Charity Commission consultation on responsible investment

Responsible investment is becoming increasingly important to charities, investors, businesses and regulators alike.

The Commission’s focus on this area recognises that many charities are already investing in this way and there are many others that are considering doing so. In 2020 we updated our research, Intentional Investing, which surveyed 295 long-term charity investors about their approach to investments. We found that 77% have chosen to adopt a policy to link their investments to their charitable mission, which compares to 59% five years ago and 23% 10 years ago. This shows the significant change in charities’ approach to responsible investment and highlights the need for updated guidance from the Charity Commission.

Our research also found that the main barrier to charities investing responsibly is a concern that this could mean sacrificing financial returns. This view is somewhat of a myth - evidence shows that integrating environmental, social and governance (ESG) factors into investment decisions can actually reduce risk and even enhance returns. Unfortunately, the draft guidance doesn’t quite hit the mark in terms of making this clear. Instead, the guidance talks about ‘financial investment’ as opposed to ‘responsible investment,’ suggesting that the two are mutually exclusive. In fact, stronger ESG scores correlate to lower price declines for companies[1].

There are also significant opportunities in this space; it is estimated that $120 trillion needs to be invested across the value chain to fund the energy transition which presents an exciting investment opportunity. What’s more, investing ‘irresponsibly’ and ignoring ESG factors could result in much worse financial outcomes – for example, when Volkswagen was revealed to be cheating on their emissions tests in 2015, their stock price fell almost 40%.

Overall, the Charity Commission’s focus on this topic is welcome and the guidance does lay out the circumstances in which charities can take a responsible investment approach. However, our concern is that the false dichotomy presented between financial investment and responsible investment could mean some trustees remain hesitant.

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[1] Based on average of Environmental, Social and Governance scores applied to the universe of ESG-ranked stocks in the BofAML US coverage universe. Source Lipper – based on peak to trough price declines over 5 year period.