The five-step responsible investment framework for charities


(Wednesday, Aug, 17, 2022)
|   4 mins

Perhaps even more than most institutional investors, charities, foundations and endowments are intrinsically receptive to the notion and advantages of responsible investment (RI). Not least because many are already focused on their own core missions to improve the health of society, the environment and the communities and economies that depend on both.

Many non-profits could significantly benefit from closer alignment of their missions and investments through environmental, social and governance (ESG) principles – and in our experience, RI is already front of mind for many such decision-makers.

But experience also shows that dialling up an RI strategy is significantly easier when there’s a framework against which to calibrate, measure and enforce that alignment.

In May last year, The Charity Commission closed its consultation on draft revised guidance for adopting a responsible approach to investing. The intention was to achieve greater clarity on the duties, discretions and legal parameters available to trustees in their RI strategies. But more than twelve months later, the finalised guidance has yet to be released.

Therefore, whereas pensions, insurance funds and other large investors are increasingly subject to regulatory pressures on sustainability issues, for non-profits, the landscape is far more fluid.

This presents both opportunities and challenges, and the window of opportunity is gradually narrowing for trustees to capitalise on RI. Now is the time for them to review their investment approach, both against the current macroeconomic backdrop and in terms of ESG factors, and to build their own framework to meet their RI goals.

Initiating greater ESG alignment

To begin this process, trustees need to understand the fundamental motivations for it. For most investors in the institutional space, there are four key objectives  – or ‘four Rs’ – on which to build a more robust RI framework:

  • Returns
  • Risk management
  • Reputation management
  • Responsibility

While ethics and profits have traditionally been seen as existing in tension, one detracting from or limiting the other, it’s clear that 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.

In fact, in the case of a global economic threat like climate change, investors almost can’t afford to not act now. That’s where the second ‘R’, risk management, comes in. Responsible investment is not only a question of helping to mitigate the worst effects of rising temperatures (or of any ESG issue for that matter); it’s also about futureproofing your portfolio to respond to the evolving market landscape and cope with the fallout as the crises escalate.

Engaging with these issues early on is particularly important in the non-profit sector, where trustees have a wide range of donors and stakeholders to manage. It’s also a question of responsibility – responsibility to stakeholders but also to their fundamental charitable mission.

For organisations with ESG factors already at the heart of their cause and objectives, aligning their portfolio with RI principles not only makes sense from an investment perspective, but is inherently relevant to their very existence.

Implementing an RI framework

Having weighed up the relative importance of these factors, trustees are ready to construct their RI framework and calibrate their strategy to enhanced, concrete objectives.

At this point, we typically advise a five-pillar process for building that framework, we call it ‘ROSIE’.

The first step is research – in particular, researching and reviewing the ESG characteristics of your asset allocations to determine your portfolio’s existing strengths and room for improvement.

What exactly that improvement looks like depends on the second step, which is translating stakeholder beliefs into clear, measurable and achievable objectives. Where there’s a multiplicity of stakeholders to please, distilling their beliefs into a central and cohesive set of core objectives is essential for measuring success in the long term and ensuring stakeholder alignment throughout.

Next up comes strategy – assessing the practicality of ESG integration, or the potential for impact investing, across each asset class – followed, once agreed, by implementation: screening, selecting and monitoring managers in line with your objectives to ensure that the strategy informs manager selection, not vice versa. At Redington, we have researched and selected impact-focused investment options across all of the asset classes we research – from social housing to private equity.

Finally, routinely reviewing the efficacy of your approach in relation to both your financial objectives and your RI goals – monitoring metrics such as exposure to fossil fuels or alignment with the UN Sustainable Development Goals (SDGs), for example – provides the fifth pillar: evaluation.

Together, these five processes – research, objectives, strategy, implementation and evaluation (or, ‘ROSIE’) – can help trustees establish a formal RI roadmap and continually ensure that they’re still on track.

For charities, foundations and endowments at the beginning of their RI journey, now’s the time to act. And with formal regulatory guidance so far not forthcoming, taking steps to get ahead of the curve will ensure that you’re putting your best foot forward, with a robust strategy already in place when mandatory reporting finally arrives.

One client we’ve taken through the ROSIE framework recently is the Health Foundation. Since our appointment in January 2021, we’ve worked with the in-house team and investment committee to set appropriate objectives and constraints in alignment with their collective investment beliefs and restructure their strategic asset allocation accordingly. This included a full restructure of their public equity portfolio. You can find out more here.

If you need support in advancing your RI efforts, please get in touch.

Unless indicated, these are the views of the author and may differ from those of the firm.


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