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 Calling for Socially Responsible Investment across Oxford University

Overcoming Barriers

Senior members of your college are likely to have some concerns about adopting a Socially Responsible Investment strategy and without the proper resources, it may seem like you’re getting into a minefield of legal and financial bureaucracy without a hope of convincing your governing body to take your suggestions seriously. Below we’ve tried to deal with some of the obvious points of concern likely to be raised and hope they are of help.

Financial issues

Most colleges should be registered charities under the Charities Act 1993 and subject to the regulations outlined by the Charities Commission. As a charity, a college will have a firm obligation to its beneficiaries and to fulfil any special charitable aims or objectives. In order to do this, trustees are appointed to manage assets in such a way so as to get the best financial return from investments. It is argued that pursuing a set of political or moral criteria with respect to investments that are not directly relevant to the charity’s activities falls outside the regulations that must be adhered to. The main cause for concern is that the adoption of an ethical investment policy, particularly one that involves screening, would lead to a significant financial loss in terms of poor investment performance – something the trustees are legally obliged to avoid.

There is growing evidence, however, that the inclusion of social and environmental criteria in investment decisions at worst does not reduce financial performance. In the short term, the evidence may appear to be to the contrary due to the exclusion of ‘defensive’ stocks such as tobacco firms in many ethical funds, but these time scales are misleading, given that investment should be seen as a medium to long term activity. Over the long term, an ethical investment fund is arguably a better option, as it often includes investing in ‘industries of the future’. The Pensions and Investment Research Consultants, in a 1998 survey carried out into the practise of FTSE 350 companies, noted that there is increasing evidence that high performance in the areas of environmental and social responsibility “underpins business reputation and commercial success in the long run”.

Research by the Ethical Investment Research Service (EIRIS) indicates that investing according to ethical criteria may make little difference to overall financial performance. EIRIS created five ethical indices that produced financial returns roughly equivalent to the returns from the FTSE All-Share Index. Notably, the Charities' Avoidance Index, which excludes the vast majority of companies involved in military sales, pornography, tobacco and gambling was 0.38 per cent greater than the FTSE All-Share over the 8-year period measured.

There are an increasing number of ‘ethical indexes’ that can be used along with screening or preference approaches to track companies meeting certain ethical as well as financial criteria. The FTSE4Good indices, for example, were launched in July 2001 by FTSE, the global equity index specialist. FTSE4Good is made up of four tradable indices associated with a set of global criteria for corporate social responsibility such as; working towards environmental sustainability, developing positive relationships with stakeholders, upholding and supporting universal human rights. However, certain businesses are also specifically excluded, notably tobacco companies and companies manufacturing weapons systems. According to FTSE4Good ethical funds do perform well over the long-term and have been shown to be less volatile than funds in the mainstream market.

The average UK ethical unit trust beat the average of all UKunit trusts by 13% (71% growth compared to 55% growth) between 1991 and 1996 [Cooperative Insurance]. There are more than 50 retail ethical funds in the UKwhose combined value grew from £199.3 million in 1989 to £3.7 billion in 2000. The growth of more investment in socially responsible areas highlights the success of SRI as a viable alternative to conventional investment.

2. Legal issue

As indicated above, the trustees of a charity have a responsibility to secure a good financial return from their investments in order to further the objectives of the charity. However, this does not mean that they are obliged to invest in a particular company or sector simply because it is performing well at any given time. Provided the trustees diversify their investments and maintain a wide range of sectors in their portfolio, socially responsible investment that results in divesting from certain sectors or companies should not conflict with this.

Legal objections are usually focused on this issue of financial returns (see previous section for plenty of reasons why this shouldn’t worry anyone!) but members of the college may also be concerned about the legal implications of allowing moral or political judgements to affect investment decisions. Admittedly the case law is limited, but there are a number of reasons why trustees would be perfectly within the law to use such criteria and adopt a SRI approach.

If the activities of a company are shown to directly impede the objectives, purposes or activities of the college as a charity then, according to the Charities Commissioners, trustees are advised not make such an investment. This leaves us with the issue of using ethical criteria to make decisions about investments that are not directly related to the objectives of the charity (or if the college has no specified charitable objectives). Again, the Charities Commissioners state that investments can be excluded on ethical grounds, provided that this does not result in a significant overall loss, and provided that it is in the interests of the charity.

This can be shown in a number of ways. For example, potential donors may be put off from contributing to a college endowment fund if it was known that the money would be invested in particular companies with a poor social or environmental record. The negative publicity generated by certain kinds of investment could also be against the interests of an institution that values its reputation as a responsible and respected contributor to society. Beneficiaries may also feel alienated and uncomfortable if the college holds investments in certain sectors. Both cases require that the trustees at least consider these sorts of difficulties that they may experience by continuing to hold such investments against the possible losses that divestment might incur.

Many organizations have adopted ethical investment criteria in accordance with these principles without legal difficulty. These include the Church of England, the University Superannuation Scheme, the Universityof East Angliaand Cambridge University Student Union. The University of Edinburghis has adopted an SRI policy in response to student campaigning, notably with the full support of many University officials as well as Members of the Scottish Parliament. It therefore seems unlikely that legal action would be taken against a college in response to a reasoned program of SRI in accordance with the constraints outlined above.

On this point, it is also worth noting that government’s Goode Committee on Pension Law Reform (a sector with similar guidelines to those of charitable trusts) recognized that within the legal constraints requiring the interests of the beneficiaries to be held paramount and the funds to be managed “consistent with proper diversification and prudence…trustees…are perfectly entitled to have a policy on ethical investment and pursue that policy.”

A further indication of the government’s favourable attitude to ethical investment is shown in the paper, A New Contract for Welfare: Partnership in Pensions (1998):

“The government believes that subject to the overriding requirements of trust law in respect of the interest of the beneficiaries, trustees should feel able to consider moral, social and environmental issues in relation to their investments.”

And one more quotation…! The interpretation of the Trustees Act 2000 by the Charities Commission reads that the suitability of investments should “include any relevant ethical considerations as to the kind of investments that are appropriate for the trust to make”.

Useful tips

NB.We strongly recommend that you familiarize yourself with the content of Appendix 4 of this report (‘Legal Considerations’), which lays out in detail all the arguments you need to know. Here we will simply give some useful tips in helping to prepare your case if members of college throw the legal card at you.

Posted on 18/10/04 by admin

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Oxford Socially Responsible Investment Campaign is campaigning for clear committment to Socially Responsible Investment from Oxford University and for greater financial transparency in the investments of Oxford University Colleges. This website contains information about the campaign, and details on how you can get involved