Can charities which have investments use them to further their charitable objectives? Is engaging with poor performers on areas such as environmental behaviours a more useful tool than broad exclusions?

Kate Rogers, co-head of charities at Cazenove Capital, introduces the discussion by saying she really believes in the power of investment to create positive change. “Charities and foundations that invest can use their influence to push for progress. This is ‘active ownership’ and is a key lever in creating positive impact, particularly in listed equity markets where they own a stake in a business. Trustees most often delegate their investment decision-making to fund managers, and in doing so also delegate any active ownership activity, like engagement and voting.

“Charities are increasingly adopting responsible investment (RI) practices,” she adds. “More than 75% of charity investors have an investment policy that connects mission and aims with investment.”

Rogers identifies a transition from exclusionary policies to a more engaged stewardship model, which recognises that it is not just about where you invest but how you use your influence as an investor to create a positive impact.

Isobel Mitchell describes ShareAction as a research and campaigning organisation aimed at “unleashing positive power of investment system for people and planet”. Her role there is senior officer – networks, where she works with charities and universities.

“There are two main levers charities can employ to use all of their assets to fulfil their mission - asset allocation and active ownership,” she says. “The asset allocation side includes divestment and tilts. With active ownership, it is about engaging with the asset manager and companies directly.”

She adds that charities can also lend their names to collaborative initiatives, for example, on climate and social issues, which can then use escalation tactics, where companies do not change their behaviour.

Colin Baines, meanwhile, is investment engagement manager at Friends Provident Foundation. “My role was created five years ago to integrate our endowment into our charitable objectives,” he says. “We revamped our investment policy and principles, and made a climate emergency declaration, which led to a new investment statement.

“These policies instruct asset manager and shareholder engagement, including voting and active stewardship. The policies have specific commitments to exclude certain stocks but also include areas where we want to use our influence to effect change.”

He mentions fossil fuels. “We exclude them from our portfolio. But when we wish to influence companies in that space, we do have a small allocation to buy shares in those companies.

“We have policies to ensure engagement is meaningful,” he continues. “It can’t just be joining third-party initiatives or signing the occasional collective letter to companies. We are proactive with a mixture of different approaches and have an escalation policy that steers us if companies are not responding adequately.

Jonathan Gillett is trustee and chair of the finance sub-committee at Polden-Puckham Charitable Foundation, which is a much smaller grantmaker with seven trustees, a part-time secretary and a mission focusing on threats to the environment and peace and security. “We set a target for our asset manager that 100% of the portfolio should be invested in climate-sustainable assets by 2025,” he says. “Since then, with the climate and biodiversity crises becoming ever more clear, trustees have decided to spend down, with all assets sold by 2024 and grantmaking ending in 2028. We will be encouraging our asset manager to keep in line with our policy as we spend down.”

Rejoining the conversation, Mitchell highlights the approach that Gillett at Polden-Puckham took on biodiversity as one of the direct ways that foundations can put pressure on their asset managers. “They wrote persistent and well-executed emails to their asset manager on this topic, which no doubt contributed to the manager developing a position on biodiversity.”

Rogers says that while it can be hard to pinpoint cause and effect when it comes to successful investor engagement, working closely with leading purpose-led investors in a collaborative relationship is rewarding.

“I really enjoy the collective action approach to active ownership. As an example, we heard from a number of our clients after the football [Euro 2020]. Obviously, the racism some of the players received on the Big-Tech platforms was abhorrent. So we were firing off emails and having conversations with analysts and fund managers asking what action we could take.”

As well as responsive engagement like this, she also argues that there is real power in creating influence through trust and strong long-term relationships with companies. “As a large asset manager, we have direct access to board level management and can use this as part of our ongoing investment dialogue and due diligence. Being able to put forward investor concerns can promote change from within and can often be as effective as other action, like supporting shareholder resolutions.”

So who is responsible for pursuing active ownership and ensuring that companies are held to account? Gillett suggests that ultimately it has to be the asset owners. “They have chosen the manager. They can change them, put pressure on them, and look for other avenues to match their investments with mission. It is all part of trustees’ monitoring of their investments.”

Baines says that while ideally there has to be an element of ongoing collaboration between the asset owner and the manager, it all flows from the tender and communicating the asset owner’s policies that the manager has to adhere to. “Then it is a ‘keep their feet to the fire’ job,” he explains.

However, charities do not always embed active principles at this early stage. Rogers says that while a lot of the tenders she sees reference sustainability and responsible investment, most define this as how the assets should be invested, with an exclusionary approach still the most common starting point. “Very few charities talk about active ownership as part of the tender discussions.”

Pooled engagement

Gillett raises the issue of pooled funds that invest in many companies. “It can be difficult to assess exactly where they are with these ESG issues. For smaller foundations who may have all of their investments in funds, the selection of funds is key.

“Trustees may feel it is easier to leave it to asset managers but they should not hesitate to ask questions and satisfy themselves that the funds fit with their values and mission.”

Rogers concurs that a lot of charities don’t have the resources in terms of assets or people to be directly invested in companies. But she says: “I have been pleasantly surprised that when you talk to clients about values, they have strong views. Most clients favour a broad sustainability approach that covers a range of impacts and concerns, across both people and planet.”

She adds: “When investing in pooled funds it is even more important to use your voice with the asset manager. We are transparent about the underlying companies in our funds so people can check they are comfortable with their exposures. When we allocate to other managers’ funds we, check their active ownership stance against best practice.”

Duty free?

With the Charity Commission having closed its consultation on proposed revised guidance on responsible investment (RI) , the panellists reflect on how far charities should have a duty to invest responsibly, including through engagement.

Gillett observes that grantmaking foundations have a duty to fund activities for public benefit but that when it comes to investments, there is no parallel duty to do so. “That would be difficult to measure, but a lot of investments are damaging to the environment in various ways,” he says. “So there should be a duty on trustees to consider whether their investments have an adverse effect on the world that they are trying to do some good in. There is a responsibility to future beneficiaries as well.”

Mitchell feels that charity investors should use their role as shareholders to push for change, primarily because it works. “It seems obvious to use all assets for the mission rather than a small part of them.

“We would like a broadening of the interpretation of fiduciary duty to cover wider society’s best interests. I want to see regulations move in that way, as they have for pensions.”

As Baines sees it, many charity investor approaches have been limited to managing risk. “Hence there is a lot of focus on climate change, due to public and stakeholder pressure to divest fossil fuels.” However, he adds: “Beyond excluding overt conflicts, more are starting to recognise meaningful RI policy and engagement as an opportunity to progress charitable objectives.

“A lot of foundations currently look at their endowments and put 95% of the effort into 5% of the capital; the spend in terms of grants. The endowment is in the large part a machine to generate income. But that is changing fast. More are realising that the 95% not only needs alignment to stop it undermining what is achieved by the grants, but it can be actively utilised as a tool to further objectives.”

Ensuring alignment rather than conflict with a charity’s objectives, is the starting point for Rogers, but she agrees that there is an argument for going further and aligning with the wider needs of people and planet.

Barriers to entry

So given the persuasiveness of the arguments over the benefits of active ownership, what are the barriers? What is stopping more charity investors from doing more?

Baines thinks it is a cultural issue. “As a generalisation, a lot of charity trustees are small-c conservative, retired professionals, still with the mindset that the endowment is there to create the income to do lots of lovely things with. Therefore, maximising income is considered a responsibility. But they need to take a holistic view of the endowment and charity’s objectives, rather than it being just an asset to sweat.

“Ongoing economic uncertainty can also mean short-termism is prevalent and there is also the issue of in-house resources; of knowing where to start. There is quality advice out there, but much of it is of the same cultural mindset that is holding back some trustees.” He recommends joining bodies such as the Charities Responsible Investment Network.

Gillett agrees that there is quite a lot of conservatism, and that traditional financial values are still quite strong. “Trustees are looking for a return and may not be so worried about ESG, although it has changed a lot in the last 20 years. When there is a reluctance to engage it can be tricky to break down barriers.”

For Mitchell, barriers include a lack of quality unbiased advice. “It can be difficult to cut through the greenwash and marketing spiel around RI. At ShareAction, we try and provide an independent voice, as well as enabling collaborative advocacy and peer learning.”

Rogers cites Cazenove’s recent research on intentional investing, which had over 250 responses from charity investors. It found that the common barriers identified were concerns about performance and about fiduciary duty.

“With fiduciary concerns, as a generalisation, there are two quite different types of people on boards,” she explains. “The first group are naturally more open to the third dimension of investment, considering not just risk and return but impact as well. This is often characterised by a different cultural make up than the traditional board. The other group of investors is those who view their role on the investment committee solely as delivering returns. The way we talk about RI and active ownership to those two groups needs to be different.

“Financially focused investors can understand that climate change and rising social consciousness raise the risk of financial loss from externalities. Some 70% of the global economy has made net-zero commitments, and 25% of global companies have. The transition is happening; it is an investment risk to ignore it and an opportunity to invest in companies that are driving the future.

“There is also research around the return benefit of influencing. It makes sense, doesn’t it, that if you invest in a company that is rubbish on ESG, engage with them and help them to do better, then there is financial benefit from this improvement as risk reduces and the cost of capital falls, as well as social or environmental benefit.”

Engaging while excluding

Even when taking active ownership, exclusion remains a tool for investors. Gillett says: “We have a long list of exclusions. For example, we have excluded high street banks because of their financing of fossil fuel companies. We do not feel comfortable buying a few shares just for engagement purposes so by excluding ourselves from that sector we can’t engage to affect change.”

Mitchell says that divestment can form part of an effective engagement escalation strategy, but adds that “engagement does take resource but we are trying to reduce that constraint.”

Success stories

Clearly, awareness around where active ownership has been successful is key to encouraging more charities to get involved. However, Rogers is cautious about overdoing it. “It is really important not to over claim victories. Yes, talk about successful engagement, but putting them all down to one investment manager and action often leads to exaggerated claims. You have to temper the enthusiasm to say ‘we did this and this happened’. It is difficult to prove causality.

“Collective action is key if we are going to tackle huge systemic issues like climate change and inequality. The most significant impact will be down to many groups of purpose-led investors working together.”  

With thanks to Cazenove Capital for its support with this feature

Wellcome sets target for carbon neutral investments News

Responsible investment should be expected and not have to be justified, charities say News

Foundations: Global investment opportunities and challenges In-depth