Ethical and responsible investment: Navigating a charity’s duties

For many charities, investment decisions are no longer based solely on financial performance. Trustees are increasingly considering whether their investments align with their charity’s purposes, values and reputation, while still generating the returns needed to support their charitable activities.

Balancing these competing considerations can be challenging. Trustees must act in the best interests of their charity, ensure that charitable assets are properly managed and make decisions that are consistent with their legal duties. At the same time, beneficiaries, donors and the wider public increasingly expect charities to take account of environmental, social and governance (ESG) factors when investing.

The starting point: a charity’s purposes

A charity’s investments exist to support its charitable purposes. Trustees therefore need to consider whether an investment strategy will help or hinder the achievement of those purposes.

In some cases, particular investments may conflict directly with a charity’s aims. For example, a health charity may wish to avoid investments in tobacco companies, or an environmental charity may be concerned about investments linked to significant carbon emissions. Trustees may reasonably conclude that holding such investments could undermine the charity’s work, damage public trust or discourage support from donors and beneficiaries.

However, trustees should avoid approaching ethical investment decisions solely from a moral perspective. The key question is whether the investment policy supports the charity’s overall interests and furthers its purposes.

Balancing financial returns with ethical considerations

Trustees are under a duty to manage charity funds responsibly. This includes seeking appropriate financial returns while taking account of the level of risk that the charity can afford to accept.

Historically, some trustees were concerned that ethical restrictions might reduce investment performance. While this can still be a relevant consideration in certain circumstances, the legal position is more nuanced. Trustees are generally able to adopt investment policies that reflect the charity’s purposes and values, provided they carefully consider the potential impact on financial returns and are satisfied that any restriction is justified in the charity’s interests.

The decision-making process is often more important than the outcome itself. Trustees should identify the relevant factors, take appropriate advice where necessary, assess the likely financial consequences of any exclusions or restrictions, and document the reasons for their decisions.

The growing importance of ESG factors

ESG considerations have become a significant feature of modern investment management.

Environmental factors may include issues such as climate change, carbon emissions, biodiversity and resource use. Social factors can cover matters such as labour practices, human rights and community impact. Governance considerations focus on issues such as board accountability, transparency and corporate conduct.

Importantly, ESG considerations are not simply ethical preferences. Many are increasingly recognised as financially relevant factors that may affect investment performance and risk over the longer term. Trustees should therefore consider whether ESG issues are material to their investment objectives and portfolio.

That does not mean every charity must adopt an ESG-focused investment strategy. Rather, trustees should ensure that they understand any relevant ESG risks and opportunities and consider them as part of their broader investment decision-making.

Charity Commission expectations

The Charity Commission expects trustees to manage investments responsibly and to act in the charity’s best interests. Trustees should be able to demonstrate that investment decisions have been made following proper consideration of all relevant factors and, where appropriate, professional advice.

A well-considered investment policy can be an important governance tool. It can help trustees articulate the charity’s objectives, identify any ethical or mission-related exclusions, explain how ESG factors will be considered and establish a framework for reviewing investment performance.

Trustees should also keep investment policies under regular review. Economic conditions, regulatory developments and the charity’s own activities may all change over time, requiring a reassessment of the balance between financial return and ethical considerations.

Practical steps for trustees

Trustees should ensure that they:

• understand how their investments support the charity’s purposes;
• identify any investments that may conflict with those purposes;
• consider the financial impact of any ethical restrictions;
• evaluate relevant ESG risks and opportunities;
• obtain professional investment advice where appropriate; and
• keep clear records of the reasons for their decisions.

Looking ahead

Ethical and responsible investment is no longer a niche issue for charities. Trustees are increasingly expected to consider how investment decisions affect both financial outcomes and the charity’s mission, reputation and long-term sustainability.

By adopting a thoughtful and well-documented approach, trustees can strike an appropriate balance between generating the returns needed to support charitable activities and ensuring that investments are consistent with the charity’s purposes and values.

How we can help

If you would like advice on developing an investment policy, reviewing existing investment arrangements or ensuring compliance with trustee duties, please contact a member of our Charity team.