The debates around responsible investment and its environmental, social and governance (ESG) aspects continue to evolve. Sabina Khan, senior investment director at Rathbones Investment Management, invited participants to consider charity leadership and ESG in terms of bridging the gap between profit and purpose. How do charities maintain mission integrity while engaging with corporations on ESG initiatives, ensuring that both profit and purpose align for sustainable social impact?
Ben Clarkson, chief finance and operating officer at Parkinson’s UK, did a lot of work on mission alignment in his previous role at Asthma + Lung UK (A+LUK). “This is becoming an increasingly important area for health charities. At A+LUK we were publicly campaigning about air pollution. It is hard to take these positions if your own house isn’t in order. If your pension fund, for example, is invested in fossil fuels you are leaving yourself open to challenge. Things are slightly less obvious at Parkinson’s UK as we don’t know what causes it, but we have a general sense that we have a responsibility to behave responsibly. There is an onus on us to engage with the things some charities shy away from.”
Katie Stewart is a research manager at ShareAction, which coordinates the Charities Responsible Investment Network (CRIN). “In terms of the 24 charities in CRIN, we have 24 opinions. Many of them are now moving past a binary division between grants and investments, instead considering how to maximise the impact on their mission across all their assets. There’s different ways of doing this, whether focusing on exclusions, engagement, or social and impact investing in assets that align with their missions. We’re also seeing increasing interest in models of participatory investment decision-making, to bring more varied voices into the room rather than these discussions being siloed within the finance team.”
Felicity Griffiths, chief financial and operating officer at Stewardship, breaks ESG down into its three components. “For the E, environmental, we have been thinking about what our carbon footprint is, and how can we reduce it in both big decisions and the small day-to-day choices that add up, and the choices each employee is making.”
She acknowledges that it is common for ESG to gravitate towards the E – unsurprisingly, given the climate crisis – but argues that the other two are equally vital. “Social is very important. Lots of our investments are in the form of loans to churches and charities, and we invest in causes that align with our mission. For the G, governance, it is about walking the walk. It is often considered the least exciting letter, but it’s crucial.”
Khan comments that governance has always been important for investors and has played an important role in the stock selection process.
Clarkson observes that there is an increasing blurring of the lines between traditional purpose-led charities and businesses, which are now bringing purpose in themselves. “How do we attract talent and donations when there are businesses moving onto our territory? People are driven by making an impact but if they can get more money doing that in the commercial world, it will be harder to recruit and retain them, so we need to focus on the S and the G to keep that pipeline of talent. We need to work out new ways to differentiate. You can have a social impact in a commercial organisation but there is a more direct link to beneficiaries in a charity. And the more transparent we can be about that, the better.”
What do we mean by impact?
Griffiths points out that impact can mean many things. “We work for charities because we believe in their mission and purpose, and impact is about how you achieve that, so impact will look different for each organisation. Having an impact means making a difference and effecting meaningful change in your area. ESG is more standardised.”
Stewart sees a challenge for S in that while there is a well-defined framework and structures for climate and carbon reporting, social factors are less coherent, certainly in terms of investments and measurement. “For example, inequality is a complex topic with multiple causes. There needs to be more work on this.”
Clarkson picks this up. “We are becoming more aware of health inequalities that exist, but it is harder to measure the social impact that you have. There is no one-size-fits-all advice approach for health charities.”
Khan raises the Charity Commission’s CC14 investment guidance, which was revised in August 2023. “Previously, the terminology included ethical and responsible investing, which could become blurred. Now, the distinction is simplified between social and financial investments.
“From an investment manager’s perspective, ESG is a way to mitigate investment risk. Companies are subject to regulation and possible reputational damage resulting from their conduct. Both can lead to financial and investor losses, so managing ESG risk is an essential part of portfolio management.”
She argues that impact is more nuanced. “Holding shares in a public company which can create positive impact is different from direct or ‘social’ investments. More broadly, charities can assess how their portfolio is aligned to the UN Sustainable Development Goals. Additionally, some charities may also apply exclusions, as trustees have become very aware of reputational risk and their stakeholders’ expectations.”
Clarkson recalls that this was front of mind at A+LUK. “We had normal exclusions but hadn’t looked at things for a long time so there was a risk we could have been accused of hypocrisy by investing in fossil fuel companies. So, we had this debate and divested.”
Engaging with engagement
This leads on to a discussion about engagement vs divestment – is there a right answer, particularly when there may be conflicting views among trustees?
It is falsely presented as a binary choice, states Stewart. “Some of the charities we work with feel that as an investor they have more social influence than financial power, so even if divestment doesn’t make any significant overall difference to the cost of capital, it does help to reinforce moral stigma. Some charities are focusing on targeted engagement and escalation processes which use their influence as shareholders, with divestment as the ultimate consequence if a company is unresponsive. Some make distinctions between different assets, for example engaging with equities but divesting from bonds and other assets that provide new capital to companies doing harm. Communication is important and there are a lot of nuanced positions that aren’t either/or.”
In response to the observation that charities may feel that they are too small to make a difference through engagement, Khan says that is where investment firms can have an effect. “Industry collaboration can vastly amplify the individual message and over time, engagement is having more impact. Understandably, there are concerns around the outcome of engagement, particularly on environmental issues and the pace of change. On the other hand, moving a complicated and humongous dial toward a certain direction is difficult to achieve overnight.”
For Clarkson, this highlights the importance of doing something positive, however small; “otherwise you get overwhelmed by the scale and complexity of the problem”.
Griffiths muses that many companies want to carry on doing what they are doing because it is profitable. “And it is profitable because the end user wants it. You can bring pressure on fast fashion, for example, but firms could argue that people are still buying it. People coming together to not buy things could have a bigger impact. So, while it might feel like we don’t make a difference, we can if we all do something.”
Khan comments how Covid led to knowledge sharing, as an immediate reaction to an immediate problem. “It showed it can be done when there is a sense of urgency.”
Stewart explains that there are two forms of engagement. “They can use their influence to affect behaviour in companies. But they can also use their power as clients to influence their asset managers – for example at ShareAction we work with charities to help them understand how their fund manager is voting on environmental and social resolutions at investee companies. Even as small investors, charities can be more powerful than they think as they have a social and public platform. Networks, peer collaboration, and shared resources can be hugely beneficial.”
Sacrificing return?
So how do charities change the mindset that by following an ESG strategy you are sacrificing financial return? “At A+LUK we had to overcome two misunderstandings,” explains Clarkson. “First, that we would get a poorer return, and second, whether we were indeed allowed to invest in such a way. The leadership of one trustee helped but we needed to take the rest of them on a journey. We didn’t make it about finances but about our mission. We explained the CC guidance and showed evidence that you could get healthy returns. This led to the decision to divest from fossil fuels. Then we got trustees to look at divestment from fossil fuels as a financial decision rather than an ethical one because of the risk of stranded assets.”
Stewart says there needs to be more thinking around systemic risk. “It is hard to see how any market won’t be affected by the economic damage from climate change.” Poorer countries, and the people there, will be hit the hardest, adds Griffiths.
Khan agrees. “Climate change will likely impact all industries eventually, and increasingly more of the social aspects alongside the environmental ones.”
For Clarkson, it is important that all charities do think about this as it will make life harder for beneficiaries, whatever an organisation’s main mission. “It is a false argument to say that charities need to draw a direct link to their activities, especially as we have an obligation to be there for as long as we are needed.”
He also contends that charities need to shout more about what they are doing with their investments. “But do it in a way that admits that we are not perfect. There are many different ways to calculate your carbon footprint. Even if you don’t get it spot on, if you have a stab at it and are broadly right, it is still positive. Don’t worry about exact measurements and quantifying it, the important thing is that you did something and can demonstrate that your carbon footprint reduced. Don’t let perfect be the enemy of good. Don’t use difficulty as a cop-out to not do anything.”
Stewart says that we need to think of risk in terms of how much more impact we could have with our investments by doing something different. “Ultimately though, the biggest risk is that we don’t get climate change under control, financially and morally.”
Griffiths cites the risk of not doing something. “Inaction is action. You are signing up for the world to be a certain way by not addressing it or investing in certain companies.”
With a tightening of regulations around greenwashing and how products are labelled, such as the Financial Conduct Authority’s new anti-greenwashing rule and the European Commission’s Green Claims Directive, Khan says managers need to be very clear about what they mean by terms such as ESG, sustainable and responsible. “Trustees need to understand why funds are labelled as they are; check inside the wrapper.”
Looking to the future
Khan considers whether macroeconomic policy changes will affect long-term investors. “Recent events, including a pandemic, have distracted the climate agenda and there are question marks around the ongoing participation of the US. For charities which have a long-term time horizon, some in perpetuity, these issues are likely to continue to evolve over the coming years and decades.”
While a lot of these debates can be frustrating, depressing and difficult, charities cannot shy away from them. But what are the positive elements on which they can focus?
Griffiths admits that the outlook can appear bleak but adds: “We all have an opportunity to make a difference, which is a positive thing. You can do something to take us in the right direction”.
Clarkson agrees that the overarching narrative tends to gravitate towards the negative but repeats his appeal to do something and not become overwhelmed. “There is lots of great stuff happening in the sector. There are people trying to make a difference. You have to see past the negativity and crack on.”
Stewart has faith in CRIN members, who have social power and can invest in a way that leads to a fairer financial system. “There is scope for charities to be innovative and influence how pension funds invest, for example. Don’t underestimate how much power you have.”
Khan concludes by saying that it is a changing world, but charities need to be adaptable. “Focusing on your mission and what you are trying to achieve, while having the flexibility to manoeuvre through difficult periods, is vital.”
Ian Allsop is a freelance journalist
With thanks to Rathbones Investment Management for its support with this article.
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