5 steps to developing a Responsible Investment policy

Developing a Responsible Investment policy can be straightforward.

The steps outlined below will lead you through the process of developing and implementing a policy. It will highlight some of the issues for you to consider and provide useful links to further information and resources. It is important to bear in mind that the level of detail and sophistication required of the policy may well depend upon the size and nature of your charity and investments.

1. Gather information about Responsible Investments and the your charity's current investments

Responsible Investment

It is important to gather information that will answer the initial questions of trustees when it is first discussed at trustee meetings. This could include:

  • What is responsible investment?
  • Why should a charity invest responsibly?
  • Is responsible investing illegal or expensive?

Your charity’s current investments

It is also important to understand your starting point, reviewing your charity’s current position and resources. This can include:

  • Your current investment policy
  • The size of your investments
  • Where assets are invested
  • Whether any social, environmental or ethical issues are currently incorporated into investments
  • The expertise available from staff, trustees or other stakeholders
  • Who your fund managers are and what competencies they can offer
  • What other charities (especially peers) are doing

2. Agree and move forward

Gaining Support

This stage is about discussing the information collected in step one and encouraging trustees to become familiar with Responsible Investment issues. It is about discussing what your charity could gain from Responsible Investment, or lose by not doing it. It may be useful to:

  • share resources – such as the Investing Responsibly toolkit or other sections of this website, so that all trustees have a good basic awareness of Responsible Investment issues
  • invite ‘experts’ on responsible investment to your trustee meetings – such as advisers, fund managers, lawyers and other charities that are already investing responsibly.

It may be at this stage that the trustees decide it is inappropriate for the charity to implement Responsible Investment. It is important to be clear about the reasons for making such a decision. Or they may decide to move forward and define why and how the charity should invest in line with its mission.

Setting Aims

Trustees should articulate the motivations for adopting Responsible Investment and consider how it links to the charity’s:

  • objects
  • core values
  • strategy
  • investment approach
  • risk assessment (particularly reputation risk)

3. Developing a policy

The third step is about translating your mission and objectives into a workable investment policy. This involves agreeing the approach that your charity will take to Responsible Investment and the issues you wish to consider.

The policy does not necessarily have to be a long and detailed document and its content will depend upon the size and sophistication of your charity’s investments. Initial research will help you to shape your policy and understand how it could affect your current and future investments.

A Responsible Investment policy can be a stand-alone document but it may be preferable to incorporate the elements below into your overall investment policy. Such a policy would therefore include both financial and SEE objectives.

A policy could include the following elements:

The charity’s overall social, environmental and ethical aims and values

These values will be clear for most charities and likely be based upon your mission statement.

Investment objectives

Your charity should already have agreed the financial objectives of your investment policy – for example, income levels and capital growth, acceptable levels of risk and asset allocation. These factors will influence how social, environmental or ethical considerations can be incorporated into your charity’s investment strategy.

Your charity should also have defined its reasons for adopting Responsible Investment (as described in step 2). These objectives, for example avoiding risk to your reputation) will help you to decide on the issues and approaches to implement.

Social, environmental and ethical considerations

You should decide how your mission can best be reflected in your investments. You should consider which social, environmental and ethical issues best fit with your aims and values, and which you wish to incorporate into your investments.

The following resources may be useful:

  • the ethical issues section gives details of the most common issues considered by charities. It is not an exclusive list but may help you to think about the issues that are most important and relevant for your charity.
  • your fund manager or investment adviser may also be able to provide a list of issues that can be incorporated into an investment policy, and help you to decide on which to incorporate into your investments.
  • your charity may wish to consult with its stakeholders (for example, staff, beneficiaries and supporters). This can be done on a formal or informal basis.
  • the legal issues section provides guidance on the scope for incorporating SEE issues into investments.

It is useful to consider which issues are of most importance to your charity and if any are ‘negotiable’. For example, if you would be willing to invest in the best performing companies within a particular sector rather than excluding the whole sector.

This will help you to decide on the approach to apply to your investments (negative screening, positive screening or engagement) and in the case of negative screening, whether you wish to set a materiality level on turnover – for example, avoiding companies that derive more than 10% of turnover from the sale of tobacco products rather than any company selling tobacco.

Approach to positive and negative screening, engagement and voting

The approach(es) you decide to adopt will be influenced by several factors including:

  • the aims set for Responsible Investment
  • the SEE issues you wish to consider – some will be more suited to a particular approach
  • the investment options available – for example, some asset classes (such as venture capital) may be more suited to positive than negative screening.
  • the resources available

For example a fundraising charity with narrow objects, e.g. animal welfare, may decide that negative screening is appropriate because it fits with its objects, manages reputational risk and is cost-effective.

4. Implement Responsible Investment

Clarifying roles and communicating policy

Implementation is often delegated to staff and fund managers. It is crucial that trustees should:

  • be clear about the roles of trustees, staff, investment committees, fund managers and advisers
  • take time to explain the policy and ensure its intentions are clearly communicated.

Selecting funds and fund managers

You should investigate whether your current fund managers can incorporate your Responsible Investment requirements. A key part of this process is asking fund managers about their Responsible Investment competencies and experience.

You may decide to review the services provided by other fund managers to select the most appropriate option.

The Funds and Fund Managers section will help you to:

  • find information on the Responsible Investment services provided by a range of fund managers
  • find details of pooled investment funds (such as common investment funds) that incorporate Responsible Investment criteria of relevance to your charity
  • gather suggestions of the questions to ask fund managers

Once a fund manager has been selected you should ensure that clear instructions have been delegated and that the implementation of the policy is reviewed. You may wish to set a timetable for future reviews of the policy and its implementation, and the steps for incorporating review results.

5. Report and Review

Reporting and reviewing is about being transparent about your policy and ensuring that your social, environmental, ethical and financial objectives are being met. It is also about meeting SORP reporting requirements.

Report on the policy and its impact

The revised reporting standards for charities, SORP 2005 require that trustees report on ‘the extent (if any) to which social, environmental or ethical considerations are taken into account’ within the investment policy.

As well as including this statement in your annual report, you may decide to communicate more details of the policy and its impact to particular stakeholder groups – such as staff, funders or beneficiaries.

Reporting on the policy and its impact presents an opportunity for charities. It can enable you to:

  • share your reasons for adopting Responsible Investment
  • bolster your image
  • build links with stakeholders, particularly if they were consulted as part of the process, or have raised concerns in the past about investments

Review fund manager and investment performance

Trustees should ensure that they receive appropriate information from fund managers about the implementation of the policy and fund performance. This could include:

  • how SEE matters have been incorporated into its investment processes
  • voting record on SEE issues
  • details of SEE research and engagement capabilities
  • how emerging SEE issues are identified
  • which companies the fund manager has engaged with, on which SEE issues, and with what outcomes

An effective and on-going monitoring process should be established.

This should be based upon agreed criteria for assessing and reviewing the policy, its implementation and impact.

This could involve the assessment of factors such as:

  • the performance of fund managers
  • whether the key issues were addressed
  • whether the aims of the Responsible Investment policy have been met
  • whether the “right” Companies were screened in or out of the portfolio
  • the effectiveness of engagement if done
  • any feedback received from staff or other stakeholders

Your charity’s investment adviser should be able to assist with the development of such a monitoring process. Also, information is periodically available on the performance of fund managers – for example through league tables on shareholder activism.

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