Investing in a minefield

18 Dec 13
Tim Willis

Panorama’s recent report into ‘unethical’ investments by Comic Relief highlights the financial dilemmas faced by charities. There is often a conflict between reputation and reward, and finance directors can help by encouraging a grown-up and considered approach

So Comic Relief invested a small amount of its investment funds in ‘undesirable’ companies. This is one of those stories that many a charity finance director worries about in respect of their own organisation. It is especially tricky for a charity like Comic Relief – after all, it hands out grants to such a broad range of good causes, its definition of ‘unethical’ must be very broad indeed.

Or should all charities worth their salt make a conscious decision not to invest in the bad ‘uns? Is it OK for, say, Cancer Research UK to refrain from investing in British American Tobacco, but freely invest in BAE Systems if it so choses?

And what is not ‘ethical’? You could argue it’s anything that sits outside an ‘ethical’ fund, but that would restrict organisations in their investment portfolio choices. Is gambling unethical? If so, where does that leave the Big Lottery Fund? What about fast food? Russian oil drilling? And why stop at investments and pension funds? What about purchasing policy, and the use of products from sustainable sources?

How many big charities do business with organisations that have a questionable ethical track record, whether relating to sponsorship or the supply of goods or services? When refurbishing their offices, would a large charity re-use old desks and chairs rather than buy new? Does it re-use and recycle as much as it could? Does it recruit through apprenticeships of Neets or poach high-flyers via recruitment consultants?

These are some of the moral quandaries even before you consider the FD’s angle. It can be challenging enough weighing up the need for diversification, balancing financial risk (never mind reputational risk) against reward, and the potentially substantial impact of good or bad investment decisions on the organisation’s finances. And after all, the prevailing driver for the FD is to maximise returns.

As financial investment portfolios become more sophisticated, it is difficult to know for sure that a managed fund doesn’t have a holding in another fund that holds stock in an unethical company, or stock in a company that does business with other, unethical companies. Ethical funds can be part of the solution, but this has to be an explicit policy of the organisation and the potential financial consequences of such a choice have to be made clear at the point that the policy is agreed.

It is understandable that Comic Relief is in damage-limitation mode right now following Panorama's report. But perhaps the response from the third sector to the Comic Relief scenario should be bolder: to say, it’s up to individual organisations to decide on their investment policy.

If they feel they can earn greater returns via an unconstrained investment policy, which would in turn provide more financial security/funding for its beneficiaries, then they should feel able to do so – even factoring in reputational risk.

There is a whole range of ways in which an organisation can choose to do business ethically, not just via its investment policy. There should be recognition that we live in a complex world, with shades of grey. Yes, an organisation should be true to its values and consider beneficiary views, but it has financial responsibilities too.

The third sector is no longer a few large venerable charities that would be sent scurrying away to strip out anything resembling an unethical skeleton in its investment cupboard at the first hint of ‘bad’ publicity.

We have a third sector ready and able to invest in, and be funded by a world of financial entities. We also have a burgeoning social enterprise sector that has within its very DNA the belief that it is possible to be a successful profit-making business whilst having beneficial social impact. And there are PLCs with profits to maximise and shareholders to satisfy that nonetheless have a strong desire to operate ethically – sometimes, indeed, for commercial reasons.

The FD can have a calming influence here, and demonstrate leadership. It is right to adopt a risk-based approach and stay within a carefully thought-through organisational policy and it’s okay to invest in what gives the greatest returns, or saves the most in purchasing costs, if that’s what the organisation wishes after weighing up the risks. To ask questions like, if your organisation trades, do you refuse to sell to someone because their moral stance on an issue is discordant with your ethical investment policy? Of course not.

We don’t have to throw our hands in the air and argue that we can’t take a purist ethical stance because it is all too complicated. But we can encourage our organisations to take a grown-up, considered look at all aspects of our business and accept some degree of risk regarding reputation.

Organisations have to decide where the balance is struck between financial reward and ethics, which will be different for each organisation. They should adopt a policy that is both realistic and grounded in the organisation’s values. The policy can then be returned to with confidence, if challenged by funders, customers, partners or the media.

Tim Willis is the chair of CIPFA’s Charities and Social Enterprises Panel

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