To SRI or not to SRI?
That was the question facing experts around the table at Caritas’ first panel discussion. Maintaining public trust while maximising returns on charity investment is difficult, as participants found out
WELCOME
What is the difference between programme-related investment, a grant and socially responsible investment (SRI)? The misnomer, it would appear, is the word ‘investment’ as I found out at the Caritas round table on socially responsible investment which took place six weeks ago on 15 July. Expenditure on mission specific programmes – even if they do result in a return of some kind – is not the same as investment to generate the income or capital return that is needed to, in the words of one of our panelists, ‘fund their mission in the normal way.’Another key point that came out of the proceedings was the perception of what SRI really means to many charities. There is some way to go before many trustees see this as something more than, for example, not investing in tobacco stocks. In other words, there is further to go to build awareness of the breadth of SRI, namely that it is not principally about exclusion, more about reinforcement of a charity’s overall mission and values.This supplement articulates some of the main concerns, perceptions and myths out there about SRI and provides what we believe is some much-needed clarity to encourage greater engagement in what can be achieved with this approach to investment.. The excellent CFDG guide, Unlocking Socially Responsible Investment is now available for free download from their website (see note 1 on page 7) and I would encourage everyone to make the most of this helpful source of information.Last but not least, the panel awaits with eager anticipation the Charity Commission’s revised and updated CC14 guidance which needs to do more to help trustees understand the balance between investing responsibly and the duty to generate the best possible return on investment.
Clarissa Dann Editor
Caritas
Although the charity sector has been fairly groundbreaking in some SRI, ethical and related areas over a number of decades, it is clear that there is still an important role for debates, reports and further exploration of the issues involved. So it was with great pleasure that we were able to host, with Caritas, this distinguished group of panelists from within, or working with, charitable organisations. Who came along to shed light on the legal, fund management, policy, membership and, of course, charity perspectives of the important topic of socially responsible investment.We believe there is an opportunity to share this more widely in the sector and this means looking at
- the extent to which investment companies are taking account of governance and SRI issues when investing money for clients;
- bespoke charity SRI and ethical policy statements, reflected in the charity SIP (statement of investment policy) and their accounts; and
- the direct engagement a charity might have with companies over matters of concern.The discussion that took place on 15 July was illuminating for those of us at the table and, among the points arising, became clear that we all need to be very mindful of the confusion over terminology and understanding as SRI activity continues to develop.We hope that this report is of interest and value to staff and trustees.
Ruth Murphy
Director of charities business development
Newtonruth_murphy@newton.co.uk
SECTOR UNDERSTANDING
CD OK, to kick off, what do people round this table think are the main reasons why there is still quite a low awareness in the charity sector of what SRI is all about?
CP There is a lot of vocabulary out there: ethical investment; social investment; programme-related investment; positive and negative SRI; CSI; social impact bonds; sustainable investment; responsible investment. Although these terms were invented to help people, they’re pretty esoteric.
DM They overlap but not really 100 per cent. We have tried in the book1 to explain what the different elements, of what we call SRI, amount to but there is a long way to go. Our responsibility, if we want charity professionals to engage, is to make it clear what the issues are and how it impacts on them.
PB I agree it’s not homogenous across the sector. And there is a variability of knowledge, engagement and desire to engage at board level – trustee appreciation is a harder nut to crack.
JBT The original question assumes axiomatically SRI is ‘a good thing’. But is it? There does seem to be something about it that is soft and comforting and allows one to ignore the things that generate real cash – and which allows trusts to fund their mission in a normal way. These are not incompatible, but the framing of the question ‘what is holding charities back…’is an interesting indication of how the debate starts.
GD I agree there is a lot of confusion. I come to this as an investment manager but can put a trustee hat on. A lot of the charities have a very disparate view when it comes to SRI. The issue is pretty clear-cut for medical charities, but generally I have encountered charities that think ‘we ought to have an ethical policy but we don’t know what it is’. I agree with Cathy, it is a big subject and it comes down to two things. One is how ethics affect the investment. The other issue is ‘what is socially more responsible’. One is there to get returns, a finance or monetary return, one is to do good and help communities – you are not doing it for a financial gain.
GW Shareholders have a responsibility within companies to make sure they are engaging with those companies on corporate governance and issues affecting those companies from an ethical point of view. And every charity has a different idea what ‘ethical’ means. As a trustee myself, I know how difficult it is to find one that fits what the charity is trying to achieve. Religious organisations are further along the curve because it is very obvious what they should be representing in their ethical policy. For a lot of other charities it is very difficult.
PB You are absolutely right. I think the key point is that the board and the charity should be working through those issues. When I was at The Church Mission Society, the issues were much clearer. We looked at what fitted with our mission and values as well as the impact on our beneficiaries, on funding and donations. You can’t just say ‘let’s have an ethical policy with a few negative screens to make us all feel better and away we go’. That is poor thinking.
LT People imply charities should lead in SRI but they have a smaller governance budget than many other institutional shareholders. All institutional shareholders are seeing more requirements to do something about responsible investment and active ownership. But my worry is that investors can be led to believe that by, for example, signing up to codes such as the UN Principles for Responsible Investment, they have ticked the ‘ethical and responsible investor’ box and fulfilled their requirement to deal with these issues, whereas in reality they have done very little.
THE INVESTMENT/GRANT SPECTRUM
CD What is the legal position in all of this?SS Trustees have a duty to act in the best interests of that charity, including when they make investment decisions. At one end of a spectrum is investing purely for financial return and at the other is what is called ‘social investment’– in effect making grants but by way of loan or some other financial assistance.
MP The Charity Commission should not pander to the whims of too many people. The law is very clear in relation to investments. Trustees must invest for the maximum financial return. Having ascertained what the maximum financial return might be it is possible to consider some of the softer issues. Having first obtained advice (I hope) on what your investment portfolio should contain, there may be one or two investments that are not compatible with your objectives. Case law indicates it is very rarely the case that you can put ethical considerations first.2
JBT This seems to suggest somehow that if a trust lost money on an investment (or failed to achieve a maximum return) it would be a different sin from losing money on a grant. Is a bad investment worse than a bad grant?
MP An investment in a strict sense has nothing to do with a grant. They are totally different concepts. A grant is not an investment in the legal sense.
"We are at risk of applying completely contradictory criteria to different aspects of what the charity does with its money" CP
JBT So there are two standards? One being how you spend money and another how you invest it?
RM Sometimes it is accepted by grantmaking trusts that you deliberately make a risky grant because you are funding something you believe needs funding. So you may overtly take a (funding) risk rather than avoiding it.
MP I thought we were supposed to be looking at investment in the strict sense today, where one is looking at applying principles of SRI to proper investment decisions as opposed to grantmaking. I completely agree with you although I wasn’t talking about grantmaking at all which is a different thing.
CP I think we may have to ask the Charity Commission to review its guidance.3 As Simon says, we are now entering a situation where we have got a range of products such as soft loans, grants and patient capital to be used for social investment type purposes and the line between these is becoming very muddy – we are at risk of applying completely contradictory criteria to different aspects of what the charity does with its money.
MP I have looked at the Commission’s guidance both in the short and the longer forms, and I don’t think they have muddied it at all. They are reasonably clear. Perhaps not enough people have read the two sets of guidance?
RM I think the guidance has a few more layers than in our first discussion points about it. My reading of it was – yes, the Bishop of Oxford case determined that if it was a choice between investing more ethically and accepting the best return – you would have to favour the latter at that time.4 But CC14 has introduced a few other clauses (and it is being rewritten soon) that actually charities ought to consider where their investments are obviously in conflict with the whole raison d’être of the organisation. I thought that trustees could add in their own personal views only if they were not to the detriment of the charity.
SRI AND INVESTMENT PERFORMANCE
GW The assumption that because you invest in SRI you get low returns is rubbish. First of all you have got the Mercer’s report5, we run SRI portfolios at Newton and, previously, at the private asset management division at Henderson, where a number of us were before. And we have a very long track record and there is outperformance v the benchmark over that period. I have a number of campaigning charities as clients who will not invest in certain sectors such as oil, gas and mining and the volatility of their returns relative to their benchmark can be quite significant in the short term, but over the long term we have no evidence that there is a detrimental impact to performance from investing in an SRI fashion. I think EIRIS6 would say, and we would agree with them, that if you have got an 80 per cent investment universe there is no detriment to performance.
CD So it really is an urban myth that SRI can impact performance?
PB It works in different people’s favours to promote that urban myth at different times. Part of the challenge for trustees is that, where a fund manager does not have a strong SRI track record, he or she is going to say ‘of course it is going to affect performance.’ And vice versa; so to work your way through that as a trustee when you are trying to get independent advice is very difficult. The volatility issue does need unpacking as there must come a point at which reducing the investment universe has an impact on volatility even if it doesn’t have an impact on total return. An environmental charity taking oil companies out of the equations, for example, is limiting their investment universe in a big way.
POWER OF ENGAGEMENT
LT I had hoped we could move on from exclusionist policies for the charity sector. It is old fashioned to only invest in companies you feel comfortable about. The way forward, which is something that the larger charities and institutions do, is to exercise their ownership position and engage with companies like BP and the supermarkets (with regard to sale of cheap alcohol for example) as opposed to exclude and have no voice. It is as a shareholder that charity investors can then legitimately go and talk to them about concerns the fund might have about the company’s practices.
GD There is a distinction between the pension funds and large charities – pension funds do interact far more than they used to. Charities are a problem because, with the exception of a few, they don’t feel it is their place to go out and campaign to boards of companies.
"The successful social investors have been the ones who are prepared to put social investment at the heart of their investment strategy instead of the financial returns" JBT
PB This is a key point. At the Church Mission Society we went through that journey from negative screening to a more thoughtful SRI policy. We would actively engage because it fitted directly with our mission – we exercised our voting rights for example with more than one oil company working in East Africa. If you are a campaigning charity it makes sense to take an engagement approach.
JBT I would agree with that. The successful social investors have been the ones who are prepared to put social investment at the heart of their investment strategy instead of the financial returns. It is difficult for an investor to be a servant of both. It is very time consuming to push them both forward at the same pace at the same time in the absence of over-riding criteria.
MP The one that puts financial return at the heart of it complies with the law; the other most certainly does not.
JBT I think the guidance must be right because if you have a moral position that you disagree with that is not representative of your charity’s position you should go and be a trustee of another charity. That’s a personal thing. It is only when there is a corporate sense of something egregious that it all works really well. The very general charities with core trustees from a range of different backgrounds could spend years trying to work out what is an ethical policy.
PB I think it raises more subtle points. And Lucy’s point is really key. Should charities start to adopt some of that more positive engagement and ‘best in breed’ practices? There is definitely a wider movement in society – not just the voluntary sector – about climate, sustainability, good corporate governance and so on but I absolutely recognise the tensions being described and indeed the legal position about return coming first. Keeping up with public opinion is important, should charities take this into account? That’s what is interesting.
REPUTATION AND PUBLIC PERCEPTION
DM One of the things we have not yet mentioned is the impact of public perception on the big fundraising charities. This came out in our book.7 Many donors do not understand that charities make investments in the first place. For a grantmaker with large endowments, public perception is not so important but if you are a high profile charity that relies on public funding then I think you can’t avoid it.
CD Is there a damaging effect on fundraising if too much is known about how many assets a charity has available to invest?
CP I think that charities can’t afford to be behind the curve on public feeling behind these issues. Charity law is one thing and the relationship with the public is completely different. I think the response of the donating public is an accident waiting to happen around this one if the charity sector does not get it right.
SS David and Cathy make a very good point about the importance of public perception. This was actually demonstrated a few years ago with a large endowed trust, the Gates Foundation, following a large-scale newspaper investigation of allegations that their investment strategy did not support their mission.8 It is important to consider the possible impact of negative PR on fundraising where charities cannot point to the ways in which their investment policies support their charitable purposes.
CD So charities have some way to go to get their visions and values better understood?
DM Absolutely. ‘Ethical’ is a very value laden term and for every charity it is slightly different. At CFDG we can’t say invest like this or that – we have to represent all our members and there are 1700 of them. We have to encourage our members to engage more, to understand the issues, the balance of financial return, impact on brand and public understanding. There are very obvious cases where charities’ missions don’t fit with certain investments. You have got to think of income in the wider sense, you can damage your brand because the public does not understand it. And is it our job to educate the public? If you asked people on the street what ethical investment means they would almost all define it in terms of negative screening.
IT’S WHAT YOU CALL IT…
GD We are all agreed communication is a problem. Is it not just a case of separating out the consultant speak? On the one side you have financial gain and clearly the Bishop of Oxford case and legal precedents demonstrate what you can and cannot do or what you should and shouldn’t do. And therefore it’s common sense. On the other side you have social gain, which is not necessarily around financial investment but is making grants and ‘investing’ into areas that are going to help society, help community and venture capital.
JBT It can be summed up quite neatly by saying that charities are in the business of ‘losing’ money: the only questions are on what and how.
CD Is it clear? An investment is an investment and a grant is a grant and you can’t really fudge these in between?
RM You can. A grant can be a social investment.
MP It is a complete misuse of the word ‘investment’ and is the cause of much confusion. It is not the correct word to use. Let’s use a different term.
CM Progamme-related expenditure should not be called investment. That is part of the charity’s objects and that is what they are deciding to spend the money on.
RM If you spend some of your money because it relates to your charitable purpose (e.g. housing to the unfortunate of Kent) at the same time as having the prospect of getting all or some of the money back. Perhaps the word “investment” is more valid.
CM Yes but that return is simply a bi-product of programme expenditure, it is recycling money. Calling it ‘investment’ is a bit like buying your own house and telling everyone it’s an investment but in fact you bought it because you really want to live in it.
JBT I suspect the word we all really need to use is ‘resources’ and whether or not it is a medieval function of capital or revenue is neither here nor there. They are all resources that we have at our disposal we can allocate one way or other and it is up to the trustees to choose what is the best use of those resources.
PB Take a step back. A charity might have a number of financial dealings. From pure grants giving money away for charitable outcome and impact; to programmes which have charitable impact but also seek financial returns, to more clear arms length injections of capital with investment criteria still related to the cause; through to investments with positive SRI criteria, just with some negative screens; and then through to a pure investment seeking, nothing but financial, return.
VOTING
JBT Perhaps a significant issue for charities as a whole is that there is no outsourced responsible voting service. We can’t vote all the shares ourselves, a lot of managers don’t vote for us and potentially a huge amount of voting power just goes to waste.
RM For most investors, you, in appointing them, buy into the approach your fund manager is going to take when voting on behalf of all their clients and behaving as one single institutional shareholder; or you hold some direct shares as a charity and turn up to the AGM yourself. Some very large organisations have their own custodians so they can exercise their votes in relation to their concerns outside the voting activity of their fund managers.
CM I wonder how many charity trustees automatically assume their investment managers are (1) voting and (2) engaging (where many are not) – the question investors perhaps need to ask is how do you monitor your investment manager to check they are walking the walk rather than talking the talk?
GD I am going to be a bit cynical here. How many charity trustees understand investment principles enough to even consider whether or not SRI might be ‘a good thing’
SO, SHOULD CHARITIES HAVE AN SRI POLICY?
MP It’s not a legal requirement.
DM A charity should at least engage with the issues and, should it decide it does not need an SRI policy then that’s fine, as long as it lays out the arguments and says it’s had the conversation. Besides the legal part, in terms of good governance, every charity should at least have the debate and make a decision.
"The question investors perhaps need to ask is how do you monitor your investment manager to check they are walking the walk rather than talking the talk?" CM
CD How do we get them to have the debate?
MP I think it is very relevant to some and completely irrelevant to others. I am not convinced about the idea of promoting it generally. One should always ask who is promoting it and why. Is it some one with a financial interest? In whose interests is it to promote an SRI policy generally.
CP I am interested in how the charity sector as a whole promotes its ethics. This is the non- profit sector and as part of the whole governance framework today, charities will be increasingly on the line to demonstrate their credentials and I don’t think it would take much more than one or two scandals or cases to rock the sector, especially, for example, knowing the rapid viral effect which social networking can have.
MP Firstly, charities are required by law to demonstrate public benefit. Ethics in its general sense has nothing to do with this legal requirement. So, what is the public benefit associated with SRI? It is an individual thing. For one charity it will be relevant but not for another.
GW They should have a statement of investment policy so, part of the conversation that a fund manager should be having, is asking if they want to think about SRI as a component.
LT I don’t think charities by law are required to have a statement of investment principals.GW It’s in fact best practice.
MP If the charity is unincorporated it will be governed by trust law and, in relation to its investments, will be subject to the Trustee Act 2000 where there is a requirement to have a policy on investments if investment managers are appointed. If the charity is incorporated, there is no such requirement in law.
CM The Charity Commission in CC14 goes on to say that if a charity does not have a written investment policy they would find it difficult to demonstrate good practice. This is not just about charity law and guidance. Investment managers need to have a clear understanding of the goals and parameters of the charity. It would be difficult to manage their money without it and it is indeed a requirement under their FSA-regulated contracts between investment managers and their clients.
MP I do not necessarily agree with this statement.
CM That they have written it?
MP With respect to the Charity Commission, it is taking a ‘blancmange approach’ to governance and saying that it must be good for you. I’m not saying it is necessarily a bad thing; merely, that there is a distinction in law and that general rules are not necessarily applicable to all.
PB I think it gets difficult when we get onto SRI. RNID has a turnover of £50m, we are not endowed, £4.5m is actively invested and of that £2m is in equities. How much of our budget or that of our trustees’ governance budget do we want to spend on the discussion compared with all the other issues we face? I think the level of engagement with SRI will be ‘horses for courses’ depending on how important investments are in monetary terms and the nature of the cause. Every charity should go round the table and discuss their investment policy and consider SRI, but the level of active engagement is up to the individual charity.
RISK MANAGEMENT
MP Isn’t having an SRI policy really a matter of risk management? In other words a sensible approach to risk management will cover a range of issues of which SRI and its applicability to a particular charity is one.
"With respect to the Charity Commission, it is taking a 'blancmange approach' to governance and saying that it must be good for you" MP
CD If you use the risk register grid and you put investment risk against reputational risk alongside fundraising risk and grade them all then you have a balanced view.9
JBT Risk registers should be about missed opportuinities as much as catastrophe aversion. The risk here is a lot of time that is spent on looking at responsible investment or engagement can distract from generating more money to fund charitable activities, so the effort becomes lop-sided. It is much better to see it as an aspect of the investment strategy of maximisation.
RM I don’t think there could be one appropriate set of questions conferred on the sector as a whole. For a charity providing care homes, the risk to their income is more damaging to their beneficiary group than some grantmaking trusts.
CP What we are doing is putting it on the negative side. The other side of reputational risk is competitive advantage and I’ve seen very little discussion on that in the charity literature and I’ve seen it more in the corporate sector. I do think it gets charities excited when they can get that on their agenda. That would be one way in.
CONCLUSIONS
The discussions ended with round-the-table polls to the following questions:
Do we think the issue of SRI will get bigger in the charity sector or stay still?
The majority answered ‘yes’ to bigger with a small rejoinder that the knowledge will remain the same but the debate will move on.
Will people understand the issues surrounding SRI more if guidance is clearer?
The general consensus was that this had some way to go with the issues surrounding SRI set to remain ‘complicated’ but awareness of general macroeconomic issues would increase. It was hoped by some that the new CC14 guidance would provide more clarification of the ‘grey areas’ Simon identified between investment for pure financial return and expenditure for a pure social return.
1. Unlocking Socially Responsible Investment, published by CFDG in February 2010. Downloadable free from: www.cfdg.org.uk/ cfdg/files/policy/policy_cfdg_sri.pdf
2. See generally Harries v Church Commissioners for England [1993] 2 All ER 300; Cowan v Scargill [1985] Ch 270
3. CC14 Investment of Charitable Funds – basic principles. This is scheduled for revision. www.charitycommission.gov.uk/publications/ cc14.aspx
4. This landmark case is summarised on page 29 of Unlocking Socially Responsible Investment (see note 1 above)
5. Demystifying responsible investment performance, Mercer, 2007. www.mercer.com/pressrelease/ details.htm?idContent=1285815
6. See, for example, http://articles.latimes.com/ 2007/jan/07/nation/na-gatesx07/13
7. See note 1 above
8. See, for example: http://articles.latimes.com/ 2007/jan/07/nation/na-gatesx07/13
9. See Caritas Guide to Risk Management, May 2010, page 8
Author: Simon Steeden
Simon Steeden is a solicitor for charities and social enterprise at Bates, Wells and Braithwaite London LLP.
Author: Ruth Murphy
Ruth Murphy is director of charities business development at Newton
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Paul Breckell is executive director of finance at RNID and former chair of CFDG.
He is a member of the Charetered Institute of Finance and Public Accountancy (CIPFA)
Author: Moira Protani
Moira Protani joined Wilsons in September 2008, is head of the charities department and is based in the firm’s London office. She is an expert in charity law as it affects charities, trustees, donors, businesses and public sector bodies which engage with charities.
She advises on the establishment of charities, trustee powers and duties, schemes, taxation, grant-making, fundraising, mergers, disposal of land and buildings, dealing with the Charity Commission, constitutional and good governance issues.
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Lucy Tusa is a consultant at Mercer
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James Brooke Turner is finance director at the Nuffield Foundation
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Guy Davies is head of charities at Evercore Pan-Asset
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Gemma Woodward is director of investment management for charities at Newton.
Author: David Membrey
David Membrey joined CFDG in September 2003, coming from the international development charity Book Aid International where he had been deputy director.
Over his 25 years in the sector David has been extensively involved in finance, IT, project management and facilities management.
Recently he has held the role of acting chief executive at CFDG prior to the arrival of Caron Bradshaw.
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from
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Charles Mesquita is head of business development at Newton Investment Management.
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Cathy Pharoah is co-director of the ESRC Research Centre for Charitable Giving and Philanthropy (CGAP) at Cass Business School.
www.cass.city.ac.uk/philanthropy
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