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How to construct an ethical policy – a case study

We recently met with a medical research charity where they had historically decided not to place any ethical restrictions on the portfolio in fear of the detrimental impact on future financial returns. The new Chief Executive raised concerns with the trustee board over potential negative impact to fundraising if supporters learnt that the charity invested in areas contrary to the organisation’s purpose. The trustee board debated the issues, and the areas of real concern were identified as smoking and obesity, both of which have a direct correlation to the diseases the charity was set to eliminate.

How to limit the charity’s exposure to the tobacco industry?

Tobacco was a relatively straightforward discussion as it is easy to identify companies who manufacture the product.

The trustees accepted this may, at times, have a negative impact on performance (tobacco companies represent around 5% of the UK equity market and 4% of the global equity market). However, it would be difficult to defend the inclusion of tobacco stocks within the charity’s portfolio.

This restriction could easily be implemented across the charity’s direct equity holdings (some 50% of the portfolio) but would be more difficult to enforce with investments in collective investment schemes.

The board agreed to take a practical approach by asking their investment manager to monitor indirect holdings, so the portfolio’s exposure was kept to a minimum. We also agreed to include an analysis of the individual and overall exposure in our quarterly reporting, to allow the charity to know exactly how much exposure it had (if any) to tobacco producers.

Tobacco distributors

The board then went on to discuss the tobacco supply chain (i.e. the distribution and sale of tobacco).

It was agreed that it would be impossible to exclude organisations involved in the supply chain as for many businesses this would be a small percentage of their overall business, and would include companies ranging from supermarkets to oil companies operating service stations.

A pragmatic solution was agreed, as their investment manager we were asked not to invest in any business where significant revenue came from the tobacco industry.

How to take into consideration obesity issues in the charity investment strategy?

The rise in obesity was a more challenging debate. The increase in salt and sugar in people’s diet has been a significant contributory factor to the rise of obesity as has the increase sale of processed food.

However, as pointed out by the medical experts on the trustee board, salt and sugar are essential components of a balanced diet and there was no conclusive scientific evidence that taken in moderation either were harmful.

The trustees would rely upon the investment manager to avoid companies guilty of bad practices through our overall approach to responsible investment.

Should the charity exclude arms and weapons from its portfolio?

One of the trustees asked if these should be excluded because conflict in any guise is detrimental to health. As there was no direct connection it was agreed that arms should not be a specific exclusion, but as a responsible investor we would not want to invest in controversial weapons.

How do we document these ethical considerations?

The conclusion for the discussion is now included in the statement of investment policy.

  • The charity will not directly invest in tobacco companies.
  • The trustees accept that some collective investment schemes may have exposure to tobacco stocks.
  • The investment manager will monitor the position of these schemes to ensure this is kept to a minimum.

In principle the Trustees would like to be responsible investors. Therefore, the investment manager is expected to take account environmental, social and governance (ESG) issues in their investment analysis and decision-making processes and engage with company management when appropriate.

Responsible Investment

As a client of Quilter Cheviot, you can be assured that as we aim to meet your investment objectives, we are acting as a responsible investor on your behalf.

Responsible Investment

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