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1 UNLOCKING SOCIALLY RESPONSIBLE IN VESTMENT UNLOCKING SOCIALLY RESPONSIBLE INVESTMENT UNLOCKING SOCIALLY RESPONSIBLE INVESTMENT UNL OCKING SOCIALLY RESPONSIBLE INVESTMEN RESPONSIBLE INVESTMENT UNLOCKING SOCIAL ENT UNLOCKING SOCIALLY RESPONSIBLE INVEST STMENT SOCIALLY RESPONSI OCIALL PONSIBUNLOCKING SC IALLY RESPONSIBLE INVESTME UNLOC STMENT UNLOCKING SOCIALLY RESPONSIBLE INV INVESTMENT UNLOCKING SOCIALLY RESPONSIBL SOCIALLY RESPONSIBLE INVESTMENT UNLOCKI BLE INVEST MENT UNLOCKING SOCIALL RESP ONSIBLE VESTMENT UNLOCKIN S CIALLY ALLY RESPONSIBLE INVESTMENT UNLO CKING SOCIALLY RESPONSIBLE LLLY RESPONSIBLE INVESTME SOCIALLY RESPONSIBLE INVETM MENT UNLOCKING SOCIALLY R ESPONSIBLE INVESTMENT UNLO CKING SOCIALLY RESPONSIBLE INV ESTMENT UNLOCKING SOCIALLY RE SPONSIBLE INVESTMENT UNLOCKING SOCIALLY RESPONSIBLE INVESTMENT U NLOCKING SOCIALLY RESPONSIBLE INV ESTMENT UNLOCKING SOCIALLY ON SIBLERESPONSIBLE INVESTMENT UNLOCKING SOCI ALL RESP ONSIBLE INVESTMENT UNLOCKING SOC ALLY RESPONSIBLE INVESTMENT UNLOCKING S OCIALLY RESPONSIBLE INVESTMENT UNLOCKING INVESTMENT UNLOCKING SOCIALLY RESPONSIBLE SOCIALLY RESPONSIBLE INVESTMENT UNLOCKING S RESPONSIBLE INVESTMENT UNLOCKING SOCIALLY RE CIALLY RESPONSIBLE INVESTMENT UNLOCKING SOCIA SOCIALLY ESPONS IBLE UNLO CKING SO SPONSIBLE INVESTMENT UNLOCKING SOCIAL LY RESPON BLE INVESTMENT UNLOCKING SOCIALLY RESPONSIBLE INVES TMENT UNLOCKING SOCIALLY RESPONSIBLE INVESTMENT UNL Sponsored by Edited by Kate Hand A CFDG Good Practice Publication

2 Published by Charity Finance Directors Group 3rd Floor, Downstream Building 1 London Bridge London SE1 9BG The Charity Finance Directors Group is a registered charity, number It is also a company Limited by Guarantee, number March 2010 Charity Finance Directors Group. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Application for permission for other use of copyright materials, including permission to reproduce extracts in other published works, shall be made to the Charity Finance Directors Group. Full acknowledgment of the author and source must be given. Every effort has been made to ensure the accuracy of the information contained within this publication. However, the Charity Finance Directors Group cannot be held responsible for any action an individual or organisation takes, or fails to take, as a result of this information. Price: 15 Printed by: Beacon Press Design by: Ingenious ISBN:

3 The Charity Finance Directors Group The Charity Finance Directors Group (CFDG) is an umbrella charity that promotes improved standards and public understanding of management in charities. We specialise in helping charities to manage their accounting, taxation, audit and other finance-related functions. Today our 1,620 members manage around 17.4 billion of charity income. We are very grateful to the members of the working group for Unlocking Socially Responsible Investment, who have lent their considerable time and expertise to its development: Ruth Murphy and Gemma Woodward of Newton Investment Management Ltd; Sam Collin and Stephen Hine from the EIRIS Foundation; and Julian Blake and Simon Steeden from Bates Wells Braithwaite solicitors. In particular, we would like to thank Newton Investment Management Ltd for sponsoring the publication. Newton Investment Management Ltd manages over 42.1 billion* on behalf of charities, institutions and individuals. Charity investment services include a segregated portfolio management service and a balanced charity common investment fund, the Global Growth & Income Fund for Charities. More than half the charitable assets are governed by charity-specific SRI and ethical policies and the team provides bespoke screening and policy guidance to clients. *as at The EIRIS Foundation is a charity that supports and encourages responsible investment. It promotes research into the social and ethical aspects of companies and provides other charities with information and advice to enable them to choose investments which do not conflict with their objectives. Its wholly owned subsidiary, EIRIS, is a leading global provider of independent research into the environmental, social, and governance (ESG), and ethical performance of companies. Bates Wells & Braithwaite London LLP (BWB) is a full service commercial law firm, based in the City of London, serving a wide range of commercial, statutory, charity and social enterprise clients and their owners and managers. BWB is widely regarded as the leading charity, social enterprise and not-for-profit law firm in the country and is recognised as such by the leading guides to the legal profession, Chambers UK and the Legal

4 Forewords I first became involved in the issue of socially responsible investment through one particular, crucial concern the struggle against apartheid in South Africa. It seemed to some of us that the most effective way to bring about change was to bring financial pressure on the South African government. One aspect of this was to persuade banks not to reschedule their loans and another was to persuade large international companies not to invest in South Africa, and with a view to that end, to persuade investors to disinvest from companies that remained there. Thus it was that the General Synod called time and again for the Church Commissioners to disinvest from companies operating in South Africa. They replied that they had done this to some extent, but in order to keep a balanced portfolio, and hence maximize their financial return, they had to retain some holdings. They had, they argued, a prime fiduciary duty to raise as much money as possible to pay clergy pensions and salaries. A small group of Christians who had long campaigned on this issue, generously backed by Andrew Phillips and his legal firm, decided to challenge the position of the Church Commissioners in the courts and I agreed to be the front man. The case was heard before Sir Donald Nicholls in October We did not get the declaration we wanted, namely that the prime duty of the Church Commissioners was to invest according to the principles of the Christian faith. However, in making his judgement Sir Donald conceded that ethical considerations can legally be taken into account, even when, in some carefully defined circumstances, this meant receiving less than the maximum return. A full account of this campaign and the judgement that ensued is rightly called The success of failure. 1 This court case chimed in with a growing interest in ethical investment, now better known as socially responsible investment, and suddenly it seemed an idea whose time had come. Since then the idea has become more and more widely accepted. Many more charitable, institutional and individual investors are looking at investment not just to ensure a fair financial return but in a socially responsible way. In my experience there is still a great deal of misunderstanding about this dimension of investment. Some people have an over simple idea of what is involved and dismiss it without proper consideration. Even those who do accept the idea do not always understand that most investment decisions are not clear cut, and judgements have to be made between competing claims. I very much hope that this timely publication will help to dispel some of the myths and give those who wish to invest in a socially responsible way some confidence and guidance in what they are doing. Rt Revd Lord Harries of Pentregarth 1 John S. Peart-Binns, A Heart in My Head: A biography of Richard Harries (Continuum, 2007), chapter CFDG

5 F I congratulate the distinguished partnership which has created this timely report. A rabidly materialist individualism, encouraged by an amoral capitalism, has been bankrupting Society s values as inexorably as it has the City s. And that broader crisis will not be susceptible to a money bailout, which anyhow will not last without an ethical reformation in the financial markets. Regulation alone cannot restore sustainability, as Lord Turner of the FSA implied when he bravely said that much current speculation serves no social purpose. So this is a report for the hour. It should prove invaluable for trustees of all types of trust private as well as charitable in navigating their way to investment policies and decisions which serve both the trust s purposes and its finances. When the Bishop of Oxford (as Richard Harries then was) bravely walked the talk by suing himself (for he was then a Church Commissioner) at the instigation of CEIG (Christian Ethical Investment Group) he lost the battle but won the war. The Judgment, crucially, made clear that the law allows indeed requires investment policy to serve the charity s purposes first and last, even where there is financial detriment in so doing (though that will be very rare.) That is no licence for trustees taking off on a moral/political frolic of their own, but mandates commonsense by preventing a charity using its assets hypocritically vis à vis its purposes. There are still tricky legal areas, such as investments which deliver social as well as financial returns, and where the trustees need to be very clear-headed about the balance and the alternatives. But, happily, the Harries judgment means that sensible trustees acting sensibly won t go far wrong. And if they read this report, they won t err at all! Lord Phillips of Sudbury OBE 3

6 Contents Working Group 1 F Forewords 2 Contents 4 Summary 7 1. Introduction 8 What is socially responsible investment? The development of socially responsible investment Charity investments 2. Why is socially responsible investment relevant to charities? 12 Supporting charitable missions Safeguarding your reputation The long-term view Consistent engagement 3. Types of socially responsible investment 16 Screening Positive screening Negative screening How investment managers implement charities policies Segregated portfolio or pooled fund? Engagement Engaging via investment managers Engaging directly o Collaboration o Voting o Campaigning and political issues Integration 4. Existing guidance and law 28 The general powers and duties of trustees Powers of investment Socially responsible investment The Bishop of Oxford case The general rule Exceptions to the rule o Investments which conflict with the objects of the charity o Investments which undermine the reputation, work or supporter base of the charity o Investment policies established by the charity s constitution Charity Commission guidance Socially responsible investment with a minimal effect on financial return Social or programme-related investment Form and disclosure of the charity s investment policy Application of the guidelines 5. Unlocking the barriers 36 Returns Legality Lack of staff resources 4 CFDG

7 Complexity Other concerns Defining socially responsible investment for your charity Cash and short-term investments 6. Generating and implementing a socially responsible investment policy 42 Step 1: Do your research Step 2: Get it on the agenda Step 3: Do you need to take action? Step 4: Develop, expand or update your socially responsible investment policy Step 5: Implement your socially responsible investment policy Selecting funds and investment managers The selection process For segregated portfolios o Clarify your needs o Can your existing investment manager meet your socially responsible investment needs? o Identify potential investment managers o Develop a shortlist o Meet the investment managers o Select an investment manager o Review your investment manager For pooled funds o Can your existing investment manager meet your socially responsible investment needs? o Identify and research pooled funds with socially responsible investment criteria o Question fund providers o Select a fund or funds o Review investments Step 6: Report and review Conclusion 51 Appendices 52 A. Glossary B. Reference Section C. Case studies 1. Save the Children UK: implementing socially responsible investment p Tudor Trust: positive investment p Church of England s Ethical Investment Advisory Group: engaging with the food industry p Central Finance Board of the Methodist Church: ethics matters p Joseph Rowntree Charitable Foundation: active stewardship p BMS World Mission: ethical investment in partnership p Central Finance Board of the Methodist Church: considering the welfare of children p ActionAid: consistent investment p.48 D. Graphs Graph 1: History of socially resposible investment funds, p.10 Graph 2: Drivers for socially responsible investment, p.14 Graph 3: Issues considered through negative screening, p.19 Graph 4: Issues considered through positive screening, p.20 Graph 5: Barriers to socially responsible investment, p.37 E. The working group F. Investment training 5

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9 Summary Unlocking Socially Responsible Investment seeks to support socially responsible investment (SRI) amongst charities by demonstrating the advantages, challenging perceived barriers and providing practical insights and guidance. We believe that SRI is a positive, forward-looking strategy for charity investment, and one that can reap significant missionrelated, reputational and even financial benefits. We start by setting out the current state of SRI and its relevance to charities. In subsequent chapters we guide readers through the types of investment available, the legal environment and how to put SRI into practice. Our Introduction gives a definition of SRI, traces its development into today s multi-billion pound market and looks at the involvement of charities. In our second chapter we ask, Why is SRI relevant to charities? We answer that question by showing that SRI: can provide a robust investment strategy that supports charitable missions; helps charities to safeguard their reputation, by aligning their investments with their mission; promotes long-term, sustainable investments; and helps to align charities investments with their other corporate relationships. S Key findings from the survey: 46% of respondents had an ethical investment policy (60% of charities with investments over 1million, and 25% of charities with investments of under 1million). 32% of charities that do not currently invest ethically are planning to discuss the issue in Of those investing ethically, 88% use negative screens, 25% use positive screens, 19% engage with companies via their fund managers and 9% vote shares on ethical issues. Key barriers to ethical investment were concerns that it would lead to lower returns (40%), concerns over legality (28%), lack of staff resources (25%), and perceived complexity (24%). The drive for ethical investment comes mainly from trustees (75%), followed by finance directors (45%), chief executives (30%) and supporters (30%). Moving on, we examine Types of socially responsible investment. These fall under the headings of positive screening, negative screening, and direct and indirect engagement with companies. Until recently the choices for SRI the ethical fund market have been limited, but the rapid growth of the SRI market means that wellcrafted policies can now meet charities financial aims, showing comparable or better returns than a policy that looks only at financial maximisation. Concern over the legality of SRI has been cited as a barrier in the past. However, our chapter, Existing guidance and Law demonstrates that trustees are not obliged to seek financial return at the expense of every other consideration, and in many cases they will be able to adopt SRI policies. In the next chapter, Unlocking the barriers, we explicitly deconstruct the supposed barriers to SRI, from financial and legal issues, to complexity, lack of staff resources, the availability of funds and how to define SRI for your charity. Finally, Generating and implementing a socially responsible investment policy shows charities how to put SRI into practice, outlining the process for adopting and implementing a SRI policy in your charity. Throughout Unlocking Socially Responsible Investment we have illustrated the issues with case studies, and with the results of the CFDG/ EIRIS Foundation, Barriers to Ethical Investment. This survey of CFDG members, undertaken in early 2009 with 164 respondents, aimed to identify the current understanding and take-up of SRI amongst charities. 7

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11 The development of socially responsible investment The roots of SRI can be traced back to the actions of religious movements in the nineteenth century. At the beginning of the 1900s the Methodist Church began investing in the stock market, consciously avoiding companies involved in alcohol and gambling. As the twentieth century progressed, more churches, charities and individuals started to consider ethical issues when making investment decisions. In 1971 the first ethical fund was established, a US fund which avoided investment in companies associated with the Vietnam War. The apartheid regime in South Africa accelerated the promotion of ethical investment in the 1980s. In 1983 EIRIS was established by a group of churches and charities as the UK s first independent research service for ethical investors. A year later the UK s first ethically screened unit trust was launched by Friends Provident. Since then, growth in SRI has been exponential. CFDG/ EIRIS Foundation survey: Barriers to ethical investment The CFDG/ EIRIS Foundation survey, entitled Barriers to ethical investment, was undertaken in March CFDG members took part in the internet survey, which aimed to ascertain the prevalence of SRI amongst charities, the barriers they had encountered, and, if they did not already invest ethically, what resources or information would persuade them to consider doing so. In 1989 a total of 199million (m) was invested, by all sectors, in UK ethical funds; this increased to 2.4billion (bn) by 1999 and reached 8.9bn in By the end of 2008 there were almost 750,000 investors in UK ethical funds. 9

12 Graph 1: History of socially responsible investment funds Pooled SRI funds ( m) (source: EIRIS) Looking at total funds, including institutional investments, the growth in SRI has been significant. By the end of 2007 the total SRI assets under management across Europe reached 2.67trillion (tr), representing as much as 17.5% of Europe s asset management industry. 2 At the same time, $2.71tr was invested in the United States in SRI strategies, equivalent to one in every nine professionally invested dollars. 3 This growth has been driven not just by ethically minded organisations and individuals, but by a growing recognition that the way a company manages social and environmental issues and risks may affect its financial value and future sustainability. Initiatives such as the United Nations Principles for Responsible Investment (UN PRI) demonstrate an increased acceptance that environmental, social and governance (ESG) factors may have a financial impact on investments. The UN PRI encourages investors to integrate ESG factors into investment and become active shareholders. It is one of the largest ever institutional investment coalitions, comprising over 470 asset owners and managers representing assets of $18tr. 2 European SRI Study 2008 (Eurosif, 2008), _2008_global_ Report on Socially Responsible Investing Trends in the United States (US Social Investment Forum, 2008), 10 CFDG

13 Charity investments The interest in SRI from the charity sector is also growing. A 2003 survey showed 40% of large charities had an ethical investment policy. 4 This compares to a 2005 survey which found 55% of large charities had policies (where large charities were defined as those with over 5m in investments). 5 The CFDG/ EIRIS Foundation survey, Barriers to ethical investment found that 60% of charities with investments over 1m now have an ethical investment policy. According to a 2008 fund management survey by Charity Finance magazine, 36% of UK charity funds were then managed ethically and over 51,000 charities invested in common investment funds with ethical screens. 6 Chapter summary SRI is that which takes social, environmental, ethical or governance issues into consideration in the investment decision. SRI allows charities to invest in alignment with their mission. As such, there is no one-size-fits all model, but there are standard approaches (which are detailed in later chapters). SRI may be traced back to charitable work in the nineteenth century, and today there are 750,000 investors in UK ethical funds. In 2007 there were 2.67tr of SRI assets under management in Europe, and $2.71tr of SRI assets under management in the United States. 60% of charities with investments over 1m now have an ethical investment policy 7. In 2008, 36% of UK charity funds were managed ethically and over 51,000 charities invested in common investment funds with ethical screens. 6 4 Green, D., Do UK Charities Invest Responsibly? A survey of current practice, (Just Pensions, CAF and EIRIS, 2003). 5 Kreander, N. Beattie, V. and McPhail, K., UK Charity Ethical Investment: Policy, Practice and Disclosure (ACCA, 2006) Charity Fund Management Survey (Charity Finance 2008). 7 CFDG/ EIRIS Foundation survey March

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15 Safeguarding your reputation Charities rely on public trust and confidence in order to carry out their work and serve their beneficiaries. That trust and confidence is very largely based on charities' reputations, and in order to retain them charities need to be, and be seen to be, independent, effective and committed. They are also expected to hold and to demonstrate high ethical standards. A 2008 EIRIS Foundation survey found that 91% of the general public believes that charities should invest ethically. 9 Supporting charitable missions Charities investments generate financial return for the charity itself, but they also support the organisations in which the money is invested. If those organisations are carrying out activities related to a charity s objects then there is an indirect, but potentially significant, relationship to the charity s achievement of its mission. SRI promotes a holistic view of a charity s aims, assets and activities to ensure that they are aligned, and working most efficiently in service of the charity s beneficiaries. The three broad categories of SRI provide three methods of supporting charitable missions. They can be applied separately or in combination. Firstly, negative screening excludes companies with activities or products in which charities do not want to invest, such as alcohol and arms manufacture. This allows charities not to support activities contrary to their mission, and not to undermine or contradict other areas of their work. For many charities this will continue to be the major element of their SRI policy. Secondly, charities may proactively support their mission through investing in companies and funds that further their charitable mission, such as fair trading initiatives, technological solutions to climate change or community microfinance initiatives. This is known as positive screening. Charities may also adopt a best-in-class approach, by identifying the companies with the best performance in a particular sector. Thirdly, charities can further their mission through active engagement with the companies that they invest in, either through voting on companies policies or engaging with companies directly on issues that concern them. Many charities undertake such engagement through the activities of their investment manager(s). As public understanding of investment grows, the social and environmental effects are also becoming better understood. These interactions are complex and may entail both positive and negative non-financial outcomes; either way, charities need to understand the impacts of their investments in order to safeguard their reputations, both internally and externally. The long-term view By and large, charities invest for the long term, because they seek to protect both current and future beneficiaries. It is widely accepted that environmental and social pressures are likely to become increasingly acute, and that the demand for charities support will therefore be likely to grow. This will in turn put greater pressure on charities resources and require greater funding. Where such monies are invested will also become more important, not least because environmental and social pressures will most likely affect financial returns. Long-term investment therefore becomes essential as it focuses on achieving sustainable, long-term returns to meet charities financial needs. Indeed, companies that are more aware of their environmental, social and governance (ESG) risks are likely to be more progressive and sustainable in the long run, and therefore to be better investment prospects. Socially responsible investment thus provides a sustainable home for sustainable investments. Consistent engagement Investments are not, of course, the only area in which charities have relationships with the corporate sector. There are a wealth of partnerships and synergies between the two sectors, including joint ventures, donations, advice and secondments, not to mention professional services such as banking. Investments should therefore be seen as part of an existing network of relationships, over which consistent standards on who charities engage with and how should be applied. Just as charities look carefully at where they receive donations from, so they need to be aware of who they are supporting through their investments. Equally, there are lessons to be learnt from the experience of institutional investors; local authority and institutional pension funds have been at the forefront of SRI for some time. 9 According to a GFK NOP survey of 2,000 adults commissioned by the EIRIS Foundation Charity Project. 13

16 Graph 2: Drivers for socially responsible investment In the CFDG/ EIRIS Foundation survey, the key reasons charities gave for investing ethically were avoiding conflicts with the charity s aims and activities (73%) and reputational risk (62%). These were followed by concern about alienating supporters and donors (32%). This suggests a growing understanding of the importance of investments in risk management and the danger of undermining charitable activities Avoiding risks to your reputation Using investments to further the work of your charity Avoiding conflicts with your charity's aims and activities Using investments to influence company behaviour Concern about alienating supporters and donors Concern about alienating beneficiaries Concern about alienating staff Addressing financially relevant social, environmental and ethical risks Number of respondents These results confirm the motivation for charities to protect their reputation and relationships with donors: fundraising charities are more likely to invest ethically than other types of charities. 70% of fundraising charities have an ethical investment policy compared to 59% of grant-makers and 32% of service provision charities. We also asked where the drive for an ethical investment policy came from, and overwhelming it is trustees (75%). Finance directors were rated second (45%), followed by supporters and donors (30%), chief executives (30%) and other staff (24%). Source: CFDG/ EIRIS Foundation Survey (March, 2009) Question: What are the main drivers for adopting and retaining an ethical investment policy? (5 = important and 1 = not at all important) 14 CFDG

17 Case study Save the Children UK: implementing socially responsible investment Save the Children UK (SCUK) is a large children s charity that, through its investment managers, uses a combination of negative screening, engagement and voting to ensure its investments do not conflict with its objectives. SCUK s ethical investment policy states that it will exclude companies from its portfolio whose practices are considered to be in conflict with the United Nations Convention on the Rights of the Child This means that it will not invest in companies that engage in activities that it judges are in conflict with its objectives. SCUK also adopts engagement and voting as part of its investment approach. Through its investment managers the charity seeks to use engagement to raise issues of concern with companies. The charity states, Rather than disinvesting it can sometimes be more appropriate to use investments to open doors to companies and raise social concerns at the highest levels. SCUK has a segregated investment portfolio of 15m, and also invests around 1m in a common investment fund that applies SRI criteria. SCUK s statement of investment principles (SIP) includes specific information about how the SRI policy will be applied in practice for example the activities that the charity wishes to exclude, and the materiality threshold that can be applied. This information is provided to SCUK s investment managers who apply it to the charity s investment portfolio. The SIP is updated annually by SCUK s Finance Director. The SIP, along with the investment performance report, is then reviewed and agreed by the Board. The exact activities excluded from investments has evolved and changed over time. When selecting its investment managers, an important element of the selection process for SCUK was questioning the SRI expertise and competencies of the organisations it met with, and researching the approach of pooled funds. The charity looked for investment managers with a demonstrable commitment to SRI, and included a senior member of SCUK s policy unit in the decision making process. This reflects SCUK s intention to link its investments to its policy on working with the corporate sector and its overall objectives. SCUK s investment managers quantify the financial impact of the negative screens applied to investments. Nick Kavanagh commented, Our aim is to demonstrate that good stock selection and sound investment management practice can deliver a good return and achieve social and ethical objectives. Nick believes that there is an increasing number of options for charities wishing to invest ethically, and would advise other charities to research these options carefully and ask lots of questions of potential investment managers to ensure that their practice matches their rhetoric. Nick Kavanagh is the former Finance Director at Save the Children UK Chapter summary SRI is relevant to charities because it can help them to fulfil their mission. SRI helps charities to treat investment as another manifestation of their aims and values, and to tailor a complex area to help meet their overall objectives. In some cases, charities can directly support their mission by influencing the behaviour of companies they invest in through shareholder activism, and proactively investing to support organisations who are helping to further the charity s objects. SRI can also help charities to protect their reputations, by minimising possible conflicts between investments and charitable objectives, and the potential knock-on effect of alienating supporters, staff or beneficiaries. 15

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19 Negative screening Negative screening involves avoiding investments that do not meet the social, environmental or ethical standards which your charity has set. There is no single correct approach to negative screening. The degree to which a particular behaviour is avoided will be determined by the trustees and set out in the charity s investment policy. Screening Screens may be applied to a range of asset classes including equities, bonds and private equity, although transparency may make the latter difficult in some cases. Screens may be implemented using the services of a research provider, asking an investment manager to apply a specific policy to your portfolio or selecting a pooled fund that meets your criteria, for all or part of your investments. Positive screening Positive screening involves investing in companies with a commitment to responsible business practices, and/or positive products and services. Forms of positive screening include: investing in companies that sell positive products and services, e.g. educational material or essential necessities of life (food, clothing, electricity, water or housing); thematic investing, e.g. investing in specific areas such as green technology or sustainable timber companies; a best-in-class approach that favours investments with best practice amongst sector peers, e.g. with a strong human rights or environmental policy. This approach allows a balance of sectors within the portfolio or fund. Positive screening may be used to: support and further the aims of a charity; select investments which perform well according to social, environmental and financial criteria; encourage responsible business practices. Negative screening may involve avoiding investments in specific companies or whole sectors. In the case of government bonds it may also be possible to avoid investing in particular countries. Investors may set materiality thresholds to determine which investments will be excluded; for example, avoiding companies which derive more than 10% of turnover from gambling, rather than avoiding companies with any involvement in gambling. It is also possible to avoid the worst performing companies (in the SRI sense) within a particular sector, for example those with the poorest human rights record. The use of extensive screens reduces the investable universe, and a portfolio is generally rebalanced to take account of this. Investment managers may find other companies with similar characteristics to one they would like to hold the share of, but which do not fall foul of the ethical requirement. Your charity may wish to use negative screening to: avoid conflicts with your objectives; avoid contradictions with your work; protect your reputation; avoid alienating stakeholders such as staff, beneficiaries, funders and members; remove specific risks from your portfolio (for example companies that may be subject to future litigation, consumer boycotts or regulation); take out the worst performers, on a SRI measure, in any given area. Negative screens may be applied by using the services of a research provider, asking an investment manager to apply specific screens to your portfolio or selecting a pooled fund that meets your criteria. 17

20 How investment managers implement charities policies Different investment managers will have their own process for handling SRI policy implementation for their clients. They will manage either segregated portfolios for charities, where each portfolio is screened according to the specific policy, or a pooled/unitised fund (whether a unit trust, common investment fund or other structure); some investment managers will offer both services. One of the balances which must be struck, if a charity wishes to have its own portfolio of investments and bespoke screening, is that between investment and diversification (investing across a range of companies and/or asset classes) whilst complying with the SRI policy. Investment and diversification should not be mutually exclusive and charities should talk to their investment managers about the policy and How investment managers im its potential impact on the type of portfolio construction which might achieve the appropriate balance, and therefore be best placed to achieve the charity s investment objective. Investment managers often have in-house research resources which are used to avoid areas of activity in accordance with a charity s wishes. But they may also utilise third party information as this provides an independent assessment. These third parties will develop expertise in screening out (or in) certain SRI criteria and should be responsive to investors requirements. From both an investor and investment manager perspective any screen that reduces the investable universe by more than 20% needs to be addressed as this might hamper the ability to produce attractive long-term returns. Case study The Tudor Trust: positive investment The Tudor Trust has an investment policy for its expendable endowment which seeks to optimise performance through a diversified asset portfolio. The Trust has operated a socially responsible investment (SRI) policy for nearly ten years. It seeks to invest in companies that hold socially responsible values and which demonstrate the potential for sustainable growth in the future. Trustees believe this positive long-term approach to investing is a key part of the strategy for the portfolio. Negative screening, where industry sectors or companies are excluded from investment, may limit future opportunities however some investments are not held as they are inimical to the work of the Trust. Investments are made based on the fund manager s assessment of best-in-class against a framework. Companies are assessed for eligibility against a number of criteria including good governance and their health and safety record. The decision to invest in this way was taken in Since then a shared learning has characterised the client/fund manager relationship. In 2008 the Board adopted new Investment Principles. The Principles took time to develop as advice was taken and current policy was adapted and changed. The principles aim to promote the mission of the Trust (supporting the social, economic and financial needs of people on the margins of society) rather than frustrate it. Over time, Tudor aims to invest all its assets in a way which is in line with the Case Study The Trust s philanthropic principles and resonates with its grant making strategy. In setting such a policy the trustees recognise the need to balance risk within the portfolio. Tudor considers itself to be a long-term social investor in ameliorating society s ills and so believes its financial investment should look for long-term performance rather than short-term gain. Following the adoption of the new Investment Principles the trustees began a review of the existing portfolio and a move into new areas of investment. The first process was to identify a fixed income manager. Fixed income is not traditionally associated with SRI and there are only a few fund managers, of the size considered prudent by Tudor, able to manage fixed income in a socially responsible manner. The Investment Principles mirror, but do not match, the UN Principles of Responsible Investment (UN PRI). They remain specific to Tudor and are used both in appointing new fund managers and reviewing existing relationships. The Investment Principles allow Tudor to adopt an SRI perspective on its investments but the trustees do not wish to be a slave to them. In the short-term Tudor continues to hold UK government gilts and there is a discussion to be had over whether these now sit well in an SRI portfolio. Fiona Young is the Head of Resources at the Tudor Trust 18 CFDG

21 Segregated portfolio or pooled fund? Many investment managers will set a minimum sum that they believe is appropriate for a segregated portfolio. If a charity requires bespoke screening it will need to identify an investment manager capable and willing to provide this. In the event of the trustees or investment managers believing that a pooled fund is more appropriate, they may, as described elsewhere in this report, be able to identify a fund whose screening policy matches the criteria of the investing charity. Segregated portfolio or a pooled fund? For example, the Polden Puckham Charitable Foundation has an SRI policy which is in line with its social change mission and Quaker values. It seeks to invest in renewable energy, public transport and ecologically-advanced housing. It uses a number of negative screens (including tobacco, gambling and arms companies) as well as applying positive screens. Graph 3: Issues considered through negative screening The vast majority of respondents to the CFDG/ EIRIS Foundation survey (88%) use negative screening, although almost a quarter (25%) use positive screening in addition, or as an alternative to, negative screening. Beyond these, there are a number of other options. 19% of respondents indicated that they engage with companies via their investment manager, and 3% engage with a company directly. A further 9% used their investments to vote shares based on their ethical position. Alcohol Animal testing Environment Gambling Genetic engineering Human rights Intensive farming Military involvement Nuclear power Pornography Supply chains Tobacco Other Number of respondents Graph 3 shows that in the CFDG/ EIRIS Foundation survey the most avoided areas were tobacco (85%), pornography (50%), military involvement (48%), alcohol (36%) and gambling (33%). Under Other, respondents identified a wide range of areas that mainly related to their specific charitable missions. Source: CFDG/ EIRIS Foundation Survey (March, 2009) Question: Which of the following issues do you consider in your investments through negative screening 19

22 Graph 4: Issues considered through positive screening Community involvement Energy and resource conservation Fairtrade Green transport Human rights Microfinance Renewable energy Supply chains Sustainable forestry Treatment of stakeholders Waste management Other Number of respondents Graph 4 shows that in the CFDG/ EIRIS Foundation survey the most widely considered areas in positive screening were human rights and fairtrade (65% each), energy and resource conservation (55%), community involvement (45%), and renewable energy (35%). Source: CFDG/ EIRIS Foundation Survey (March, 2009) Question: Which of the following issues do you consider in your investments through positive screening? Case study Church of England s Ethical Investment Advisory Group: engaging with the food industry The Church of England s Ethical Investment Advisory Group (EIAG) produced a report in November 2007 entitled Fairtrade begins at home looking at the impact of supermarkets on British farming livelihoods. The Church of England approached this from a specific standpoint: it is the landlord of tenant farmers and is a major investor in the retail food industry. The report identified a number of issues within the industry including: 1 suppliers (not supermarkets) often bear the cost of promotions, such as two for one offers; 2 risk is routinely transferred to suppliers by the supermarkets, which rarely enter into written contracts with farmers and can renege on oral agreements, to famers economic detriment; 3 labelling does not always clearly identify the true country of origin of products (products that are packaged or processed but not produced in Britain may be labelled British); 4 margins obtained by farmers on UK liquid milk supply have been steadily eroded to the benefit of the supermarkets to an extent that many dairy farmers have gone out of business. The EIAG engaged with supermarkets in writing and in meetings before and after the production of the report. The report and engagement helped create investor pressure, in addition to public and regulatory pressure, for a fairer deal for farmers in their dealings with supermarkets. One of the supermarkets the EIAG engaged with, for example, now has two milk own-brands, both of which represent a better deal for farmers: local choice milk which has received a 25m injection from the company and for which the company pays a premium; and standard milk which is no longer sourced from a pool but through direct contracts with farmers. The EIAG has stayed in touch with the farming community and NGOs with an interest in the issues, and continues to engage with supermarkets. The Competition Commission has recommended that the government create an ombudsman to handle complaints from suppliers about supermarkets, an idea which was endorsed in the Church s Call to Action published in conjunction with the report. The major supermarket groups are resisting the implementation of the recommendation and it is on this issue that the EIAG s current engagement is focused. Edward Mason is a member of the Church of England s Ethical Investment Advisory Group 20 CFDG

23 Engagement Engagement is the process by which investors seek to maintain or improve corporate social, environmental or governance (ESG) issues, in relation to policy, management or performance, in alignment with the objects and concerns of the charity. Your charity may wish to use engagement to further its charitable objects or improve its willingness to hold shares by: encouraging more responsible business practices; encouraging greater transparency and disclosure; influencing corporate behaviour to further the mission of your charity; finding out what companies are doing in relation to areas of concern to your charity; potentially improving investment returns by encouraging companies to manage social or environmental risks or to address new social or environmental business opportunities; fulfilling your responsibilities as an active share owner (this refers to investors understanding of, and approach to, the broader responsibility of company ownership, the activities of the company and its role in society and the economy). Engagement usually involves dialogue, negotiation and gentle (or firm) persuasion. It may take the form of: informing companies how their actions will affect your investment decisions; encouraging and persuading them to improve certain policies and practices; offering to help them formulate a policy or improve an approach to an issue of concern (this may be particularly relevant for a charity with expertise in a particular area e.g. an environmental charity helping a company create a policy on biodiversity). Engagement with companies may be an effective tool in changing behaviour, but benchmarking the success of engagement is difficult. It is not always possible to determine the extent to which any company s shift in policy and practice is owed to any one investor s engagement with it. However, there is evidence that company behaviour has been influenced by investor engagement and many industries have responded positively to such engagement by making their ESG activity and reporting far more transparent. Engaging via investment managers An investment manager s role in engaging with companies is not always straightforward. The nature of the engagement will vary according to the manager s investment process and their policy on engagement. Investment managers engage with companies where they have a concern about a practice, product or other aspect of the company. This engagement takes place primarily to drive change deemed beneficial to the overall financial performance of the company. The investment manager is representing their clients interests and acting as a shareholder on their behalf. The collective weight of investment means that acting as a major shareholder for all the client assets under management can give investment managers significant influence. Whilst an investment manager may be sympathetic towards a charity s SRI concerns, unless a particular SRI stance has been taken within their investment process the investment manager is unable to promote or represent one client s agenda above that of another. Additionally, most investment managers are responsible for a wide variety of clients, not just charities. Therefore engagement will be carried out for a number of reasons, which might include: industry specific issues; wider SRI concerns; risk management; and sustainability of returns. Below are some examples within these categories: 1 Industry specific issues food retailers - responsible food retailing general retailers - supply chain management energy supply - supporting a lower-carbon future pharmaceuticals - development and access to medicines extractive industries - transparency of payments to host governments 2 Wider SRI concerns water - increasing demand and diminishing supply climate change - implications for companies 3 Risk management regulation and legislation - health & safety, environmental factors risks - health & safety, reputation labour issues - production processes and efficiency, customer focus supply chains - labour issues product safety 21

24 You may wish to use the list of questions below to help ascertain how an investment manager s engagement approach fits with your charity s mission and reflects your issues of concern. 1 What is the focus and emphasis of the engagement policy? What are the main themes and priorities and how are they decided? What is the strategy to select companies for engagement? Does the engagement policy only apply to UK companies? 2 What engagement methods are used? Is it one-to-one meetings, letters, or attendance at company presentations? 3 What is the investment manager s voting record at Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs)? 4 What kinds of resources are devoted to engagement? Does the investment manager have a dedicated in-house team and/or purchase independent data? 5 How does the investment manager report on his or her engagement activities? How much information is made available to clients? (Good reports demonstrate that the investment manager has a full understanding of ESG issues and, equally importantly, how this impacts the company s bottom line). 6 How does the investment manager measure the impact of her or his engagement? 7 Is the investment manager involved in any responsible investment initiatives (e.g. UK Social Investment Forum, Institutional Investors Group on Climate Change, Responsible Investors Network, Carbon Disclosure Project or UN PRI)? 8 If not produced by the investment manager, is there an independent review of engagement activity? Engaging directly It is possible for your charity to engage directly with companies (though this may be time-consuming). Collaboration In many cases there are forums for charities to meet like-minded investors and join together to present a united front when engaging with companies. This might enable you to achieve greater influence, economies of scale and to pool resources and expertise. The Carbon Disclosure Project (CDP) provides a secretariat for the world s largest institutional investor collaboration on the business implications of climate change. Institutional investors collaborate to collectively sign a single global request for disclosure of information on greenhouse gas emissions. The Charity Investors Group consists of charity and fund manager representatives who meet on a regular basis to discuss investment issues. Whilst SRI is not a specific issue for the Group, it is another forum for discussion with other investors within the sector. The Church Investors Group (CIG) is a grouping of investment and trustee bodies representing charitable and pension funds of denominations, dioceses (or their equivalent), religious orders and Christian-based charities. CIG seeks to: Enable sharing of information amongst members; Encourage the adoption of Christian-based investment policies; Commission research on relevant issues; Enable members to make joint representation to company managements; Enable members to take a public stance on ethical principles in investment and socially responsible business practices. The Ecumenical Council for Corporate Responsibility (ECCR) is a membership organisation working for economic justice, environmental stewardship, and corporate and investor responsibility. It acts as a forum to discuss and research relevant issues, inform and assist members in specific representations and engagement with companies, and enable members to share experience and expertise. In its outward-facing work it aims to: encourage companies to adopt and maintain the highest standards of corporate responsibility in all aspects of their business, and express concern when they do not; and uphold these same high standards through responsible investment and the use of its own resources. The Forest Footprint Disclosure Project (FFDP) helps investors to identify how an organisation s activities and supply chains contribute to deforestation, and link this forest footprint to their value. Modelled on the Carbon Disclosure Project, it aims to create transparency and shed light on a key challenge within investor portfolios, where currently there is little quality information. The Institutional Investors Group on Climate Change (IIGCC) is a forum for collaboration on climate change for European investors. The group s objective is to catalyse greater investment in a low carbon economy by bringing investors together to use their collective influence with companies, policymakers and investors CFDG