I have been advising charities for many years and believe our role is to provide a framework, tools and questions for charities to utilise. The latest investment evolution is the move towards sustainable investing, which has increased in rapidity over the last few years, we feel with justification.

Our long-held view is that carefully implemented sustainable investing approaches, including environmental, social and governance (ESG) analysis and integration, can help to identify high quality companies. The Covid-19 pandemic and its economic implications have provided the conditions to test this approach. In March 2020, we saw the greatest market correction since the great depression with some of the world’s largest economies partially shut down. It was companies with strong business resilience and robust balance sheets that were able to weather the storm and outperform their peers. This market sell-off was not driven by financial exuberance, oil shocks or even Brexit. Instead, it was created through an external shock that no one other than foresighted virologists could predict.

The immediate fallout in capital markets caused by this extreme event reminds me of a quote from Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.” When Buffett made this quote he was referring to the exposure of overly-indebted companies during times of crisis. However, for this crisis, we believe that another variable exposing some businesses has been the quality of their non-financial metrics, otherwise known as their ESG credentials.

We have seen examples of companies that pre-crisis had already instilled a disciplined approach to health and safety and were therefore able to operate throughout the crisis with minimal disruption. In addition, businesses that had long embraced the concept of dynamic working to accommodate different working patterns were better equipped when lockdown struck. More efficient homeworking and forced investment in digital capability has meant that some companies have been able to maintain and even increase productivity for certain roles and professions.

To highlight the performance of sustainable investment strategies this year, a recent Morningstar report revealed that:

• Over the 10 years through 2019, nearly 59% of surviving sustainable funds across the categories considered have beaten their average surviving traditional counterparts;
• Sustainable funds, during the Covid-19 sell-off, delivered superior returns in all but one category compared to their traditional counterparts; and
• In the first quarter of 2020, 51 out of 57 of the Morningstar sustainable indices outperformed their broader market counterparts.

More recently, a US-based study by Morgan Stanley found that sustainable equity funds outperformed their traditional peers by a median of 3.9% to the end of June 2020, and US-based sustainable taxable bond funds outperformed their traditional peers by a median of 2.3%.

Investments make a difference; be that to increase the financial stability of a charity, to provide regular distributions, to engage stakeholders and on the flip side can result in reputational issues if investments misalign with the charity causes.

The building blocks that form the modern sustainable charity strategies can be broken down into ethical, responsible and impact. The ethical building block is relatively simple and is the exclusion of certain sectors, companies, services or products. The most common exclusions are tobacco, gambling, pornography, armaments and alcohol. The new focus is fossil fuels and we have seen many universities around the world commit to fossil fuel divestment. In the US, which is often seen as a laggard compared to the UK and Europe, 350.org says that “over 1,240 institutions representing over $14tn in assets have committed to some level of fossil fuel divestment”.

Questions for you to ask:

What ethical restrictions do we currently have in place?

How are the restrictions defined?

Are these restrictions reflective of where we are as a charity today and for tomorrow?

I have broken this next question out as I feel it deserves special mention due to currently receiving the most coverage:

Should we divest from fossil fuel companies completely, partially and/or engage?

Good practice with any ethical restrictions is to be clear what your excluding, how that is assessed and why you feel it appropriate. I have seen fossil fuels divestment be defined and implemented in different ways, such as divestment from all companies in the sector, best in class investing or exclusion based on a certain turnover in tar sands. There are also arguments for engagement with the major oil companies as they are integral to the current energy system and could be part of the transition to a greener future. However, if you look across to the car manufacturing market, it is not an incumbent that has forged ahead, rather Tesla which in July 2022 became the most valuable car manufacturer in the world.

The next area which has seen the most headlines is referred to as responsible and ESG investing. Interestingly, although often a cross over, it does not mean these strategies are invested ethically and that is something to be mindful of. This type of investing moves beyond ethical screens, takes into account non-financial information including ESG factors and will typically include active ownership. As a chief financial officer in North America stated in the Investing for Global Impact: A Power for Good 2020 report: “I don’t tend to think of ESG as impact. To be blind or to ignore the various factors that are considered and measured within ESG, would be to not critically evaluate a business and an investment. To me ESG is just good due diligence.”

How do the investment managers incorporate ESG factors in to investment analysis?

Is thematic investing appropriate or does it narrow my investment universe?

Does the strategy also meet our ethical requirements?

How does the investment manager engage with companies?

The last building block we consider is impact investing which moves the focus on to the environmental and social impact an investment has. Impact investing can be implemented through both liquid and illiquid positions with a wide ranging spectrum of impact. During 2020, green bonds and social bonds have had a record $332bn overall issue size year-to-date and provide a way to invest for a positive impact. Companies, we see, typically want to engage more with their customers and align to what is important to them. This has led to companies implementing many programmes across the world such as the Unilever sustainable living plan. Like companies, it is common for investment strategies to align with UN sustainable development goals, which seek to address global poverty, inequality and climate change. This alignment can help to drive the focus on to investments that are having a positive impact and with trillions of dollars required to meet these goals it can be a good way to identify company revenue growth.

Do we want my investments to be invested to provide a positive impact?

Shall we implement an impact strategy using private assets?

Is there a point at which our investment returns from impact investing are diminished?

Can we be part of the impact story?

Dr Malini Saba, philanthropist and founder of the Anannke Foundation, says in the Investing for Global Impact report: “Covid-19 has been a blessing and also an evil, because we’ve never faced anything like this before. All of us have to rethink how we want to treat the planet and treat each other as human beings.”

Implementing any one of the building blocks or creating a sustainable strategy is part of the continuing evolution investing for charities has been through over the years. “Never waste a crisis” is an oft-used quote and as the world enters one of its most testing times now may be the moment to undertake that evolution.

Ian Chesham is director, charities and not-for-profits at Barclays Private Bank

Charity Finance wishes to thank Barclays for its support with this article