The negative media coverage today of Comic Relief’s investments into alcohol, arms and tobacco highlights the challenges charities face in trying to be perfect ethical investors, say sector observers.

Tonight, BBC’s Panorama will broadcast a programme on charity practices which will include how Comic Relief invests its funds. It is criticised for investment, through pooled funds, into tobacco, arms and alcohol.

But many sector commentators speaking to civilsociety.co.uk have noted that the sums invested by Comic Relief into tobacco and arms are relatively small.

Panorama is to report that, in 2009, through managed funds, Comic Relief had more than £300,000 invested in shares in the alcohol industry, £630,000 invested in shares in BAE systems and £3m invested in shares in three different tobacco companies.

In 2009, Comic Relief had an investment portfolio worth £97m.

Jane Tully, policy manager at CFG, says: “Charities should rightly seek to avoid investments that directly conflict with their mission in an obvious way as a minimum. However for the biggest charitable investors the realities of the markets and need to generate sufficient risk-adjusted return make it difficult to always fully achieve this.  In order to manage risk, charities need to have a diversified portfolio.

“For a large investor with  significant sums invested and broad charitable aims, if much of investment activity is excluded as it conflicts with mission, diversification may end up being compromised. “

Indeed, Comic Relief will argue to Panorama tonight that its trustees have a responsibility to invest for the best return, and that ethically screened investments would not provide an effective risks return profile.

However, Panorama will say that it has identified several ethical funds which avoid investing in alcohol, weapons and tobacco, and which have all outperformed Comic Relief's portfolio for the past three years for which figures are available.

And it will add that it has examined the investment policies of the top 20 best-known charities in the UK and overwhelmingly they have investment policies aimed at avoiding conflicts with their key overarching aims. “Comic Relief stands out by stating in its annual report that it does not have any kind of ethical screening.”

Importance of an ethical investment policy

Jamie Hartzell, founder of Ethex, says this is a downfall for Comic Relief. “Even though it is difficult, if not impossible, to completely avoid unethical investments, in my view a charity like Comic Relief should have in place an investment policy that aims to ensure that money is as far as possible invested in a way that best supports the charity's objectives.”

Raj Singh, programme director at sustainable & responsible investment membership network UKSIF, adds that Comic Relief’s lack of an ethical investment policy is a case for reputational damage for the charity. “The story on Comic Relief’s investments first broke in August. The BBC Panorama programme is a follow-up. This is not new to Comic Relief or anyone in the charity investment space.

“It creates a strong argument to use fund managers who actively invest money which is in line with a charity’s end goal.”

Singh also said there was an inherent risk with using pooled funds as organisations did now know where their money would go, noting that earlier in the year the Church Commissioners were criticised for a small, indirect investment into Wonga.

Singh adds that at a basic level how charities operate in this respect desperately needs to be communicated to donors. “We can talk about this easily in the world of finance, about risk and return. But really, most donors don’t know that the money they give does not always go directly to projects, but into investments.

“It’s a core issue, donors need to be educated on how charities function. Transparency is vital. And an ethical investment policy as a start is core.”

Impetus for ethical and social investment

Luke Fletcher, a partner at Bates Wells Braithwaite, added: "I am a bit surprised that these stories are considered worthy of a Panorama investigation, as charities are generally more ethical investors than other categories of investors.

"However, it does reveal a certain level of expectation that charities exist for the public benefit and will invest in a way that is above reproach. Unfortunately, too often investment committees think in one paradigm and trustee boards think in another paradigm. It is fundamentally self-defeating for a charity to give grants to other charities alleviating conflict and at the same time to finance arms companies with its investments.

"I do think investment committees should generally be more demanding of investment managers when it comes to ethical screening and selection - if this story is an impetus for more discipline around ethical and social investment by charities, all the better."