Ethical Investment and Charitable Institutions in Ireland
Ethical investment is a valid and progressive investment objective, for Charities and other investors, but it is not a one size fits all proposition and its implementation requires experience and expertise.
Charitable Institutions, whether approaching ethical investment for the first time or critically reviewing an extant mandate, must set about resolving or confirming aspirational aspects of the objectives, as set out in an investment mandate.
The Charities Commission (the Regulator for England and Wales) sensibly guides Trustees towards resolving ethical investment objectives under three headings: Financial Investment; Programme Related Investment; and Mixed Motive Investment.
Financial Investment involves an industry-standard investment process (financial assessment of the investor; risk / reward assessments; asset allocation model; asset selections). This process is extended in accordance with the aims of the Charity to include: negative screening; positive screening; and (occasionally) stakeholder activism imparting some level of influence over the behaviour of the company that the Charity has chosen to invest in.
Programme Related and Mixed Motive Investments are investments that directly further the aims of the Charity, and may yield a return.
In Ireland, regulation of the Charities Sector is undergoing change. The Irish regulator (the Charities Regulatory Authority) was formally established on October 16 2014 under the Charities Act 2009, building on previous legislation (1961 Charities Act), and superseding the Commissioners for Charitable Donations and Bequests for Ireland.
In the increasingly sophisticated international and domestic context, Irish Charity investors face particular challenges:
• Compliance with the tax code with respect to Charities
• Increasingly onerous obligations with respect to reclaiming tax on foreign dividends (in the case of segregated accounts)
• Compliance with Charities regulation and guidelines regarding investment
• Appropriate management of the Charity’s overall investment portfolio comprising: Financial; Programme Related; and Mixed Motive investments respectively
• Appropriate management of Financial Investments by Charity
The latter of these is particularly important as it defines the terms of engagement of a Charity with the financial and investment markets.
The investment policy statement of a Charity pursuing ethical investment will need to define, carefully, what is meant by ‘socially responsible ethical investment’, and this is a fraught process. For instance, some charitable institutions may choose to regard nuclear energy as the solution to fossil fuel pollution and have no difficulty with investing accordingly. Even apparently, straightforward cases may have pitfalls: a Charity simply placing a deposit with a leading bank may be scandalised to learn that the bank has lent money to an internet service provider that declines to block pornography from crossing its platforms – should the Charity bring its deposit business to a different bank? Are other banks any more discerning in any case?
The difficulties may be summarised as follows:
• Negative Screening is unlikely to adversely affect investment returns in the long term, but it is a less than perfect exercise (take the bank deposit example above).
• Positive Screening is likely to more closely reflect the ethical aims of the Charity, but the narrower the set of eligible investments the greater the potential for an adverse impact on returns, and the greater the difficulty in identifying (collective or segregated) investment opportunities.
• Stakeholder Activism is all very well, but it works well only where the Charity is able to exert strong financial and / or moral persuasion influence as a result of its investment. It requires a degree of engagement between the investor and the invested company that is beyond the time and attention capacity of most Charities.
One size does not fit all when it comes to ethical investment. Charities concerned about ethical investment of their assets should ensure that they incorporate adequate competence and capacity within their management structures to deal with the more or less complex issues arising. In many cases, this could be accomplished by the incorporation of a non-executive directorship role tasked with defining and overseeing the ethical investment mandate of the Charity.