Understanding ESG Investing for charities

Like many sectors, the investment industry loves buzzwords and acronyms, and one of the most common in recent years has been ESG. But what is ESG and what does it mean for charities? This article aims to help you understand the importance of ESG for your charity, and the essential things to know when you are considering your charity’s investment strategy. 

What is ESG?

ESG stands for Environmental, Social and Governance. In simple terms, it captures a range of issues that investors may consider alongside more traditional financial analysis, such as profit and loss, dividend policies, cashflow and market share. For example, a company or investment you are considering may score well on its finances alone but, with ESG thinking, you also need to understand how their profits are made and the impact that the business and its products and services have on the world we live in.

Why ESG matters to charities

ESG investing offers an excellent opportunity to align your charity’s financial goals with your mission-driven values.  Donors and stakeholders also increasingly expect you to invest responsibly.      

Building reputation and donor trust

Another reason that ESG matters to companies is legislation. Governments are increasingly choosing to regulate against poor practices through fines, sanctions or other actions. 

ESG is about how an organisation goes about its business, an approach often also described as Sustainable or Responsible. This is different to other terms you hear like Ethical, Impact or Climate Change. ESG considerations will be present in investments with these names, but there is often a more specific target outcome associated with them, for example, investing to achieve a social aim or to create and deliver specific types of renewable energy.

Donors are also increasingly looking for charities to show the ways in which they manage and assess the impact of their activities on the communities they serve and beyond. 

The vast amount of information available means that people can be more selective when choosing where to spend their money, and poor or questionable practices are quickly made public. Organisations that demonstrate good ESG credentials are more likely to attract positive reviews and loyal support.

Managing risk and compliance

Another reason that ESG matters to companies is legislation. Governments are increasingly choosing to regulate against poor practices through fines, sanctions or other actions. Organisations across sectors that fail to meet these standards risk negative publicity and the actions taken against them could severely impact their ability to operate. This obviously will affect financial performance too. The United Nations has published its 17 Sustainable Development Goals, and member governments are looking to this framework when developing their policies and regulations.

How to prepare for ESG investments

1. Run your own checks

You can do your own research. Companies are increasingly likely to provide information in their report and accounts, or on their websites about these matters. When reviewing materials and other information, consider asking yourself the following questions:

• Environmental: Do company activities have the potential to damage the environment and if so, what steps does it take to stop, minimise or offset this damage? Climate change is one of many examples

• Social: What impact does company activity have on society, not just directly but also within its supply chains? Examples might include having sweatshops in developing nations or the impact of open cast mining on indigenous populations.

• Governance: Is the company well run, with fair and open practices and a healthy relationship with stakeholders, regulators and competitors? You may want to know that executive pay is reasonable, and employees are well treated, among other measures.

ESG-rating agencies, such as MSCI (which is used by the IFSL CAF ESG Funds), score companies based on pre-determined criteria. To increase investor confidence in these agencies, the UK Financial Conduct Authority (FCA) has announced that they will be included in its regulatory scope in the future.

2. Consider working with an investment manager

If you have the resources, your charity could choose to work with a fund or investment manager. Managers can help you conduct your checks, as well as design and manage an investment portfolio for you, where you can specify exactly what criteria and scoring you want them to use. 

If you are investing in funds, you will need to understand the approach adopted by the fund. For all funds that claim to be sustainable, review their Sustainability Disclosure Document. Recent FCA regulations require firms to clearly explain their approach to ESG in no more than two pages.

Getting started

ESG investing may seem complex, but it could be a rewarding process that allows charities to align their investments with their mission and vision. This article offers a brief overview of a complex subject. If you would like further support to incorporate ESG in your charity or not for profit’s investment strategy, our team at CAF is here to help. Please visit our Investment Knowledge Centre or contact our Charities team.