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Ethical investment and ESG screening for charities

Exclusions prohibit certain investments from a fund or portfolio. For us these are client-driven at the portfolio level, and at a fund level these are set within the fund’s objectives. Ethical or values-based investing is often associated with exclusions, an approach that incorporates an investor’s moral principles, values or religious beliefs by screening out investments with particular features. These may be applied on a variety of issues.

If we think about the difference between ethical and ESG integration - ethical investing is a values-driven approach to investing, focused on excluding assets that do not match the values of the investor, effectively looking at the impact the assets have on the world around them. ESG integration, on the other hand, considers the impact that an investee company’s environmental, social and governance practices might have on the future financial prospects of the investee company, how the company is managing those factors and how they are priced into the investment.

A significant number of the charities we work with have an ethical policy, and we are well versed in integrating ethical policies into our investment process. To complement our investment managers’ knowledge in this area we employ an independent specialist firm (Ethical Screening) to review the securities researched by our analysts and advise which ones should be excluded given their exposure to sectors or activities which clients want to avoid.

The key to a successful policy is applying it across all the activities of an organisation not just the investments.

How to approach ethical investment?

Discussions usually start when trustee boards are formulating or reviewing their investment policy. Whether your charity wants to exclude certain sectors or not, it is helpful to understand the values that you stand for and how these might be implemented.

How to apply restrictions to the portfolio?

Restrictions are loaded onto our dealing system for on-going monitoring and compliance. We can screen all direct holdings (fixed income and equities) so that your ethical values are incorporated into how your portfolio is managed.

How does an ethical policy impact portfolio construction?

Sometimes implementing an ethical policy can cause an unintended (and sometimes significant) skew and at times the financials’ sector is the only ‘ethical’ area which is not impacted by the screen.

We will work you to assess how your charity’s policy may impact your portfolio to understand:

  • which stocks are excluded
  • the impact at a sector level
  • if there is a bias towards certain areas within the market.

Will it impact investment performance?

Sometimes it can become difficult to distinguish whether it is the policy or the manager implementing it, that is driving the investment returns. Although blaming under-performance on the ethical policy in some cases may well be true, in others it may reflect wider performance issues within the investment management firm.

If you are unsure, we encourage you to compare the performance of your portfolio against a similar one which does not have any constraints, so it is easy to see whether the policy or the manager is the cause.

Constructing an ethical policy

An example of the different ethical considerations to bear in mind when constructing a charity's policy.

Read case study

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The value of your investments and the income from them can fall and you may not recover what you invested.