Investment

All to the good?

Is socially responsible investment an irrelevant distraction for school bursars or a cause for concern? Mike Goddings reviews some significant investment precedents and suggests setting an active strategy

Investing a school’s assets appropriately might reasonably be considered a simple matter of choosing between various financial alternatives. However, the increased emphasis on socially responsible investment deriving from the introduction of the Trustee Act 2000, combined with recent events and greater public awareness, may mean that schools are neglecting this important aspect of their investment policy. In order to examine this subject in a meaningful context, it is worth reviewing the bases of an independent school’s capital investments.

From the top
The Governing Instrument, Reserves Policy and Investment Strategy are sensible places to start, as these should determine the parameters of investment. Where appropriate, the Governing Instrument should contain any restrictions or conditions placed upon the capital. These should then translate through to the policy and objectives, which can be regularly reviewed to reflect changing circumstances.

Capital may be permanently endowed or expendable, income may be accrued or not, guidelines may be set in maintaining the real value of the capital, and occasionally the benefactor will be explicit in outlining any ethical parameters that must be observed when either investing the capital or distributing the income.

So far so good. The difficult part is trying to meet these criteria within the legal framework of trustees’ fiduciary responsibility, which broadly requires trustees to obtain the best financial return from the charity’s investments consistent with commercial prudence. The common factor that links these criteria is risk.

Watch the risk
Investment risk is often associated with individual stocks, markets and asset classes. The highest risk would be to invest in a single company share, while a much lower risk profile would be achieved by diversifying across a broad range of securities that represented different asset classes, spread across different markets. For many years, the same concept was applied to ethical investment, based on a 1991 court judgement (Lord Bishop of Oxford and others v Church Commissioners for England and others).

This case was based on the premise that it was unacceptable for the Church of England to invest in companies that were clearly at odds with their charitable objects (that is, the advancement of religion). As a result, the Charity Commission accepted that charities could reasonably desist from investing in companies whose activities were diametrically opposed to the charity’s objects, and which might also alienate their supporters to the extent that voluntary income would be negatively affected. However, it cautioned against stretching moral acceptability to the point where the process of exclusion could potentially compromise the likely returns and increase the risk exposure by artificially constraining the available investment universe.

Think again
Although many charities and religious groups took the opportunity to fine-tune their investment policies, this chink in the formerly well armoured defence against exclusion began to pose a dilemma.

While medical charities could reasonably bar tobacco-related investments, environmental charities could avoid the oil and mining sectors and animal welfare charities could choose to avoid pharmaceutical companies involved in animal testing, it was at best a blunt instrument, and at worst did not help those charities set up “for the general good” that wanted to be “ethical” in their investments strategy, but for whom exclusion would be far too wideranging and inappropriate.

Additionally, even those charities that could legitimately exclude companies directly at odds with their charitable objects were potentially in a dilemma.

The blame game
As with all ethical debates, there will always be a difference of opinion in how far one should go down the chain of involvement.

This was illustrated in publicity surrounding the use by the Israeli armed forces of Caterpillar bulldozers in the destruction of Palestinian dwellings and infrastructure.

Vehement concern was expressed from some of the highest quarters of the Church of England that some church funds were invested in Caterpillar, and there were calls for the investment to be sold. The company was approached by the investment managers acting on behalf of the Church, who established that the US manufacturer had sold the machines as civil engineering equipment to the US Government, and that the equipment was subsequently exported to Israel and militarised by the Israeli Government.

Listen to all views
The moral of this tale is that even where an ethical investment policy is in place, there will always be circumstances that require reconsideration and possible adaptation, but in demonstrating the effective disharge of fiduciary responsibility, it is always wise to avoid the trap of being a forced seller. Effective investment management decisions are based on analytical rather than emotive criteria.

Without wishing to pass moral judgement on the point at which a company should be excluded, if this example is taken to extremes, charities will be left with nothing to invest in, as suppliers are categorised as being tainted by financial association, and so on.

It is this conundrum that has given rise to the process of positive engagement, the blanket term for which is widely known as “socially responsible investment”, or SRI. This takes the view that the traditional ethical approach, where exclusion, if taken to the extreme, will ultimately fail in its objective of making money.

Other choices
The alternative approach is to engage in shareholder dialogue with those companies in which the charity has a stake, in a positive attempt to influence their activities in the areas of concern. This particularly addresses those companies “tainted by association”. In many areas of charitable concern, it is the only realistic way to align the investment policy with the aims of the charity, as many come under the category of “for the general good”.

Issues such as supply chain management, human rights abuse and other non-product-centric areas, such as business ethics, are more easily managed through dialogue where the perceived threat of disinvestment and the associated adverse publicity is more of an incentive to change than when the share price has already fallen as a result of the actions or inaction at issue.

Getting it right
It is clear that the risk associated with SRI is reputational, and in the context of the examples outlined above, one where a balance has to be struck between the risk of not investing in something, and suffering poor returns, or of investing in something, but being aware of the concerns, and being able to be seen to be addressing them.

The Trustee Act 2000 recognises this in the advice to trustees in the booklet CC14, where the Charity Commission acknowledges that “an ethical investment policy may be entirely consistent with the principle of seeking best returns” and that “there is an increasingly held view that companies which act in a socially responsible way are more likely to deliver the best long-term balance between risk and return”. The process of positive engagement encourages companies to do just that.

Independent investing
There are a number of investments that are beginning to attract public interest, and which may reasonably apply to the way in which award funds and bursaries are invested. A company’s corporate social responsibility policy may well highlight its good works in employee relations, but how far does it go on child or family-friendly issues? Does it have a policy on social inclusion, and how does it go about promoting it?

Telecoms companies have a huge potential impact on child education, both positive and negative. The reaction of the food and drink industry to the prevention of childhood obesity and alcopop promotion is part of national debate.

The degree to which the school’s investment policy is prepared to address these issues is something all bursars should be putting to the top of their investment agenda.

Mike Goddings is senior client relationship manager with CCLA Investment Management Ltd, authorised and regulated by the Financial Services Authority. He can be contacted on 020 7489 6022. 

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