Charities are putting investment portfolios to harder work

Like everyone else, charities are facing escalating costs and turbulent global markets. So to achieve their philanthropic goals, they are increasingly investing to achieve them rather than just to grow their assets (Simon Dawson/Bloomberg)

Charities are finding themselves strapped for resources, so are shifting the allocations of their investment portfolios to achieve their philanthropic goals

Charities are finding themselves strapped for resources, so are shifting the allocations of their investment portfolios to achieve their philanthropic goals

If you think it's hard navigating escalating costs and turbulent global markets, imagine being a charity. This whole sector is finding its resources under pressure while also having philanthropic goals.

But rather than batten down the hatches and retreat into conservative, capital-preserving portfolios, these organisations are increasingly looking to put their investments to work in closer alignment with their values - to make sure they are achieving as much as possible with the assets they have.

“Over the past 20 years, I’ve seen a real sea change,” Carol Mack, chief executive of the Association of Charitable Foundations, tells AOX. “There has been growing recognition that what you’re doing with your investments can help you to achieve your mission.”

Environmental, social and governance investing might have been designated a dirty word by the current US administration but in the UK virtuous spirits do not seem to have been dampened. “In fact, quite the opposite,” says Celia Waring, client investment director at CCLA.

“It has almost prompted investors to be more committed and more vocal about what they want to see their investment managers doing on their behalf,” she said.

In the past, exclusions and restrictions were the main tools available to charities looking to reflect their priorities in their portfolios: no arms, no tobacco, no fossil fuels. But now organisations are engaging in more proactive, sophisticated ways. 

They are asking harder questions of their managers, Waring says: “We are asked about active ownership in every discussion with a prospective client: do you subscribe to the UN Principles for Responsible Investment, what’s your voting track record, are you a member of any investor coalitions?”

CCLA has just published its annual mental health and modern slavery benchmarks, which rank the largest 100 companies in the UK based on their performance on these topics, for the enlightenment of investors.

Church-based charities are firmly among those showing increased enthusiasm in aligning their investments with their values. 

If the question is ‘what would Jesus invest in?’ then the answer comes courtesy of The Pontifical Academy of Social Sciences in the form of the Mensuram Bonam, issued in 2022.

This provides faith-led investment guidance for Catholic bodies, including restrictions in the categories of human dignity, the common good and social justice.

Jesuits in Britain goes so far as to put its mission before returns. “We are committed to promoting the common good by making investments that support social development, even if they may yield a lower rate of return,” the charity says.

“This reflects the Church’s preferential option for the poor, recognising that assisting those in need is a matter of justice, not just charity.”

Larger outfits with more assets to play with, a greater tolerance for risk and illiquidity, and more sophisticated in-house capabilities are often in a good position to fine-tune their portfolios.

The largest among them are able to directly target impact investments through private markets.

But for smaller charities, who must keep an eye on their cash reserves and are sometimes tempted to exclude risky or complex investments entirely, how realistic is it to put their money where their lofty values are?

An evolving market of pooled funds is increasing the options for organisations great and small, lowering the barriers to entry to certain assets.

“They allow smaller charities to have exposure to a larger strategy that can commit to longer term, illiquid investments and often pure impact funds,” says Lisa Stonestreet, head of communications and charity impact at the Eiris Foundation.

And as charities become more vocal about wanting to put their endowments to work, the array of available pooled funds is graduating from simple multi-asset strategies to more sophisticated impact options.

Big Issue Invest, for example, is soon to launch its £25mn Growth Impact Fund, which aims to support social purpose organisations that have been previously “shut out from social investment”.

“We’re seeing commercial investors entering this space seeing the opportunities to offer impact products. I think that will accelerate the use of the main endowment for impact investing,” says Mack.

It turns out that size is not everything, especially when it comes to engagement. “That mindset needs to shift,” Stonestreet insists. Even a small charity, as the expert in their area of concern, can be in a powerful position to ask the right questions of their invested companies.

Friends Provident Foundation, which provides grants to projects targeting a fairer economy, is one charity that has worked with ShareAction to nudge invested companies to engage on labour topics including the living wage.

This kind of collaboration, where charities come together to amplify their impact, is another emerging trend, with such partnerships as the Charities Responsible Investment Network drawing on numbers to shout louder.

Of course, the idea of throwing money at all the best causes is appealing. But as institutional investors, charities must keep an eye on the bottom line. A mission-led investment strategy that tanks returns is no strategy at all.

But many are finding that values-driven investing need not mean financial compromise. In fact, Stonestreet says: “There’s increasing evidence that mission-aligned portfolios or sustainability-aligned portfolios deliver competitive returns.”

In tough financial times, as donors feel the squeeze and the work of charities becomes more important than ever, endowments no longer have the luxury of languishing in generic portfolios. Instead, they are being asked to do it all: make money and do good.