Sources and comments on law and finance in SRI

Law, Finance and Socially Responsible Investment

SRI friendly statements of law:

“6.14 Increased disclosure must also be accompanied by greater clarity over what investment strategies trustees are permitted to follow under charity law. The current position is that trustees can follow an ethical investment strategy – but only if this does not result in significant economic detriment for the charity. Since ethical funds, on average, produce an economic return that is very similar to non-ethical ones, this means that trustees are free to choose from the wide range of ethical funds. This choice should be made clear to them.” Private Action, Public Benefit (report into Charity Law; Cabinet Office Strategy Unit 2002).

“The government believes that, subject to the overriding requirements of trust law in respect of the interests of the beneficiaries, trustees should feel able to consider moral, social and environmental issues in relation to their investments”. A New Contract for Welfare: Partnership in Pensions (HM Govt Dec 1998).

“Trustees … are perfectly entitled to have a policy on ethical investment and pursue that policy” The Goode Committee on Pension Law Reform.

SRI unfriendly (in implication, but not in fact):

“In considering what investments to make Trustees must put on one side their own personal interest and views. Trustees may have strongly held social or political views. They may be firmly opposed to any form of investment in South Africa or other countries, or they may object to any form of investment in companies concerned with alcohol, tobacco, armaments or many other things. In the conduct of their own affairs, of course, they are free to abstain from making suhc investments. Yet if, under a trust, investments of this type would be more beneficial to the beneficiaries than other investments, the Trustees must not refrain from making investments by reason of the views they hold.” Judgement in Cowan vs. Scargill.

Evidence of performance of particular funds:

'...in light of the increasing evidence that ethically invested funds can be extremely profitable. For example , the Aegon Ethical Income fund is a 'dark green' fund – i.e. it exercises extremely stringent criteria – but is among the 'top 10% of all corporate bond funds.' 'In the UK All Companies Sector there are 19 [ethical] funds that have a three-year performance track record. Of these, five are in the top 25% of funds, while a further eight have produced above average returns.' (This is to say, they enjoy an above average representation in both the top half and quartile of funds.)' (Examples taken from article 'How virtuous is your ethical fund?' by Jenne Mannion in the Sunday Telegraph, May 1st, 2005.) Quote from an OUSU report to the University of Oxford, 2005.

“Church of England's £4.3bn investment fund was the second-best performer of more than 1,000 funds over the past decade ... The fund eschews investments in pornography, weapons, alcohol, tobacco and newspapers.” From an article by Robert Budden, printed in both the Financial Times and 'Virtue Online', March 29^th 2005.

Existing SRI policies

“Investments shall be made to obtain the best financial return for the University, consistent with commercial prudence and the need to ensure adequate spread and diversification of assets. However, the University will avoid direct investment in companies whose main business is gambling, tobacco or armaments, where this is 50 per cent or more of the turnover.” Bath University.

‘wherever possible the University would prefer not to invest in companies involved in the manufacture of arms’. In practice this means that there are currently thirteen companies in the FTSE 350 index in which the external managers do not invest Consolidated Fund monies.’ University of East Anglia.

“UEA is a University with a major international presence. It recruits globally and its research and teaching activities have a substantial global component. A significant number of UEA staff and students teach, research, work and study in locations other than the UK...” University of East Anglia, explaining its decision.

OUSU commentary on Charity Commisioners Guidelines

(excerpt from a 2001 report to the University)

Regulations published by the Charities Commission further illuminate these points (Student Union Comments in Italics):

“any decision by trustees to invest “ethically” by avoiding certain investments, or certain institutions, must be centered on the interests of the charity and not of the trustees. Trustees may exclude investments on this ground only if it leaves them with a wide enough range of investments to produce an acceptable investment performance”. Our portfolio, therefore, must be wide enough to secure good returns, but we are under no legal obligation whatsoever to invest in any particular firm simply because they appear at that moment in time to be providing good returns.

“if trustees are satisfied that a particular range of investments would directly impede the furtherance of the objects of a charity and be of financial detriment then they may exclude that range. For example, investments may be excluded if they would result in a loss of financial support from subscribers”. This point is interesting for several reasons. Firstly, as noted above, certain kinds of investment may well result in a loss of subscription from alumni and other donators. Moreover, this regulation gives us even greater freedom that the one above: not only can we exclude certain companies, we can legally exclude certain kinds of company (for example oil, arms, or pharmaceutical firms).

“trustees of a charity should decline to invest in a particular company if it carries out activities which are directly contrary to the charity’s purposes and, therefore, its interests and those of its beneficiaries”. Given our status as a high-profile public institution dedicated to the pursuit of learning, conflicts between our objects and our investments could occur in a number of ways. We might find such a conflict, for example in areas where companies are guilty of moral irresponsibility, contributing to a restriction of freedom of speech, or breaching national or international law. The investment working party of the University of East Anglia came to a similar conclusion after investigating its holdings: “UEA is a University with a major international presence. It recruits globally and its research and teaching activities have a substantial global component. A significant number of UEA staff and students teach, research, work and study in locations other than the UK..

Form of legal and financial argument
1. The move from unethical to ethical investment would only barred to Trustees if (i) it would cost them financially and(ii) it would not itself fit with the objectives of the charity.
2. It would be a breach of Trust for the Trustees to invest in any company which conflicts with the objects of the company.
3. There is no evidence that ethical investment is less profitable than otherwise. Indeed, there is some evidence to the contrary.
4. It is possible to construe the objectives of the Trust broadly. In fact, some would argue, it is more than possible, it is positively necessary. Consider UEA's argument above. Does the College wish to be an international institution? Consider, also, that many educational institutions (including Edinbugh and Corpus Christi College, Oxford), operate a specific exclusion against tobacco. This is not because 'fighting cancer' is legally instantiated as one on the objectives of those institutions. Rather, it is because the institution's employees are actively engaged in work to develop understanding that can be used against the effects of cancer. And is it not the case that all of our academics, most obviously those concerned with philosophy and the social sciences, are working for the understanding which will allow us to inhabit a more just world in general? What of the effects on the development of the third world of arms trade; what of the brutal regimes it supports – is it not the case that in the end, it is these things we wish to bring an end to?

With this in mind, the Trustees should consult the EIRiS briefing, 'Investing Responsibly: a practical introduction for Charity Trustees'. This can be viewed here: http://sri.oxfordfairtrade.org.uk/design/filelibrary/EIRIS%20-%20Toolkit%20for%20Charity%20Trustees.pdf

If you have some notice, you can phone up EIRiS and they will send you some hardcopies free. Othewise, it might be worth printing it off and attaching it to any reports you do.

Posted on 15/06/05 by tom