Purpose. Profits. Planet: Charity trustees and sustainable investing
February 06, 2020
Sustainable investing is a hot topic for many charity trustees, and with good reason - environmental, social and governance factors can diminish the funds available to serve beneficiaries. At the same time, opportunities are being opened up to create targeted outcomes directly through the investment decisions that charities make.
Climate change represents a risk that is existential. Research, such as from The Economist Intelligence Unit and Aviva Investors, indicates over £3 trillion of assets could be at risk between now and 2100, so asset managers are investing a significant amount of money in detailed climate modelling tools to understand their exposure.
A growing wealth of evidence suggests that, with the exception of some niche impact investments (see below), investing sustainably protects investment returns rather than compromises them. So much so that regulators are making it mandatory for certain people and organisations to factor environmental, social and governance (ESG) into their decision making. Trustees of pension schemes with over 100 members, for example, are now required to update their Statement of Investment Principles to cover material ESG considerations.
From a risk perspective, improved data is crucial to driving sustainable investing into the mainstream. With improved company disclosures on ESG, and a burgeoning market of sophisticated analytics firms, companies are able to help enable and better inform asset managers to invest in a sustainable way. According to the Investment Association, £2 trillion of assets managed by UK asset managers are now invested sustainably.
What does this mean for trustees?
Charitable trustees should seek to examine whether their governing policies (such as their Statement of Investment Principles) and processes are in line with current good practice and the Charity Commission’s guidance on investment matters for charities. Trustees should also make sure they have an investment strategy and manager that is well matched to their ESG priorities. This means being prepared to test how their asset managers factor ESG into their investment decisions, and what checks and balances they put in place to mitigate these risks. Trustees may also wish to make sure that ESG characteristics of investments are included as part of their portfolio reporting. As long term investors, climate change is a threat to future programming for charities.
But this story does not only relate to risk. A recent report by the Business and Sustainable Development Commission suggests the 60 biggest markets related to delivering the Sustainable Development Goals (such as micro-irrigation, electric vehicles, low-cost surgery and green chemicals) could open up over £9 trillion of market opportunities. Investment opportunities can also be found in the local community, such as in affordable housing and healthcare delivery.
Some trustees may also want to think strategically about how they are using an endowment to drive forward a charity’s mission. Opportunities now exist to make ‘impact’ investments directly through an endowment (such as by investing in social enterprises). These may not always yield a risk-adjusted market return, but can be acceptable if they contribute directly to furthering a charity’s aims. Trustees may want to test whether they should “carve out” part of an endowment for the purpose of making impact investments, even if that means running a smaller grant programme, to provide the best outcomes for their beneficiaries.
The idea of viewing an endowment as well as a grant programme as a vehicle for driving charitable objectives directly is a relatively new one, but one that is being enabled as the sustainable investment market matures. The Access Foundation takes what it calls a “Total Impact” approach to managing its endowment, whereby it “considers the social and environmental impact of all work, including the investments held within a portfolio”. It has recently started publishing a series of blog posts about the experience of taking this approach.
How can PwC Investment help?
We can support trustees in setting an investment strategy that is in line with the values and ambitions of a charity, and then identify investment managers that have strong capabilities around sustainable investing. We can also provide ongoing monitoring of both core financial and ESG performance, to hold investment managers to account and identify emerging risks.
If you would like to learn more about our work in this area, please contact: