Impact investing for charities
Do your investments align with your mission?
Neil Cradock, Head of Charities at Barclays Wealth & Investments, looks at how to make an impact with your charity investment portfolio.
What’s the impact of your investment portfolio?
Your investment portfolio is a critical resource, and risk, for your charity. Are you maximising its value and ensuring alignment with your mission and purpose – now and for the future?
Impact investing is an evolving, innovative approach gaining traction and visibility in the industry that can help you achieve both these aims.
Every investment has an impact
Historically, many investors may not have considered how their portfolio’s companies operate or been interested in the outcomes of what they produce. Charities have frequently been more sensitive to these issues and many already avoid companies/sectors with more questionable activities (eg, tobacco, gambling, cluster munitions, pornography).
Trustees are increasingly recognising their responsibilities for the investments they make and their associated impact on our world. Incorporating these considerations more formally into our decision-making process creates new possibilities for how we advise charities and manage their investment portfolios.
As we see it, impact investing is about investing for both financial returns and positive societal outcomes.
As such, you can expect an impact portfolio to include companies providing commercial solutions to our pressing social or environmental challenges – such as climate change, water shortage, health, education or plastic waste. Alternatively, you can expect an impact portfolio will identify companies with better operating practices – such as environmental management, gender equality or corporate governance. In both cases, the attributes identified are contributory factors that we believe help deliver attractive returns.
Avoiding unethical stocks vs. assessing companies for impact
Compare impact investing with ethical investing, where a set of values or beliefs pre-determines which holdings are acceptable for inclusion in your investment portfolio.
Impact investing takes a more nuanced approach that relies on data and insight about the company, rather than moral beliefs for investment decisions. Importantly, it’s possible to combine both ethical screens and impact investing in portfolios.
What’s right for your charity’s portfolio
With impact investing added to the range of investment styles, it can be difficult to decipher and decide on the right approach. Let’s look at two critical aspects of your portfolio – financial returns and reputation management.
Maximising your returns
While investment portfolios can serve various aims, maximising the financial return is a critical consideration for trustees, however the Charity Commission does provide the flexibility to make any investment provided it’s justifiably in your charity’s best interest.
With ethical investing, you should be willing to forgo any financial returns of companies or sectors you’ve excluded. This isn’t to say an ethically screened approach can’t perform like a traditional one – just that your conviction should be strong enough that benefitting from the excluded companies’ performance shouldn’t be acceptable to your charity given its mission.
With impact investing, there’s a growing body of academic evidence and investor experience demonstrating that impact approaches perform like any other investment.
Of course, in both cases remember that like any investment, the value of your capital may go down as well as up.
Aligning with your mission
As charity trustees, you must be able to demonstrate that your decisions fulfil your responsibilities, and donors and stakeholders will increasingly hold you to account for your investment decisions. For example, a YouGov poll for Good Money Week 20171 found 77% of the UK public said they would be unlikely to donate to a charity if its endowments or other assets were invested contrary to its mission.
With an effective ethical approach, trustees should be confident that their organisation will avoid reputational detriment by steering clear of industries which conflict with their mission.
However, rather than just being comfortable about doing less bad, impact investing offers trustees a more proactive option.
To help deliver their mission, trustees can use the portfolio to invest in companies and projects that are aligned with their aims – eg, green bonds for an environmental charity or social real estate for a homelessness charity. Taking this holistic approach to the mission can then be a showcase to donors on how their funding is used to enhance the charity’s reputation.
Starting the conversation
Overall, impact investing offers an innovative way to invest for those who care about their financial returns and for those who care about the societal outcomes of their investments – and, most importantly, those who care about both.
As stewards of a charity’s capital and reputation, trustees must consider their organisational goals and assess whether the investment portfolio reflects and actively supports this mission.
Things to consider
The value of investments can fall as well as rise. You may get back less than what you originally invested.
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