What can an investment adviser do for a charity?

Estimated reading time: 4 minutes

The role of an investment adviser in the charity sector can be easily misunderstood or not fully appreciated. You might expect that sort of comment from an investment consultant but, having spent several years as the head of investments at one of the UK’s largest charities, I understand how an investment consultant can support charities not only in their investment, but in their wider financial objectives. 

By way of illustration, consider one of the hot topics in the investment world – environmental, social and governance (ESG) factors – and how these may or should affect a charity when drawing up its investment strategy. 

ESG investing is driven by the desire to improve investment returns and manage risk by understanding the key factors that influence the long-term sustainability of a company. It is not about socially responsible investing or the exclusion of stocks, such as tobacco companies, on ethical grounds; it is about ensuring that decision making by the charity’s investment managers takes into account the risks and opportunities presented by ESG factors.

The important point is that both the investment adviser and the charity should start by developing a clear understanding of the latter’s aims, a consensus on the definition or meaning of the processes available to the charity in realising those aims, and a shared understanding of the steps necessary to implement these processes. 

"Deciding investment strategies and mitigating reputational risk must be put above virtue signalling, and the calculations are complex"

Investment advisers can help bypass bias

Setting and executing an investment strategy must be a hard-headed exercise in rationality – as far removed from emotion or bias as possible. The ultimate objectives for the charity should be the maximisation of investment returns and the minimisation of risk. The temptation to indulge in virtue signalling or to accept a reduction in financial returns as a quid pro quo for a supposedly higher moral standing is (for most charities – there are exceptions, such as medical charities that screen out tobacco stocks) dangerous and should be avoided. 

Recent press reports on the fossil fuel divestment campaign and its apparently growing popularity among institutional investors are relevant here. According to campaigning group Fossil Free at the end of 2018, “over 1,000 investment institutions with almost US$8tn in assets under management had committed to divest from the world’s largest oil, coal and gas companies”.

The direction of travel on moving to a lower carbon world is clear, although a cynic might observe that a commitment to divest is not the same as actually selling out of holdings in oil, coal and gas companies. This topic can arouse strong feelings among proponents and opponents of fossil fuel divestment, so charities and their investment advisers need to tread carefully, as reputational risk is a key consideration. A large conservation charity made headlines recently by announcing that it would remove fossil fuel investments from its portfolio by 2022, citing the “insufficient progress” made by energy companies in investment in green alternatives.

"The ultimate objectives for the charity should be the maximisation of investment returns and the minimisation of risk."

However, debate is growing over whether divestment is the best way for investors to engage major energy companies to change their behaviour in preparation for a move to lower-carbon fuels. Demand for oil and gas globally remains strong. Such holdings give concerned investors the opportunity to influence management; in addition, once divestment has taken place, there is no guarantee that the shares will not be bought by other parties that may be less concerned about climate change.

Some charities may take the view that the potential reduction in investment returns caused by divesting from fossil fuels is a price worth paying when it comes to climate risk mitigation. They may even argue that, ultimately, to invest in such companies is too great a financial risk (the “stranded assets” theory), although it seems likely that the transition to a lower carbon world will continue for several years.

Does your charity need an investment adviser?

The calculation is a complex one, and each charity must weigh the arguments in the light of its own particular circumstances and objectives. A detached, neutral investment adviser can help by providing an independent and unbiased view, based on rigorous analysis of the options available and a careful assessment of the likely impact of the chosen strategy on portfolio returns. Ultimately, though, the trustees themselves must consider the consequences for their charity’s reputation amongst the public at large.

A version of this article, entitled 'Get the balance right on returns and reputation', was originally published on the Civil Society website. 

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