CAF Investment Account

IS IT TIME FOR YOUR CHARITY TO INVEST ETHICALLY?

More charities are choosing to hold investments with the potential to maximise returns and protect their values at the same time. But when it comes to ethical investing, it's important to look at the bigger picture.

WHAT SHOULD TRUSTEES CONSIDER?

Trustees have a duty to maximise financial returns on behalf of their beneficiaries, as long as their investments don’t harm those they aim to help. And with growing evidence that ethical funds can match or outperform mainstream funds in the long term, a number of charities are reviewing where they place their money.

To safeguard their reputation, charity trustees should weigh up whether their investment policy matches their mission and whether an ethical fund could match their donors' expectations.

DEFINE 'ETHICAL'

'Ethical' means different things to different people. What's more, the link between investment and mission may be very clear cut for some charities, but less so for others. Bear in mind that:

  • No ethical investment by a charity should have a negative effect on its charitable aim or beneficiaries.
  • No ethical investment should simply be a reflection of the personal preferences of the trustee.
  • An unconstrained fund - which has the freedom to invest in any asset class or geographic region - could have higher return potential than an ethical fund.

CREATE AN ETHICAL INVESTMENT POLICY

Once trustees have agreed on the charity's definition of an ethical fund, it’s important to write it down in an ethical investment policy. For smaller charities, you might want to consider whether to:

  • Manage your investments yourself or find an investment manager to do it for you.
  • Choose a dedicated ethical fund that better fits your investment criteria.
  • Include a positive screening approach (actively investing in stocks that fit well with your charity's goals) or a negative screening approach (actively avoiding stocks that go against your charity's aims)

THE IMPACT OF RESTRICTIONS

Automatically excluding all "unethical" stocks from your investment portfolio seems like a win-win situation. But it can also have some unexpected consequences. For example:

  • Sticking to stocks in one particular index (like the FTSE 100, which is made up of the 100 biggest stocks listed on the London Stock Exchange) could backfire if the index as a whole performs worse than expected - especially compared to other indexes such as the FTSE 250 or the MSCI World.
  • Government bonds have acted as a "safe haven" in the past, but currently offer investors little return. In contrast, other types of debt (like corporate bonds) that are seen as better quality because they carry less risk of not being repaid, could offer better diversification.
  • Splitting your portfolio 40:60 between fixed income and equities worked well in the 1980s, but doesn't work so well in today's investment environment.
  • Restricting the scope of your investment managers could hold back returns and increase risk.

DO YOUR RESEARCH

With a choice of ethical funds on offer, it's important to:

  • understand how the fund may behave compared to non-ethical funds
  • think about screening your investments to avoid exposure to stocks that conflict with your charity's principles, such as arms or tobacco
  • consider compromising to find the best match between your charity's needs and its fund of choice, as building a bespoke tailored portfolio can be expensive

THINK ABOUT PERFORMANCE

It's well worth thinking about the impact of ethical investment on performance. Remember that:

  • Ethical portfolios can be distorted by the "small companies effect" - the theory that smaller firms can outperform larger ones because they have access to more growth opportunities.
  • Ethical funds can match mainstream investment funds, especially over the long term.

OUR ETHICAL FUNDS

The CAF Socially Responsible Portfolio, managed by F&C Investments, allows charities to invest in a choice of four funds, each screened for charities seeking to invest in companies that make a positive contribution to society. Call us on 03000 123 444 to find out more.

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Important information

The value of investments may fall as well as rise. You may not get back the full amount that you originally invested.

Past performance is not a guide to future performance.

There is no guarantee about the level of capital gains or income that will be generated.

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Regulatory information

Disclaimer

The CAF Investment Account is offered to you by CAF Financial Solutions Limited (CFSL) and is operated and supplied by Interactive Investor Trading Limited. Interactive Investor Trading Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: Standon House, 21 Mansell Street, London E1 8AA.

CAF Financial Solutions Limited (CFSL) is authorised and regulated by the Financial Conduct Authority. Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA. CFSL is a subsidiary of Charities Aid Foundation (registered charity number 268369).


Charities Aid Foundation © 2016 | Registered Charity Number 268369
25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA Telephone: 03000 123 000
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