Daniel Ferrell-Schweppenstedde

Policy and Public Affairs Manager

Charities Aid Foundation

Why it’s time to revisit charities and responsible investing

21 May 2021

Like many other organisations within the charity sector, CAF has just responded to the Charity Commission’s consultation on its revised guidance for charities and their trustees about adopting a responsible (or ‘ethical’) approach to investing. This comes against a backdrop of increasing demand from consumers for investments that meet social and environmental, as well as financial, criteria; and growing scrutiny by the public of the investment activities and strategies of companies and other organisations. Hence these efforts to renew guidance for charities on responsible investment could not be more timely.

A new range of concerns for charities when it comes to investing assets

The world of investments and how charities interact with it has changed over the (almost) three decades since the Bishop of Oxford case in 1992, which aimed to limit the Church of England’s investment in companies with links to South Africa. The case brought in significant changes for trustees. The ruling established that it was permissible for trustees to bring in ethical considerations for investment decisions and provided for three possible justifications: if an investment would conflict with the aims of a charity; if it might impact its work either by making beneficiaries unwilling to engage with it or by alienating beneficiaries, donors or supporters; if there would be no financial detriment.

The precedent established by the Bishop of Oxford case means that it has been possible for charities to take into account a wider range of motivations for making decisions on their financial investments. But this rests on a fairly thin basis in terms of case law, and it is not always widely understood by charity trustees. Furthermore, charity law now operates in a significantly changed context. A wider range of considerations have to be taken into account by charities (in particular around the issue of investments being in conflict with their wider mission and reputational risks) due to societal and legislative changes over recent years.

That is why it is important that the existing guidance is made clearer and put on a firmer footing. It is also important that in doing this there is an element of future-proofing, as it is clear that the regulatory (and societal) context will continue to change, so the guidance must be able to adapt and evolve  in order to ensure it can be applied by charities in  light of their emerging organisational needs and the needs of the people and communities they serve.

Market developments and long-term sustainability of investments

Part of this context is also the long-lasting impact of Covid-19, which will result in financial returns being an ongoing concern for all different types of charities and funders. Market developments will be of particular worry  for charities with endowed assets (although by no means only them), as they will be carefully considering the ability of these investments to recover. However, as a historic reference point one could look at data from US funders after the last financial crisis. After an initial drop due to market shocks, trust and foundation endowments saw long-term gains post-2008. Candid has provided data on how US funders reacted to the 2008 global financial crisis and recovered from it. Their assets grew by 58% between 2010 and 2018, and overall giving grew from $46 billion in 2010 to more than $80 billion in 2018. This represents a 76% increase, double the GDP growth rate (37%) in the same time period.

At the same time many charities with endowed assets are making different trade-offs in the current financial climate. The Association of Charitable Foundations (ACF) found in a recent survey that the vast majority of respondents are planning to maintain or increase spending on grants to civil society organisations in 2021 (86%), even though 40% are expecting a negative impact on their own finances.

This sits alongside endowed charitable organisations wanting to take into account a wider range of factors alongside financial returns. Many are increasingly looking to get more alignment between their investments and their grants, and are looking towards ESG investing to mitigate the risk of having investments (in companies and otherwise) that run contrary to their wider mission.

Perceived trade-offs between investment approaches?

An overarching question is whether the revised guidance draws too great a distinction between responsible (or ethical) investment and financial investment. Whilst the guidance is clear that trustees can adopt a responsible investment approach, the wording and structure implicates that the two are mutually exclusive and therefore present a choice or inherent trade-off between investing responsibly and getting a financial return. However, it is far from clear that this is the case.

An increasing body of evidence shows that ‘responsible’ investments can in many cases match or even outperform ‘traditional’ investments. Some larger investment funds have already adjusted their approach to reflect the fact that some areas previously considered profitable are less reliable than they were due to changing social, environmental and technological factors and that moving away from these asset classes is actually the more financially prudent thing to do in the medium- and longer term.

The long-term financial interest of their charity is a core consideration for trustees when making an investment. There may also be wider risks to consider in situations where an investment is currently seen as prudent from a financial standpoint but comes with high reputational risks that can subsequently translate into financial risk; for example for fundraising charities who may lose large parts of their donor base if donors disagree with the approach taken.

When it comes to the climate crisis, for instance, there is growing consensus across the public, private and third sectors that from both an ethical and commercial perspective concerted action is needed. Political parties are responding with a focus on net-zero policies in the UK and across the globe, which will have wide-ranging regulatory implications that will impact all sectors. Businesses are recognising shifts in consumer attitudes and growing consciousness of ‘shared values’ to maintain their mandate to operate.
Large public institutions are setting their eyes on the topic as well. The Bank of England, for example, set out an ”indicative path towards mandatory climate-related disclosures across the UK economy, aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD)” and published its own climate-related financial disclosure for the first time in June 2020. This coincides with developments in the social sector.

Impact on the community and environment

Increasing numbers of charities are taking the decision to divest from certain asset classes, which can also be a result of public and stakeholder pressure. The ACF is hosting the Funder Commitment on Climate Change which includes six commitments that charitable foundations and other funders will take on climate change.

Other legislation has evolved to reflect these changes. The 2006 Companies Act (which also applies to many charitable companies) introduced a duty on directors to take into regard the impact of the company’s operations on the community and the environment when promoting the success of the company for the benefit of its members as a whole. There are also currently changes to the Charities Statement of Recommended Practice (SORP) being discussed which might require charities to report on their investment strategy.

This makes it clear that as we look over a longer-term investment horizon and consider cross-cutting issues such as the climate, the lines between ‘responsible’ or ‘ESG’ investment approaches and basic investment prudence become ever more blurred. Many of the criteria that this guidance suggests are relevant to taking a ‘responsible investment approach’ – such as consideration of shifting public opinion on issues like the climate crisis – are arguably criteria that should simply be applied to all investment decisions.

Proportionality – not every charity asset is the same

There is a potential question as to whether the guidance could further clarify a degree of proportionality with regard to the investment duties and responsibilities of trustees. The charity sector as a whole holds significant amounts of assets, but the vast majority of charities are small with incomes below £100,000. Some charities have the capacity to track their investments in detail (either by having their own investment managers working for them or having a close relationship with a dedicated investment manager), and some may even be in a position to act as ‘activist investors’ by using shareholdings to ask questions at AGMs and campaign publicly to influence industry practices.

A charity with large assets may, for example, be in a position to investigate all of its financial relationships to ensure they meet its intended investment ambitions, and even to put pressure on providers if they fail to do so. But the vast majority of charities will not have that capacity. Even if they do have the resources to pay for external advice, they are unlikely to be able to afford advice or products highly tailored to their specific needs so they will be beholden to whatever the current standard market offering may be.

This may mean, for instance, that there is a risk of a gap between a charity’s investment aims or the expectations of its supporters and its actual investment holdings. It is important that trustees feel reassured that in such instances they will not be held unreasonably accountable for factors beyond their control; and have confidence that - as long as they have acted in the best interests of their organisation at all times and clearly documented all decisions - they will have discharged their duties and responsibilities appropriately.

What’s next?

The changes to the guidance are to be welcomed insofar as they help to give trustees the confidence to consider responsible investment approaches. But the guidance remains neutral on the question of whether, beyond being allowed to, trustees should have a duty to align their investment approach with their wider mission. And it is here that there may be an opportunity to be more ambitious, by shifting the emphasis so that responsible investment is positioned as the norm rather than the exception for charities (in line with existing charity investment trends and with trends in the broader investment market). ACF for example says in their response that “ultimately […] the central problem of the current guidance remains in the revised version proposed – a false binary between ‘responsible investment’ and ‘financial return’. [….] it risks remaining increasingly out of step with both current practice and societal expectation”.

For now trustees have more accessible guidance and are more equipped to make the choices they think are best for their charity, which is good. But the investment world is in flux, and significant changes are happening in how charities operate. At the same time societal expectations and public opinion on issues such as the climate crisis are shifting rapidly. As a result, we need to ensure that any changes we make now do not set in stone policies or approaches that risk rapidly going out of date. One thing is for certain: this is only the start of the discussion about responsible investment in the charity sector, and it is a discussion we all need to be part of.


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CAF's response to the Charity Commission consultation on charity investment

Our response to the Commission’s consultation on revised guidance for adopting a responsible (or ‘ethical’) approach to investing.

Read our response