Responsible investment (RI) is already front of mind for many key decision-makers in the UK charities sector. Tom Wake-Walker, explains how charities can build strong responsible investment frameworks and select asset managers that will help them achieve their goals.
Many non-profit organisations could significantly benefit from closer alignment of their missions and investments through environmental, social and governance principles.
Yet with formal regulatory guidance so far not forthcoming from the Charity Commission, the regulator of charities in England and Wales, the responsible investment landscape is far more fluid for charitable funds than it is for most institutional investors.
This presents both challenges and opportunities – and although such regulation is expected imminently, we believe the time to act is now.
So, let us consider how charities funds can build their responsible investment framework and select the asset managers that will best help achieve those responsible investment objectives.
Engineering greater ESG alignment
Dialling up a dedicated strategy is significantly easier if there is a framework against which to calibrate, measure and enforce the alignment with responsible investment principles. Any charity embarking on this process should start by focusing on four key motivations, or ‘four R’s’:
- Returns – in the long term, markets and industries will be forced to adapt to more sustainable models of both funding and function. For investors, engaging with this trend today is the groundwork for sustainable returns tomorrow.
- Risk management – in the case of global economic threat like climate change, investors almost cannot afford not to act now; it is a matter of future-proofing your portfolio to respond to the evolving market landscape and to mitigate the worst effects as risks increase.
- Reputation management – engaging with such issues early on is particularly important in the non-profit sector, where trustees have a wide range of donors and stakeholders to manage.
- Responsibility – non-profits have a duty to stakeholders as well as to the organisation’s fundamental mission.
After weighing up the relative importance of these factors, trustees will be able to build and implement a robust framework that truly supports their responsible investment intentions, and to calibrate their strategy to enhanced, concrete objectives.
Building a responsible investment framework and selecting managers to suit
When building such a framework, we typically advise a five-step process that we call “ROSIE”:
- Researching the ESG characteristics of your existing portfolio to review its strengths and weaknesses.
- Distilling stakeholder beliefs into a central and cohesive set of achievable objectives.
- Assessing the practicality of an ESG or impact strategy across each asset class.
- Implementing that strategy by screening, selecting and monitoring managers in line with objectives.
- And routinely evaluating the efficacy of the approach by monitoring metrics such as the UN’s Sustainable Development Goals.
By way of example, let us look closer at the implementation and manager selection.
When looking to select any new manager, it can be helpful to follow a considered and repeatable process the utilises quantitative and qualitative screening factors, allowing charities to then home in on the strengths and weaknesses of the remaining shortlisted strategies.
At Redington, we include ESG and stewardship as one of our key selection factors when assessing every manager’s investment strategy, and this has its own subset of factors to consider, such as the company’s commitment to ESG and stewardship, the level of expertise in ESG and engagement topics, and the degree to which ESG and stewardship considerations truly influence investment decision-making.
All the points are assessed on a relative basis within different asset classes to ensure fair comparison is made dependent on the ease with which responsible investment considerations can be integrated.
Such a process can allow trustees to find those managers and strategies that are both suitable and complementary to any responsible investment considerations that form a part of the overall investment philosophy.
We also see many charities looking to add impact investing options to their portfolios to ensure a portion of their capital is generating social and/or environmental impact alongside financial return.
Among other factors, our assessment of impact strategies pays particular attention to the ability of managers to quantitatively evidence their impact, as well as articulate the level of engagement they undertake with portfolio companies. High-quality impact strategies such as natural capital or social housing can be key allocations for charities, enabling their portfolios to help deliver real-world change.
Ultimately, exploring options such as these and taking the above steps to get ahead of the curve will ensure that non-profit organisations put their best foot forward, with a robust responsible investment strategy already in place when mandatory reporting eventually arrives.
This article was first published by MandateWire
