Charities face a tipping point

In April, we debated the ‘state of philanthropy’ with the British-Swiss Chamber of Commerce at an event in London, including how sustainable investing could help restore public trust in charities. Here we reproduce some highlights of the speech by our UK private bank chief executive.

Brexit – the elephant in the room

Speaking on the cusp of the UK’s scheduled exit from the EU is a tricky task. The good news is on UK charitable giving, which has remained remarkably consistent over more than a decade, through boom and bust, at £10 billion a year. Since the UK’s EU Referendum in 2016, the evidence suggests that both donations and volunteering have remained largely unaffected, which is very encouraging.

But there is plenty to keep charitable organisations awake at night. Public donations are only part of the funding picture. UK charities have typically received more than £200 million a year in EU structural funds, with those in areas of deprivation or high youth unemployment able to tap additional EU money. The UK government has said it will cover the costs of EU-funded programmes until the end of 2020, but longer-term, the sector has lost an important donor.

At the same time, charitable needs could skyrocket. In the UK, a weaker pound has already raised prices for imports (not to mention delivering an effective cut to charities’ overseas programme funding.) Any future tariffs on EU products, with potentially more than 10% added to some food items, threaten big impacts on household budgets.

Another big issue with Brexit is staffing shortages. Recruiting and retaining EU staff has already become more difficult for charities, and this is especially acute in the areas of health and social care. Almost 10% of all staff in adult social care are employees from other EU member states.

A Brexit-induced recession would of course cause great strain on charities. Even economic uncertainty, as we have seen since 2016, leaves the vulnerable more at risk from hardship. The impacts go well beyond personal finances, job security, and housing, with Paul Farmer, the chief executive of Mind, speaking about the costs of prolonged uncertainty on the mental health and wellbeing of the nation.
 

So, in this environment of rising demand, and falling capital and labour supply, it is clear that charities must act. But how? Well, at the risk of stating the obvious, they must focus on what they can actually change – and one lever to pull is on the investment side.

Charities are in danger of falling behind

For a long time, charities were at the vanguard of ‘ethical investing.’ As far back as the 1800s, some were excluding tobacco, weapons and gaming stocks on moral grounds. But as ethical investing evolved into socially responsible investing, and then into impact investing and sustainability, institutional and retail investors took up the baton, employing more advanced thinking and more impressive solutions, and charities failed to keep up. Today, they are in danger of being left behind.

This is, to coin a phrase, not sustainable. The Tate Modern’s recent decision to refuse donations from the Sackler Foundation shows public sensitivity to the provenance of charitable funding. The same level of scrutiny is gradually being applied to charities’ investment income too. We have seen the media uproar over the Church of England’s holdings of Wonga, and student protests across the world over universities’ investments in fossil fuels. The ability to monitor charities’ investments and implement them in a way that is consistent with their everyday operations could well be key to Trustees’ success in future. The excuse that “I didn’t know” is no longer good enough – the world has moved on.

We all recognise that charities are over-stretched, and spending less time than they should on investment matters. New rules and information requirements are absorbing their time –from fundraising and lobbying, to tax reporting and the treatment of personal data – and half of UK foundations have no paid staff.

But sadly many trustees, and – even worse – some professional investment managers, feel their duty is discharged by investing in companies that merely tout their ethical credentials. Some believe that persistent spin and ‘greenwashing’ muddies the water too much to do even this effectively. And a survey by Newton Investment Management in December found that 59% of Trustees believe sustainable investing has a detrimental impact on returns. So how do we address these concerns?

Dispelling the myths

Well, to take the first point, there is a marked difference between ethical or responsible investing, and a truly sustainable strategy. An energy company, for example, might have an impressive commitment to gender equality, and pay the Living Wage, but if its business model revolves solely around contributing to greenhouse gases, it is not sustainable. Sustainability means considering the future.

Which brings us to the question of returns. Trustees’ duty is to do what is best by their organisations – and for those with investment portfolios, that means maximising income. At Lombard Odier, we believe that sustainability will drive higher investment returns. If a company considers the consequences of its actions, its chances of surviving to earn future revenues are increased. When looking at 41 different studies of sustainability and returns, Oxford University’s Smith School of Enterprise found 80% showed good sustainability practices boosted share price performance.    

But can we really see through the greenwash – to pick companies making a difference? All too often, companies like the energy company I mentioned earlier score well on traditional environmental, social and governance (ESG) metrics, because data on business organisation and operation is plentiful, whereas data on the real-world impact that companies exert is poor. 

Applying forward-looking analysis

That’s why at Lombard Odier, we believe in going well beyond standard ESG metrics, adding forward-looking analysis to identify whether companies actually follow through when it comes to sustainability. We believe that companies with a combination of sustainable financial models, sustainable business practices and sustainable business models (those exposed to the ‘megatrends’ of the future – demographics, natural resources, climate change, inequality and the digital revolution) will be the long-term success stories.

Twenty years refining and investing in our proprietary framework means we can build tailored portfolios and run sophisticated analysis on existing charity portfolios. We can give quantifiable data on how a portfolio stacks up against the United Nation’s Sustainable Development Goals for example, how its equity investments score against benchmarks like the MSCI World, and run specific analysis – say on how well a portfolio scores on environmental concerns.

Restoring public trust

For now, there is little data on how investing sustainably affects how much people give to charities. But it seems logical that those charities which invest in line with their values should garner more trust and greater longevity themselves.

The 2018 Charity Commission report found that public trust in charities is at its lowest level since their records began. In its analysis, the Commission notes that charities have “obligations to act to a high standard of compliant and ethical behaviour that the public expects.”

Interestingly, their research also showed that public trust improves most markedly when charities show exactly - in a pie chart for example – where their money is spent. Surely it will not be long before public scrutiny is applied just as strongly to how a charity invests its money, as well as how it spends it, and that greater transparency and conviction here would have similar, positive results.

Trustees have a duty to protect charities’ reputations, and ultimately to make higher investment returns. With demands on their time, resources and capital rising, this is something very much in their power to change. Adopting an investment strategy that is in line with their mission is more defensible, more environmentally sound, and more long-term-oriented – in short, it looks more sustainable all round.