Rhodri Davies, Programme Leader, Giving Thought

Rhodri Davies

Head of Policy

Charities Aid Foundation

The role of giving


11 December 2013

BBC Panorama this week took aim at charities in an episode entitled “All in a Good Cause”. There had been quite a bit of controversy in the run up to the programme being aired, as one of its targets was Comic Relief, the charity with which the BBC has a longstanding funding relationship. Despite this, the programme was eventually shown, and proved to be somewhat less explosive than feared.

There were some valid criticisms raised, and also some sloppy insinuations of wrongdoing that didn’t really bear much inspection. For instance the mention of the fact that all of the money raised on Red Nose Day each year does not immediately go out of the door, but is instead given out in grants over subsequent years, which was painted as Comic Relief “hoarding” the money. This is such a fatuous misrepresentation of the way charities work in the real world that I’m not even going to bother engaging with it.

The most interesting aspect of the documentary, and the one that I want to focus on here, is the criticism that was levelled at Comic Relief because it was found to have investments in companies whose lines of business would seem incompatible with the charity’s own aims, such as arms manufacturers and tobacco companies. This caused a media backlash from commentators, celebrities and the public, and has brought to light a major issue that has been vexing charities for years. The question is whether they are under an obligation to maximise financial returns on investments in order to further their own charitable activities, or whether their charitable status should oblige them to invest along ethical principles even if that means a reduced financial return.


When we say that such-and-such is an “ethical” investment, whose definition of ethical are we using? Surely what counts as ethical is largely in the eye of the beholder? On the assumption that none of the companies in which underlying investments are being made are actually operating illegally, we are therefore making a distinction between companies that are deemed “OK” according to our world-view and those who are not. But there is a hidden distinction here too: is it the company’s line of business that offends us, or the way it operates? There might be renewable technology companies that employ cleaning staff on sub minimum-wage zero hour contracts, and conversely there might be tobacco companies who treat their staff wonderfully. Are one or other, both or neither to meet our criteria?

If we assume that both line of business and method of operation are relevant criteria, what does this mean in terms of where we draw our line? It would obviously be fiendishly difficult to apply both of these criteria in practice, particularly if the investments are in funds that contain a range of equities or even in funds of funds, where the underlying investments are even harder to determine.

Even if one decided to invest solely in “ethical” investment funds in order to get some sort of reassurance, a quick glance at these funds reveals that there would still be many outstanding questions. Almost all of them have a significant allocation of financial services shares, and apart from justifiable concerns about the way in which many financial services firms have operated in recent years, one could also ask what these investee firms are doing with their own investments. Does this also have to be taken into consideration?

This is not a problem particular to charities of course- it is one that faces anyone who wants to invest their pension ethically, and struggles to work out the best way in which to square their financial requirements with their personal values. The additional challenge that charities face is that they open themselves up to potential criticism if future scrutiny leads to media stories of the “charity X has investments in company Y” kind.

This is something that the Church of England learned to its cost recently when it was found, following the Archbishop of Canterbury’s criticisms of the payday loan company Wonga, that the Church actually had money in an investment fund that had invested in Wonga.


There is a philosophical question at stake for charities and their trustees: should their sole focus be on their core mission, or do they have a more general responsibility to minimise harm and maximise good? And there are practical implications of this question- if the former is true then it would seem to dictate maximising financial return in order to further the charity’s core mission. This is an approach that many charities currently take.

CAF offers investment services for charities, some of which are ethical funds and some of which are mainstream investment funds, because our mission obliges us to meet the needs of charities and help them make the best use possible of the money they have. For some that means ethical investing, and for others it means investing for maximum financial return.

What is not true,  but which has been implied by some commentators following the Panorama programme, is that charity law or regulation somehow prevents charities from investing ethically because they are required to maximise financial returns and thus have their hands tied. This mistaken belief gets to the heart of the issue, which is that there is a lot of confusion and lack of clarity about what trustees can and can’t do when it comes to making investments. 

There is detailed guidance, in the shape of the Charity Commission’s Charities and Investment Matters A Guide for Trustees (CC14), which spells out the rules surrounding ethical investment and has even been updated to incorporate active social investment (of which more another time…). Having been quite involved in the detailed consultation on this update, I have been interested to see that the level of understanding of the guidance still seems quite low. This has also been noted by others in the sector.

The key principles guiding the Commission’s approach to ethical investment were established in a seminal 1991 court case (Bishop of Oxford and others –v- Church Commissioners for England 1991), in which the Bishop of Oxford took the body responsible for investing the Church of England’s assets to court, arguing that they had inappropriately prioritised financial returns over ethical considerations. This resulted in the identification of a number of grounds on which making ethical investments could be justified for a charitable organisation.

The crucial thing to bear in mind is that it is not the role of Trustees to apply their personal values or make moral judgements about what constitutes an appropriate investment. The only grounds allowable in law are practical, and linked to the organisation’s stated charitable purpose (which makes sense when you think about it, as the decision is about what to do with the money that the charity as an organisation has raised on the basis of that being its purpose).

These grounds are: • a particular investment conflicts with the aims of the charity; or • the charity might lose supporters or beneficiaries if it does not invest ethically; or • there is no significant financial detriment.

We should note that these conditions are stated as “or” conditions, which suggests that trustees need only produce an argument to show that one of them is met in order to justify an ethical investment approach.

It is interesting that ethical investments can be made on the grounds that “there is no significant financial detriment”. This suggests that there is actually pretty much full freedom to adopt an ethical approach if trustees can successfully argue that it would not result in a financial loss. Since there is quite a lot of evidence to suggest that ethical funds are now beginning to match or even outperform commercial funds, it may well become far easier for charities to justify taking an ethical approach.

What the Panorama furore has brought to light is that charities have not really taken the second condition into account. Whilst many may have tangled with the internal issue of whether an investment is in line with their charitable mission, they do not seem to have given as much thought to the external question of how it will look to their supporters and donors and what effect that will have on fundraising.

It is obvious from the reaction to the revelations about Comic Relief that there would have been a pretty strong argument for screening out some of their investments on the grounds that they would produce exactly the sort of controversy that they have produced. There would similarly seem to be a good argument for many other charities considering whether an ethical investing approach would be in their best interests with regard to the views of their stakeholders.

Of course, hindsight is always 20:20, so the challenge is to find evidential grounds for arguing before the event that a particular investment would have a negative impact on supporters or beneficiaries. Greater understanding of the views of charitable donors and the wider public on how charities invest their money would be useful here.