Ethical investment – the theory and the practice

We recently hosted two ethical investment seminars for charities – one in Edinburgh, and one in Inverness. The speakers were Julie Hutchison and Gair Brisbane, both charity specialists at Standard Life Wealth who work with charities on investments.

What is ethical investment?

Ethical investment relates to the consideration of the type of investments that charities can hold, using an ethical perspective. Many charities choose to restrict their investment portfolios so they don’t invest funds in ‘sin’ industries or sectors contradicting their charitable objectives.

Comic Relief underwent a very public example of ethical investment theory and practice. A couple of years ago, their investments were found to be funding arms and tobacco companies – industries that contradict, you may think, the charity’s purpose and aims. Comic Relief engaged in a very public examination of their approach to investments, to emerge with a healthier ethical investment policy.

Practical considerations

Julie covered the theory. She talked through the legal underpinning of ethical investment. One of the most striking points of Julie’s talk is that there is no requirement for charities to raise more funds at the expense of their principles. It is perfectly fine for charities to obtain lower returns from their investments if that fits better with their charitable objectives.  It all comes back to charities acting in line with their purposes.

How to think about ethical investment

Gair discussed some tricky examples with a quick show of hands: most attendees felt that charities shouldn’t have investments in tobacco. But what, Gair asked, of all the many different companies involved with the supply and logistics of tobacco? It seems straightforward to say no to tobacco producers; it seems much harder to say no to tobacco retailers such as the big supermarkets along with the rest of the quite significant tobacco supply chain, whose main operations are retailing and not tobacco production.

Placing restrictions on a portfolio can have an impact on returns, particularly in the short term. This can work both ways: an industry sector can boom or contract, raising or lowering the average market returns. In the longer term, though, restrictions tend not to have a dramatic impact.

Consider too a charity that works for economic development in a developing countries. How then to treat tobacco companies that may be buying from these areas, providing major local investment and supporting lots of jobs?

Where do you draw the line? There is no straightforward answer, and each charity needs to consider the right answer for themselves, aligned with their objectives (and their values) and what they feel comfortable with.  It’s not a question of individual moral preferences of trustees – the focus is on the charity and its purposes.

Take the time to think it through

What came through very strongly is that the ethical investment process is very valuable. Julie and Gair have found that many of their clients value time and discussion dedicated to self-reflection on ethical policy issues. Thinking about your charitable objectives and what matters most to you as an organisation is a very worthwhile exercise – it could help to protect your reputation.

If you have any questions, please email Julie or Gair directly or us via charities@chiene.co.uk and we’ll be happy to help. You can also check out our Events page to see if there are any more upcoming seminars in which you might be interested.