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What’s the impact of your investment portfolio?

Neil Cradock, Head of Charities & Not-for-Profit's at Barclays provides information and guidance about protecting and maximising your charity's investment portfolio.

Your investment portfolio is a critical resource, and risk, for your charity - are you maximising its value and ensuring alignment with your mission?

Impact investing is an innovative approach gaining traction and visibility in the industry that can help you achieve both these aims.

As the field is still new and evolving, it can be hard to understand how it relates to other investment approaches and how to discuss it with your charity’s trustees, investment committee or finance team.

To help start that conversation, here we seek to clarify - What is impact investing? How does it differ from traditional and ethical approaches? How do I know it’s right for my charity?

Every investment has an impact

Historically, many investors may not have been aware or interested in how their portfolio’s companies operate, or in the outcomes of what they produce. This is changing. Charities are typically more sensitive to this, with many avoiding certain stocks sectors with more questionable activities (tobacco, cluster munitions, pornography etc).

Like a growing number of investors, we’ve recognised a simple, but critical fact that every investment we make and own has an impact on our world. Incorporating these considerations in our decision-making process creates new possibilities for how we advise charities and manage their investment portfolios.

As we see it, impact investing is about investing intentionally for both financial returns and societal outcomes - to protect and grow your assets as well as making a positive impact to our world.

So you can expect an impact portfolio to include companies providing commercial solutions to our pressing social or environmental challenges – such as climate change, health, education or plastic waste. Because these are (unfortunately) growing issues, companies that can successfully address these will profitably grow – and so can your portfolio.

Alternatively, you can expect an impact portfolio to identify companies with better operating practices – such as environmental management, gender equality, or corporate governance. These companies can have a competitive advantage relative to their peers – and so can your portfolio.

Avoiding unethical stocks vs. assessing companies for impact

Compare impact investing with ethical investing, where a set of values or beliefs pre-determines what is acceptable for your investment portfolio.

This is a direct way to express strongly held views of your charity with an exclusions list. At the same time, it can be tricky to implement. Not all ethically-labelled funds use the same set of screens, or apply screens in the same way. Moreover, what’s ethically acceptable for one charity may not be for another – for example, abortion or defence.

Impact investing takes a more nuanced approach that relies on data and insight about the company, rather than moral beliefs for investment decisions. Importantly, it’s possible to combine both ethical screens and impact investing in portfolios.

What’s right for your charity’s portfolio

With impact investing added to the range of investment styles, it can be difficult to decipher and decide on the right approach. Let’s look at two critical aspects of your portfolio – financial returns and reputation management.

Maximising your returns

Investment portfolios serve various aims - generating annual budgets, covering potential liabilities, or funding future projects.

In all cases, maximising the financial return is a critical consideration, though the Charity Commission (CC14) provides the flexibility to make any investment provided it is justifiably in your charity’s best interest.

With ethical investing, you should be willing to forgo any financial returns of companies or sectors you’ve excluded. This isn’t to say an ethically screened approach cannot perform like a traditional one – just that your conviction should be strong enough that benefitting from the excluded companies’ performance shouldn’t be acceptable to your charity given its mission.

With impact investing, giving up returns isn’t a requirement. The vast majority of impact fund managers target market-rate returns, and a growing body of academic evidence and investor experience is showing that impact approaches perform like any other investment.

In fact, through our research with the Financial Times (1) with families and their foundations, 85% reported their impact investments met or exceeded their expectations of financial returns . 87% said the same about social objectives.

Of course, in both cases remember that like any investment, the value of your capital may go down as well as up.

Aligning with your mission

Like all aspects of your charity, you want to be proud of your investment portfolio. Increasingly your donors and stakeholders will hold you accountable for your investments. In fact, from a YouGov poll for Good Money Week 2017 (2), 77% of the UK public said they would be unlikely to donate to a charity if its endowments or other assets were invested contrary to its mission.

With an effective ethical approach, you should be confident that your organisation will avoid detriment to your reputation by steering clear of industries which conflict with your mission. This should prevent cases such as the Church of England (Wonga), or Cancer Research UK pension fund (tobacco).

Rather than just being comfortable about doing less bad, impact investing offers a more proactive option.

To help deliver your mission, you can use your portfolio to invest in companies and projects that are aligned with your aims – e.g. green bonds if you are an environmental charity, or social real estate as a homelessness charity. Taking this holistic approach to your mission can be a showcase to donors on how you use their funding and enhance your reputation.

Starting the conversation

Overall, impact investing offers an innovative way to invest for those who care about their financial returns and for those who care about the societal outcomes of their investments – and, most importantly, those who care about both.

As stewards of your charity’s capital and reputation, consider who you are as an organisation and whether your current portfolio reflects this. Moreover, consider whether your investments can actively support your mission. We hope we’ve given you the ideas and explanations to start that conversation with your colleagues. In our next article, we’ll explain how charities are using impact investing and the options they have.

1.  Investing for Global Impact 2018, Financial Times (2018)
2.  ‘Bad’ investments put charity donations at risk, warns YouGov poll for Good Money Week, Good  Money Week press release (2017)