Aligning your investments with your charitable purpose

'Double bubble' for charities?

Resources at charities are necessarily tight so the opportunity to deliver more for less is one that trustees are keen to embrace. By investing in products, infrastructure and services that are aligned with the objectives of their charity, endowment or foundation this is very achievable.

Strong market-competitive investment returns are available on specialist investments that will also typically align with one or more of a charity’s objectives.

The Charity Commission’s new guidance for investments published in 2023 gives further impetus to this. It is now very clear from that guidance and the preceding Butler-Sloss judgment (2022) that trustees are empowered to invest with the dual objective of financial return and furthering their charitable purpose.

Meanwhile, over the last decade, we’ve seen a significant broadening of the range and availability of investment products which offer positive social or environmental benefits – often termed ‘impact investments’ – enabling trustees to access niche investments which are more targeted to their particular charitable purposes.

The 2022 Global Impact Investing Network (GIIN) survey estimated a total of USD 1.165 trillion is managed in impact investments and around three quarters of these investments are managed with the objective of achieving a risk-adjusted, market rate of return (or better).   
It's no surprise then that we are seeing a growing interest from the charities, endowments and foundations for investment products that deliver this 'double bubble'.

How should trustees approach this?

Some charities set explicit targets for ‘impact’ investments and write this into their investment policy statement. Large high-profile endowments and fund-raising charities are most likely to adopt this targeted approach. Guy’s & St Thomas’ Foundation is a good example of this. They have set an explicit target of 10% of their £1bn endowment for impact investments that help create better health outcomes for people. The National Trust has similarly committed a significant proportion of its endowment to environmentally positive investments.

Other charities won’t have explicit targets but when selecting new investments will proactively consider whether there are investment products which can fulfil their financial objectives as well as aligning with their charitable objects. This could be a formal undertaking written into investment policy statements or an informal commitment to review the options whenever investments are being reviewed.

When?

There is no wrong time to consider aligning your investments with your charitable purpose. However, a natural point is when you review your investments.

This could be as part of a ground-up review of your investment policy and strategic asset allocation or more simply when selecting a new investment manager to implement your investment strategy. Either way, ask your investment consultant and investment managers to consider the full range of options including alignment with your charitable purpose – and not to simply assume the ‘status quo’.

What are the options in practice?

There are a wide range of pooled funds which offer positive social or environmental investments. These pooled funds make it easy for charities of all sizes, from endowments with over £1bn of assets to smaller charities, to access investments which can align with their charitable objects.

Relevant pooled funds are often organised by trends, such as healthcare, the energy transition, biodiversity or social equality. These trends naturally lend themselves to alignment with specific charitable objectives. Increasingly, there are also place-based funds to enable positive social investments into specific localities – important for some charities with endowments which are to be directed to specific regions.  
Importantly, the range is not just restricted to investment in equities. There are good options available across all the main asset classes, including corporate bonds, specialist credit, property, infrastructure and absolute return funds; potentially enabling charities to integrate their charitable purpose throughout their portfolio.

Many of these funds aim to address some or all of the UN’s 17 Sustainable Development Goals. Often these funds also report your investment’s contribution to supporting the goals. This so-called ‘impact reporting’ can be an effective way to engage with your stakeholders to demonstrate how your charity’s reserves are serving the dual purpose of financial return and benefit delivery.

Examples of match making in practice 

Public versus private markets?

Pooled fund options are available in both public and private markets. In general, private markets enable greater depth of impact. For example, providing direct private loans to build a new hospital in an under-served region will deliver far greater impact than say buying shares in a healthcare provider listed on the S&P 500. Having said that, by investing in public markets and driving up demand for these types of investments, you are reducing the cost of capital for new investments and so also helping deliver genuine impact, albeit the depth of impact is less.

By their nature, private market funds are illiquid (or have restricted liquidity) so necessitate a patient investor with a long investment horizon to get the best out of them.

Private market funds are typically more complex to invest in, requiring more specialist advice and extra day-to-day administration. Fee rates will be higher too although, an experienced investment consultant may be able to negotiate more favourable terms. You are of course expecting that higher returns for this illiquidity and specialist investment more than compensate for those higher fees. These factors should be weighed up in your consideration of the most suitable option.

What to look out for?

Loss of diversification – the pooled funds which are closely aligned with your charitable purpose are likely to be specialist, focusing on a narrow sector of the investment universe. For example, investing in a ‘pure play’ biodiversity theme may limit the investment manager to stock selection within a group of around 100 to 200 companies. This limits the diversification of your investments and will mean these types of pooled funds are likely to be more volatile in year-to-year performance and may deviate from the broader investment market significantly over extended periods. Trustees should carefully size their allocation to these more concentrated funds appropriately in line with their duty under the Trustee Act 2000.

Greenwashing – investment managers are ever keen to secure a sale. Unfortunately, some test the boundaries of reasonableness by defining their products as ‘impact’ or ‘sustainable’ funds. Be ready to lift the lid on their underlying investments and challenge the impact thesis – your investment consultant should be live to this issue.

Higher costs – specialist funds necessarily require more skill and research from the investment manager. Often they also have a lower volume of assets under management. Fee rates are typically higher for these reasons so in weighing up the options, trustees will need to consider the expected ‘net’ benefit considering the expected investment return, the fees and the extent to which the investment furthers their charitable objects too. In other words, it may be fine to pay higher fees if the trustees are reasonably satisfied that higher investment returns are expected and/or the investments further their charitable purpose.

Next steps

Find your ‘double bubble’. Ask your investment consultants or investment manager how you can integrate your charitable purpose into your investment portfolio to provide additional charitable benefit as well as great financial returns.

At LCP we have been carefully reviewing a wide range of specialist investments – drawing on the expertise in our energy transition team and health analytics team – to identify opportunities for our clients to invest in long-term winners that deliver positive social and environmental outcomes.