Many charities undertake responsible, impact and social investment as a way of aligning their investments with the charity's purposes. Responsible investment approaches can also be used to manage conflicts between the investments and the purposes, reputational risks and to strengthen financial performance. There is some blurring of definitions and terms between the three approaches which is explored in the definitions below.

ShareAction, host of the Charities Responsible Investment Network and Responsible Investment Network - Universities, defines responsible investment as: "a transparent approach, embedded throughout the investment process, that takes the negative and positive impacts on people and planet as seriously as financial risk and return", noting that "by taking positive and negative impacts on people and planet as seriously as financial return, large investors can drive action to tackle the problems caused by unsustainable and exploitative business models. For example, just 100 companies are responsible for over 70 per cent of global carbon emissions. Big investors in such companies hold the key to tackling the climate crisis by pushing these corporate giants to decarbonise. Investors can also mobilise money to invest in well-proven low-carbon solutions and provide finance to companies that need to rapidly scale their use of solutions to achieve timely transition."

The Impact Investing Institute states "Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return".

Impact investments may be classified as financial or social investments depending on factors such as how closely the investment matches the charity's purposes and the projected financial return. Some impact investment approaches involve making social investments, typically into social purpose businesses and charities either directly or via a fund or bond. Some charities also undertake impact investing in secondary markets, for example buying shares in companies which contribute to solutions to environmental or social issues, or in order to take on an activist role to improve the company’s environmental or social practices (this overlaps with responsible investment).

The Charities Act 2011 states "a social investment is where charity trustees use money or property with a view to both:

• achieving their charity’s purposes directly through the investment
• making a financial return"

The financial return required may intentionally be lower than the sum invested (a 'return of' investment rather than 'return on') but there is some expectation of a financial return. This is different to a grant where there is no expectation of a financial return. Social investments can be made into the charity’s own operations (for example purchasing an operating premises) or into other organisations (for example making a loan to a charity to buy a building, investing in shares in a social enterprise or investing in an impact fund which makes investments into businesses with a quantifiable social or environmental impact). Most charities in England & Wales can make social investments.

A total impact approach involves a charity aiming to use all of its investments to generate a positive impact in line with the charity's purposes, alongside its grant-making or charitable programme delivery. This could include using responsible, impact and social investment approaches. A total impact approach will typically involve thinking about investments on a spectrum, with some investments very closely aligned to the charity's purposes and others which contribute more broadly towards the charity's purposes. A total impact approach can involve both financial and social investments.

For more on the evolution of terms, see ShareAction's 'What's in a definition?'  

Other terminology used includes:

• ’spectrum of capital’
• ‘the ABC framework’ with investments classified as Avoid Harm, Benefit Stakeholders and Contribute to solutions

Responsible investment

Why might charities undertake responsible investment?

• to further the charity's purposes (for example a nature charity seeking to invest in companies which are helping to progress the transition to net zero)
• to avoid or manage conflicts with the charity's purposes (for example a health charity avoiding or limiting investment in ultra-processed food)
• reputational risks (for example a fundraising charity avoiding investments in arms manufacture)
• to ensure the charity's purposes are for the public benefit in the broadest sense (for example the climate crisis leading to damage across communities, including where charities have their operations)
• to safeguard financial performance and manage risk (for example poor corporate governance leading to lower financial returns or the effect of the climate crisis on financial returns over the immediate and longer term)

How might charities undertake responsible investment?

There are a wide range of techniques which can be used. Typically techniques will be used by the charity's investment managers on behalf of the charity.

The UN Principles for Responsible Investment's Introductory Guide to Responsible Investment (UNPRI) includes:

• Screening: ruling investments in or out based on pre-specified criteria (for example a charity avoiding investing in companies which are exacerbating the climate crisis or seeking to invest in companies which are contributing to solutions to the climate crisis). A charity might entirely exclude investment in a particular sector (for example arms manufacture) or company, might set limits (for example, limiting the amount of an individual company's revenues or within a fund the amount of revenues from a sector, such as limiting tobacco to less than 10% of revenue).
• ESG integration: considering environmental, social and governance factors when assessing investment opportunities, typically as a method of maximising the long-term value of a company. This approach will not necessarily avoid conflicts with the charity’s purposes, for example ESG ratings might rank tobacco companies against each other based on their environmental, social and governance performance but investing in any of these companies may still involve a conflict with the purposes of a health charity
• Stewardship: use of influence by investors, through a range of methods, including engagement, filing resolutions, voting at shareholder meetings, influencing policy makers, contributing to research and participating in public discourse. Investment managers, on behalf of charity investors, might first engage with a company to request a change in behaviour, there would then be opportunities to escalate engagement if changes aren't forthcoming, and finally divesting where change is unlikely to occur.
• Stewardship with other stakeholders: charities, investment managers and other stakeholders working together to enhance their effectiveness in pursuing their stewardship objectives (for example ShareAction's Healthy Markets initiative)
• Taking action on sustainability outcomes (see below)

For more detailed definitions, visit the UNPRI Glossary

Voting

Owners of shares in a company have the right to vote on corporate actions, often at the company's annual general meeting (AGM). This might include votes on the company's activities (for example merging with another company), governance (for example pay for top executives or the board), social (for example on labour rights) and environmental factors (for example resolutions requiring the company to meet particular environmental standards). The number of votes a shareholder has corresponds to the number of shares they own. Typically an investment manager will vote on the charity investor's behalf, and may outsource some or all voting to a proxy voting company (which may provide administration of voting or also take responsibility for voting decisions).

CC14 notes: “If you have delegated voting responsibilities to your investment manager, you should be aware of the manager’s voting policy. You should take reasonable steps to understand how your investment manager has voted on your behalf.”

Voting might be taken in order to safeguard financial performance or based on environmental or social factors. A key part of successful stewardship involves the charity giving clear instructions to the investment manager on the parameters for voting, for example any commitments to particular social or environmental targets, or in instances where the investment manager is voting all shares such as in a pooled fund, having a clear understanding of the manager's intended voting parameters and how these fit with the charity's requirements. Reasonable steps to understand the manager's voting might include a quarterly report of votes undertaken, highlighting any particularly linked to the charity's purposes.

Where investments are in a pooled fund, trustees/staff/committee members understand when the charity has opportunities to influence voting parameters, for example there may be a client survey.

How might responsible investment differ depending on the charity's investment approach?

For charities that mainly invest cash, there are options to search for ethical bank accounts or to check whether a bank provides fossil fuel financing: see charities that mainly invest cash.

For charities investing via a pooled fund, information can be sought on how the pooled fund approaches responsible investment, including screens, ESG integration and stewardship. The EIRIS Foundation's 'Responsible Investment in Charity Pooled Funds’ outlines the responsible investment policies of charity-specific pooled funds in the UK.

For charities with a bespoke portfolio, there are a wider range of options to choose from regarding responsible investment, which can be tailored to the charity's purposes.

A majority of responsible investment approaches focus on shares, where stewardship through engagement, shareholder voting, etc can be undertaken. Work is underway to increase opportunities to undertake responsible investment in relation to bonds, for example the development of a fossil fuel phase-out bond index designed to maximise investor impact on company-level behaviour change, the cost of capital for fossil fuel expansion and, ultimately, real-economy emissions.

Trustees/staff/committee members should ensure there is a clear process for signing off stewardship and engagement activities. Turnaround on some activities may be tight so the process should include flexibility for a nominated individual to sign off on specific activities without needing approval from the full committee/board, and clear parameters for which activities need sign-off.

Sustainability (contributing to solutions in the ABC framework) is a key part of responsible investment, ensuring investments have "positive impacts on people and planet". A number of recent initiatives by regulators are helping to formalise reporting on sustainable investment opportunities.

In the UK, the Financial Conduct Authority's incoming Sustainability Disclosure Requirements (SDR) and investment labels are designed to help investors 'navigate the market for sustainable investment products'. The requirements and labels are an attempt to enhance the credibility of the sustainable investment market. The new rules include: an anti-greenwashing rule for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading; product labels to help investors understand what their money is being used for, based on clear sustainability goals and criteria and naming and marketing requirements so products cannot be described as having a positive impact on sustainability when they don’t.

The European Commission is also considering a Sustainable Finance Disclosure Regulation (SFDR) which would build on and clarify existing Article 8 and Article 9 disclosure requirements. Article 8 funds promote “environmental and/or social characteristics”, while Article 9 refers to investment products that have a sustainable investment objective; all holdings within a fund must be sustainable investments that meet the standard of “do no significant harm”.

Further developments in responsible investment include:

• developing standards outside of the companies or industries involved to ensure minimum parameters to protect social, environmental, and economic systems.
• the European Parliament and the Council Corporate Sustainability Reporting Directive (CSRD) aims to improve the way companies report sustainability information, which varies from one company to another and is not easily comparable. The CSRD incorporates the concept of ‘double materiality’. This means that companies have to report not only on how sustainability issues might create financial risks for the company (financial materiality), but also on the company’s own impacts on people and the environment (impact materiality).
• an interest in the long-term health of the financial system as a whole. Universal owners (investors who own investments across a wide spectrum of the economy, as in many charity portfolios), find it particularly difficult to diversify away from systemic risks such as climate change, biodiversity loss, rising inequality, and global pandemics, and emerging approaches focus on countering whole-system threats by effecting change in the real economy.

Leadership and influence

Whilst charity investments are small relative to other institutional investors (eg pension funds) and in comparison to the overall investment market, there are clear opportunities for charities to take on a leadership and influencing role in relation to investment practice, for example:

• collaborating with other charities, investment managers and stakeholders to achieve change (for example ShareAction's Good Work Coalition)
• joining and promoting the charity's support for investment initiatives (for example NCVO's Fuelling Positive Change Campaign to encourage charities to divest from fossil fuels.)
• seeking greater transparency in investment practice (for example the ESG Investing Olympics)

Examples

• Guy's & St Thomas' Foundation
• Barrow Cadbury Trust
• WWF
• Esmee Fairbairn Foundation

Impact investing

As noted above, impact investing is broad, and can encompass both financial and social investment, and overlaps with both responsible and social investment approaches.

The Impact Investing Institute produces a range of guidance on impact investing, including a learning hub and guidance for charitable endowments.

Charities pursuing a total impact approach include:

• Access - The Foundation for Social Investment: Total Impact Approach
• Ufi VocTech Trust: Investing for Impact
• Golden Bottle Trust: Total Portfolio Impact
• Barking & Dagenham Giving

Social investment

The Charities (Protection and Social Investment) Act 2016 gave charities in England & Wales the power to make social investments. A social investment is where the charity’s money or property is used with a view to both:

• achieving the charity’s purposes directly through the investment
• making a financial return

The financial return may be on top of the return of the original investment (for example repayments on a loan comprising both the loan itself and interest payments) or a return of some portion of the original investment (for example 50% of monies are repaid, in contrast to grants where no monies are repaid).

As well as using the charity’s money or property, trustees can take on a commitment which puts the charity’s funds at risk, such as a guarantee (for example an arts charity taking out a loan to stage a new production with the intention of paying back the loan via ticket sales, might secure a guarantee from a charitable foundation that if the ticket sales aren’t enough to pay back the loan, then the charitable foundation will pay back any remaining balance).  

The Charity Commission's CC14 guidance states:

Making decisions about social investments - When deciding if a social investment is in your charity’s best interests, comply with the decision-making principles and think about:

• how the social investment fits with your charity’s overall financial position, spending plans and plans for achieving its purposes
• what you expect from the investment - both the financial return and helping you to achieve your charity’s purposes
• the risk that the social investment will not deliver (or will underperform) on your expectations
• the cost of making the investment
• how long you plan to have your charity’s money invested, and your exit arrangements
• how you will measure and monitor performance of the social investment
• the tax treatment of the investment
• You must also comply with your specific legal duties to take advice on, and review, any social investments.

See the Charity Commission's CC14 guidance for more information on making social investments.

Social investments can be made to directly deliver the charity's work (for example where a charity purchases a building from which to run services) or into other organisations which deliver the charity's purposes (for example making a loan to a social enterprise).

Any charity intending to make social investments should take advice from an individual with appropriate expertise. Trustees (with help from staff and committee members where needed) will need to consider whether social investments are appropriate in their charity's context, for example with regard to the charity's:

• available funds
• time horizon
• risk appetite

Examples of social investment

• Joseph Rowntree Foundation
• Esmee Fairbairn Foundation
• WWF

Social investments and time horizon

A social investment might be short (for example providing a lending facility for a charity which needs cashflow support while waiting for an agreed grant to be paid) or ultra-long term (for example providing a loan to purchase a building to be paid back over 20+ years or buying shares in a social enterprise which are held on an ongoing basis). Where a charity, for example an endowed foundation, has a long-term time horizon or can provide investment at concessionary rates (receiving money back at a lower than market rate or potentially receiving back less than the original investment), this can increase opportunities to provide patient, catalytic capital. For more on catalytic capital in the UK social investment market.

Taking advice on social investments

As with financial investments, trustees have a duty to take advice when necessary on social investments. This advice might come from a trustee/staff/committee member or an individual with relevant expertise, for example financial or investment experience, experience running a business, expertise in the social impact the charity is looking to achieve. The advice might come from a volunteer or paid adviser. Many charities making social investments also seek legal and financial guidance in conducting due diligence on a proposed investment and agreeing the legal terms of the investment.

Advice may also be needed on how social investments will be valued for the purposes of the annual accounts.

Social investment risk appetite

A charity's risk appetite for social investments is likely to be different to the risk appetite for financial investments.

Considerations include:

• financial risk
• ’impact risk’
• how risk is shared between the charity as investor and the investee (for example exploring social investment approaches where risk is more evenly shared or more risk is taken on by the charity making the investment -  ‘Esmee Fairbairn Foundation's perpetual bond’
• a process for assessing individual investments as discrete opportunities and in relation to any broader portfolio of social investments

Investment policy - social investments

Social investment

The Charities (Protection and Social Investment) Act 2016 gave charities in England & Wales the power to make The charity may have a standalone policy for social investments, a combined policy for financial and social investments. Items to include in an investment policy for social investments include:

• if the charity holds permanent endowment, which approach (see Principle 1) is being used to make social investments
• how the charity will source, due diligence and, where appropriate, take external advice on social investments.
• how social investments fit with the charity's overall financial position and spending plan
• the charity's allocation to social investments
• timeframe for social investments, including across different asset classes and direct investments
• which asset classes/products the charity will invest in and how these might affect the proposed impact of the investment
• whether the charity will take advice from someone experienced in the issues that the investment aims to contribute to, and whether that is a Trustee, staff member, volunteer or service user
• how the charity will consider risk in relation to social investments, including financial risk, impact risk and risk sharing
• exploring providing catalytic and concessionary capital
• appropriate and proportionate oversight arrangements, including formal agreements with investees, a social and financial performance monitoring and reporting framework
• risk appetite for social investments