activities, suggesting a very practical orientation to this work and a clear fit with established risk management processes. These drivers were followed by concern about alienating supporters, donors, beneficiaries and staff, and finally addressing financially relevant social, environmental and ethical risks, and using investment to further the charity’s work.
Recessionary pressures
Finally, the survey also looked at the effect of the recession. We found that almost 60 per cent of respondents have reviewed their investment policy in the last three months in light of the recession, and 70 per cent are likely to review their policy in the next six months. With income stream dwindling, we were concerned that this might presage a falling off of ethical investment but charities, but when asked whether recent market turmoil had changed their view of environmental, social and governance risks in relation to their investments 56 per cent of respondents said that it had not. Ten per cent said that it had promoted them to be more risk averse, and 3 per cent said it had actually increased their commitment to ethical investment.
We have found the survey very illuminating, particularly since it is a reflection of ethical investment under pressure. CFDG’s report on the barriers to ethical investment will be published later this year.
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