Comic Relief, Panorama and the complexities of ethical investing
The BBC has been struggling with a virility test over a probe by Panorama into the corporation’s in-house charity Comic Relief. The programme’s reporters have accused it of failing to spend some of the money it raises from the public and investing it unethically in arms, tobacco and alcohol companies.
BBC bosses did not want to appear defensive over the long-running investigation which is finally due to broadcast this evening. But a greater danger looms. It is that the programme will feed a woefully unsophisticated view of how the modern world of investment works.
Not all the cash that charities raise is spent at once, for good reasons. Projects to bring change can require five-year programmes. Cash is handed over annually, once it is clear last year’s money was well spent. To keep the balance in the bank would earn a meagre half per cent interest. So charities invest the cash in equities, not in risky single companies but in blue-chip managed funds.
Charity Commission guidelines insist on this. Legal, and legal precedents like Cowan v Scargill (1985), insist charities have a duty to obtain the best financial return in relation to both risks and yields.
Charities with a single-focus are allowed to avoid some investments; animal charities, for example, can eschew firms which do animal research. But charities with broad briefs like “the relief of poverty” are not allowed to avoid everything considered bad for poor people in some way. That would give them too narrow an investment base which could make their portfolio more risky.
There are ethical investment funds. Some have windows of good performance. But overall they are slightly more risky, cost more to manage and produce lower returns. Ethical funds substantially under-perform the global equity average. To secure £100 today you’d need, seven years ago, to have invested £80 in ethical funds compared to £70 in broader global equity funds. There are sound moral arguments for individuals to choose them but the law does not allow charities to do that. Had Comic Relief invested its full portfolio ethically in 2003 it would today have £20m less to spend on projects to help the poor.
Once you use managed funds it is difficult to isolate “undesirable” investments, as the Church of England found to its embarrassment when it was revealed to have money in Wonga world. Had Panorama journalists scrutinised their own BBC pension scheme they would have found its seventh biggest equity investment in British American Tobacco (£37.8m). It is also in arms, with £25.3m in BAE Systems, and has more than £50m in alcohol. Sensationalist journalism might cry pot and kettle. The truth is that investing ethically in a world of complex globalised interdependency is nowhere near as easy as many suppose.
Paul Vallely is Visiting Professor in Public Ethics at the University of Chester
A shortened version of this was published in The Times
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“Charity Commission guidelines insist on this. Legal, and legal precedents like Cowan v Scargill (1985), insist charities have a duty to obtain the best financial return in relation to both risks and yields. Charities with a single-focus are allowed to avoid some investments; animal charities, for example, can eschew firms which do animal research. But charities with broad briefs like “the relief of poverty” are not allowed to avoid everything considered bad for poor people in some way.”
I think you’re absolutely right to suggest that the legal position is complex, but the current Charity Commission guidelines don’t seem to me to be as rigid as you suggest? Indeed, quite the opposite. They say clearly that charities can choose to make ethical investments, within some limits, and that the fiduciary duty of trustees can be fulfilled through ethical investment choices even at the risk of a lower rate of return, if they can justify that such ethical investment choices secure supporters or reputation, for instance. The guidance reads:
“Can a charity decide to make ethical investments?
Yes. Trustees of any charity can decide to invest ethically, even if the investment might provide a lower rate of return than an alternative investment. Ethical investment means investing in a way that reflects a charity’s values and ethos and does not run counter to its aims. However, a charity’s trustees must be able to justify why it is in the charity’s best interests to invest in this way. The law permits the following reasons:
– a particular investment conflicts with the aims of the charity; or
– the charity might lose supporters or beneficiaries if it does not invest ethically; or
– there is no significant financial detriment.”
http://www.charitycommission.gov.uk/detailed-guidance/money-and-accounts/charities-and-investment-matters-a-guide-for-trustees-cc14/#c3
My understanding was that the Charity Commission updated its advice and it does not insist on this. Charities can choose to invest ethically: http://www.charitycommission.gov.uk/detailed-guidance/money-and-accounts/charities-and-investment-matters-a-guide-for-trustees-cc14/#c3
C3 Can a charity decide to make ethical investments?
The short answer
Yes. Trustees of any charity can decide to invest ethically, even if the investment might provide a lower rate of return than an alternative investment. Ethical investment means investing in a way that reflects a charity’s values and ethos and does not run counter to its aims. However, a charity’s trustees must be able to justify why it is in the charity’s best interests to invest in this way. The law permits the following reasons:
a particular investment conflicts with the aims of the charity; or
the charity might lose supporters or beneficiaries if it does not invest ethically; or
there is no significant financial detriment.
– See more at: http://www.charitycommission.gov.uk/detailed-guidance/money-and-accounts/charities-and-investment-matters-a-guide-for-trustees-cc14/#c3
Obviously, Comic Relief’s investment – its lawyers have specifically stated this in the letters it has written – are likely to lose supporters and beneficiaries because it has not invested ethically.
The law is not rigid so much as ambiguous and the various clarifications from the Charity Commissioners only add to that ambiguity. Indeed in some ways they are self-contradictory. The law needs altering to ensure that all charities can invest ethically, even where that means a charity secures a lower rate of return.