Charity power
Mark Mansley develops the theme of SRI and asks if your investments further your mission?
Charities and foundations are increasingly becoming aware that their investments are rarely completely detached from their mission – in fact, the companies they invest in may be helping to create some of the problems they are seeking to address, undermining the charity’s mission through the way the company works or the products it sells. At a public policy level, the companies may be opposing the sort of changes the charities regards as important. However the reverse is also true – some companies may be helping to address key problems through innovative products and services. From whatever perspective, it is increasingly difficult for charities to regard their investment portfolio as completely separate from their daily work and their mission.1
‘Responsible’ investment
The traditional, simple response has been to exclude some of the objectionable companies or sectors – a healthcare charity would quite understandably want to avoid the tobacco sector. However, such an approach is limited; whilst it gives the portfolio an ethical overlay, it does not address some of the more complex problems and opportunities involved with most issues; it does nothing to achieve or incentivise change; and too much exclusion can affect investment choice and potentially performance.
In response to the limitations of this narrow exclusionary approach, the idea of ‘responsible investment’ has been developed. Broader and more flexible, it is generating interest from charities and foundations. It has gained acceptability among many financial institutions as a concept, but can also help charities meet the need to demonstrate that their investment policies are consistent with their mission. It can provide a solution to growing regulatory pressures – charities are now required to disclose their investment policy on environmental, social and governance issues as part of the SORP requirements, and the new Stewardship Code2 will encourage institutional investors and their fund managers to take the responsibilities of share ownership more seriously.
For many, responsible investment is focused on good governance of companies and dialogue over issues such as the company’s strategy. Remuneration has been a controversial issue for many companies, with an increasing appetite among shareholders for voting against remuneration reports. Responsible investment may also seek to consider broader non-financial factors in the analysis of companies, such as reputation and the environmental and social sustainability of companies in the longer term. There is growing acceptance that this broad, pragmatic approach does not harm returns and may even enhance them.
This broad responsible investment approach has few real drawbacks, and is probably all that is appropriate for most general charities. It is therefore somewhat worrying that not all charities have yet implemented such an approach. Ignoring the potential of responsible investment creates, in my opinion, real reputational risks for the charity. Charities which find themselves in such a position should first start a dialogue with their existing fund manager – and if this is not satisfactory, then they should consider re-tendering their fund management and evaluate possible fund managers on their ability to deliver responsible investment along with other considerations.
A more active approach
In contrast, other charities are going beyond simple ‘responsible investment to consider how they can use their investments more actively to press for change in line with their mission. This is built on a recognition of the power of the financial markets and the fact that companies are ultimately answerable to their shareholders. The world of investment and financial markets may not be relevant in all areas (the arts, for example) but can be very central in others – e.g. the environment and human rights. That said, using the financial markets as a mechanism for change is far from easy. Investors and their advisors are focused on the financial returns and many do not share the concerns of the charity. It will be important to have a strong argument – a business case for change – which highlights the risks of ignoring the issue or the possible opportunities it creates.In terms of mechanisms to pursue such a strategy available to trustees, organising a campaign of disinvestment from a company or sector perhaps is the obvious choice and the option most obviously associated with ethical investment. However, while disinvestment is appropriate for an individual charity keen to avoid association with anything they find at odds with their mission, it is not generally very effective as a way of achieving change, as most investors will be reluctant to exclude an investment on ethical grounds. There can be exceptions; for example the campaign for disinvestment from Apartheid South Africa has been cited as a factor contributing to the collapse of the Apartheid regime. However, to have an impact such a campaign has to gain widespread acceptance, which will be difficult to achieve, particularly in today’s increasingly global financial markets.
Engagement
Bearing this in mind, a more appropriate and successful approach is ‘engagement’ – raising, as a shareholder, social and environmental issues with a company’s board of directors and/or management. This approach has its limits – it would be pointless to expect a tobacco company to refocus its business model on Fairtrade chocolate, for example – but it can be very effective where companies can be made see the merits of change. A classic topic for engagement would be encouraging a company to have more robust supply chain policies to avoid reputational risks.
Charities can pursue engagement in a number of ways. They can talk to their fund manager and see if they are willing to adopt a particular issue and engage on their behalf. A growing number of fund managers devote reasonable resources to engagement with companies, but whether a fund manager will be able to focus on a particular client interest will depend on a number of factors – such as how strong the arguments are and what other activities companies are undertaking. Alternatively, charities can engage directly; company management is often surprisingly responsive to hearing from ‘real’ investors, even if fairly small, rather than the various advisors and managers that they normally deal with.
A better approach may be to work with others, and there are a number of initiatives which support working collaboratively on engagement. In the UK the ECCR (Ecumenical Council for Corporate Responsibility) is a group of faith-based investors with a good track record on practical engagement. At a global level, and more suitable for the larger investors, the United Nations Principles for Responsible Investment3 have an engagement clearing house which provides a forum for fund managers and investors to discuss and work co-operatively on engagement opportunities (a simple test for any fund manager is to see whether they have signed up to the UNPRI and are actively involved in its networks).
Shareholder resolutions
Perhaps the most radical form of engagement is to help propose a shareholder resolution, to be voted on at a company’s AGM. Such resolutions have the advantage that they force the company and investors to debate and consider an issue. However, some feel that shareholder resolutions are a crude and confrontational tool and that dialogue and discussion are more appropriate.
The mechanisms of proposing a resolution are relatively straightforward under UK company law. Either five per cent of a company’s shareholders or 100 investors collectively holding share capital of at least £10,000 ‘nominal’ value (the actual value may be rather more than this) are needed to propose the resolution – the latter is the more usual route. The Companies Act 2006 has made this slightly easier, so that shareholders do not have to hold their shares in their own name, but can have them held in nominee. As an illustration of this mechanism at work, clients of Rathbone Greenbank have helped propose three resolutions in recent years. Careful attention must also be paid to the timing of such requests – companies need only cover the additional costs of circulating the additional materials if the resolution is filed before the year end. Otherwise, investors may legitimately be faced with a large distribution bill.
The resolution itself needs to be carefully worded to be as supportable as possible – so it must be reasonable, practical and backed up by an understandable business case. Calls for disclosure, new policies or improvements to risk controls are more likely to succeed than calls for the company to stop doing something; most institutional investors feel it is not their job to micro-manage companies, and much more likely to support more reasonable requests for increased transparency and disclosure.
However, the actual proposing of a resolution is only a small part of what is likely to be involved, particularly if one wants to have a reasonably successful outcome. Considerable effort has to be put into developing taking the argument to shareholders. Typically this will evolve some sort of report on the arguments for the resolution, together with a series of presentations and meetings with other investors. Extensive dialogue with the company in response to the filing is likely to be needed (and potentially useful) but is also time consuming.
The outcome of a shareholder resolution is unlikely to be successful directly. However, a substantial level of support (and active abstentions) will send a very strong signal to company management. And the process of dealing with the resolution may have a marked impact on the internal debate with the company.
Recent shareholder resolutions have included motions calling for a proper assessment of risks and economics of the development of tar sands at Shell and BP, and a resolution at Tesco calling for improvements in animal welfare standards in its supply chain (particularly with regard to chickens) – initiated by the celebrity chef Hugh Fearnley-Whittingstall.
Collaborative initiatives
One of the most effective ways of working with investors and engaging with companies is through a broadly-based collaborative engagement initiative. Perhaps the best example is the Carbon Disclosure Project, launched in 2000, and which now has the support of some 534 institutional investors, holding $64 trillion in assets under management. It calls for leading companies to disclose their emissions of greenhouse gases and their strategy address the challenge of climate change.
Typically such initiatives start in civil society with a group of campaigners identifying an issue on which it might be possible to work with investors. They then identify some lead investors interested in the area who can provide vital credibility with other investors. Some form of government backing may also be involved. Foundations can also get involved by providing crucial funding.
As the above examples indicate, collaborative engagement works best on such issues as calls for disclosure, rather than more specific actions, which may struggle to get broad support and can prove somewhat controversial. They usually work best as multi-year initiatives, giving them time to build significant momentum and gain acceptance of a wider pool of investors. This longevity also means companies recognise that the pressure for change will not disappear.
In context
For most charities, the world of their investments is not completely detached from their mission and the daily activities. There are a number of ways they can use their investments and the financial markets as a route to achieving change. What is possible and suitable will vary from charity to charity, and it is important to be focused and realistic about what might be achievable. However, working with investors and financial institutions can provide new and often complementary opportunities for furthering the charity’s mission.
1. Please refer to the Caritas SRI roundtable supplement , September 2010 for further information on the issues. www.charitiesdirect.com/caritas-maga zine/to-sri-or-not-to-sri-794.html
2. www.frc.org.uk/corporate/ investorgovernance.cfm
Author: Mark Mansley
Mark Mansley is an investment director at Rathbone Greenbank Investment, responsible for advisory services, strategy and specialist investments, including mission related investing.
Since 1993 he has focused on socially responsible investment, providing independent analysis on integrating social and environmental factors into investment policy, and conducting research into issues such as climate change and health and safety.
He is author of the book Socially Responsible Investment – a guide for pension funds and institutional investors (Monitor Press).
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