Step 3: Develop a policy
The third step is about translating your mission and objectives into a workable investment policy. This involves agreeing the approach that your charity will take to Responsible Investment and the issues you wish to consider.
The policy does not necessarily have to be a long and detailed document and its content will depend upon the size and sophistication of your charity’s investments. Initial research will help you to shape your policy and understand how it could affect your current and future investments.
A Responsible Investment policy can be a stand-alone document but it may be preferable to incorporate the elements below into your overall investment policy. Such a policy would therefore include both financial and SEE objectives.
A policy could include the following elements:
1. The charity’s overall social, environmental and ethical aims and values
Setting out your charity’s overall values and objectives is a good starting point for a discussion of Responsible Investment, as the process is ultimately about linking your charity’s values with its investments. These values will be clear for most charities and be based upon your mission statement.
2. Investment objectives
Your charity should already have agreed the financial objectives of your investment policy – for example, income levels and capital growth, acceptable levels of risk and asset allocation. These factors will influence how social, environmental or ethical considerations can be incorporated into your charity’s investment strategy.
Your charity should also have defined its reasons for adopting Responsible Investment (as described in step 2). These objectives, for example avoiding risk to your reputation) will help you to decide on the issues and approaches to implement.
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3. Social, environmental and ethical considerations
You should decide how your mission can best be reflected in your investments. You should consider which social, environmental and ethical issues best fit with your aims and values, and which you wish to incorporate into your investments.
The following resources may be useful:
- the ethical issues section gives details of the most common issues considered by charities. It is not an exclusive list but may help you to think about the issues that are most important and relevant for your charity.
- your fund manager or investment adviser may also be able to provide a list of issues that can be incorporated into an investment policy, and help you to decide on which to incorporate into your investments.
- your charity may wish to consult with its stakeholders (for example, staff, beneficiaries and supporters). This can be done on a formal or informal basis.
- the legal issues section provides guidance on the scope for incorporating SEE issues into investments.
It is useful to consider which issues are of most importance to your charity and if any are ‘negotiable’. For example, if you would be willing to invest in the best performing companies within a particular sector rather than excluding the whole sector.
This will help you to decide on the approach to apply to your investments (negative screening, positive screening or engagement) and in the case of negative screening, whether you wish to set a materiality level on turnover – for example, avoiding companies that derive more than 10% of turnover from the sale of tobacco products rather than any company selling tobacco.
Research can show how the companies that your charity currently invests in would be affected if you applied screens on particular SEE criteria. Research providers such as EIRIS or Ethical Screening, or your fund manager, may provide such information and help you understand how setting levels of materiality or specific criteria could impact on your investable universe. Adding too many restrictions could impact financial returns.
4. Approach to positive and negative screening, engagement and voting
The approach(es) you decide to adopt will be influenced by several factors including:
- the aims set for Responsible Investment
- the SEE issues you wish to consider – some will be more suited to a particular approach
- the investment options available – for example, some asset classes (such as venture capital) may be more suited to positive than negative screening.
- the resources available
For example a fundraising charity with narrow objects, e.g. animal welfare, may decide that negative screening is appropriate because it fits with its objects, manages reputational risk and is cost-effective.
More details of the approaches you can adopt can be found in ways of doing SRI
Other important elements of a Responsible Investment policy are:
5. process for making decisions and implementing policy
6. transparency and disclosure
7. process for reviewing and monitoring policy
Guidance on these issues is provided in steps 4 and 5.
Further information
Ethical Investment Research Services (EIRIS) Limited researches over 2,800 companies globally. Coverage spans 40 different areas including traditional "sins (alcohol, tobacco, pornography etc.), environmental performance, human rights and many other areas. EIRIS works with charities to translate their core mission into a meaningful, detailed policy to be used in the filtering of the investable universe. This enables charities to find out if companies are ‘acceptable’ according to their own specific ethical criteria. Further to this, charities can look at company reports and sector reports either as an investment tool or when assessing partnerships and donations.
The Charity Investment Ethics Database from Ethical Screening gives Charities and Not-for-Profit organisations basic information on the ethical issues affecting the UK's top 350 companies. This free of charge service aims to increase awareness of ethical investment within the not-for-profit sector; and enable registered users to harmonise their investment policies and portfolios with their charitable aims and objectives.
