by
Andrew Frankling | Sep 09, 2014
Some time ago I sat on a plane next to a member of the finance team for a very well known Australian charity.
Given my background and general interest in charity finance, I asked him what the most important part of his organisation’s investment strategy was. I don’t recall exactly what answer I was expecting, but maybe something along the lines of “really understanding what our investment governance capabilities allow us to do”, or “knowing what needs to be achieved investment wise to support core ongoing services”.
So his answer surprised me: “Don’t make any investments which could endanger next year’s donations”.
On reflection, this response makes a lot of sense for any charity reliant on substantial ongoing donations.
So how could a charity be “silly” in this regard? While a number of potential governance failures come to mind, this article will focus on the potential to make investments which don’t match your organisation’s ethical, social and governance (“ESG”) criteria. For instance, a charity which supports the victims of substance abuse may want to avoid investing in securities issued by a winemaker.
ESG-style investing has grown substantially over the last decade, perhaps best demonstrated by the introduction of agreements such as the United Nations supported Principles for Responsible Investment (“PRI”)1. It takes three broad forms:
- Avoiding securities issued by companies undertaking activities you want to avoid (“negative screening”)
- Overweighting securities issued by companies undertaking activities you want to promote (“positive screening”)
- Active engagement with a company’s management to attempt to change its corporate focus
To date there has been less interest in having an ESG focus for fixed interest investments relative to equity strategies. This has occurred for various reasons, including2:
- The more direct exposure that equity investors have to any risks given their more junior status in a company’s capital structure
- A lesser research focus
Nevertheless if you own bonds directly you can ask your portfolio manager to undertake, as a minimum, negative screening.
Doing this means you can avoid stepping on a proverbial land mine with your donor base.
Oh, and the ESG criteria for those who invest internationally often excludes companies manufacturing land mines as well.
- www.unpri.org
- “The Growing Role of ESG in Fixed Interest Portfolios” July 2014 My Consultant Newsletter www.jana.com.au
This is the fourth article in a series about investing issues for charities and not for profits (“NFPs”). Investing issues for Not for Profits and Charities" click here; "Investment lessons from Donald Rumsfeld" click here and "Not for Profit Investors - Are you (really) managing your investment manager?" click here
Please contact our NFP team Justin McFarland, Tim Smith or Casper Wolski on (02) 9697 8721 for more in information.
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