The 8,500 Charitable Trusts and Foundations in the UK control an estimated £50 billion in assets and yet, outside their grant making programme, only a tiny proportion of these assets are actually held in investments designed to help them further their missions.

The 8,500 Charitable Trusts and Foundations in the UK control an estimated £50 billion in assets and yet, outside their grant making programme, only a tiny proportion of these assets are actually held in investments designed to help them further their missions. In part this is caused by myths and misconceptions of the fiduciary responsibilities of trustees. Historically trustees are, of course, amongst the most prudent of investors, but over the years as ‘modern portfolio theory’ has taken hold, trustees have gradually become more comfortable with the concept of risk adjusted returns. Most now are attracted to holding previously considered “risky” investments if they are hedged by counterbalancing assets within the overall portfolio. It is common for large charities to hold in their investment portfolios a small percentage of higher risk investments such as private equity, venture capital and hedge funds. The problem lies in the fact that the law does not differentiate between the roles of the trustee, for example between a pension trustee and a charity trustee. Both are fiduciaries, but the charity trustee has an additional guiding purpose which is to achieve the charitable objectives of the donor in the context of over arching public good. For charity trustees, if an investment furthers the donor’s wishes then, unlike a pension fund, an investment into a lower return or higher risk social investment can be made, especially if acceptable within the overall positioning of the portfolio. The Charity Commission’s guidelines allow charity trustees to adopt a total return policy across its capital funds and allocate funds towards social investments providing the future needs of present and future beneficiaries are taken into account. The current innovations to create financial products that deliver both social impacts and solid financial returns are a wonderful opportunity for charity trustees to direct the management of more assets towards mission driven investing. Socially screened (as opposed to ethically screened) investments, deposits in social development agencies, micro finance funds and fixed income products of varying maturities and yields all serve to enable a charitable foundation to match its need for suitable investment opportunities that advance its mission within its tolerance for financial risk. Some foundations, especially in the US, have a well developed process towards social investments. The FB Heron Foundation with billions under its stewardship is well known for having about 24 per cent of its total assets in a diverse range of social investments that match – or in some cases – outperform traditional benchmarks of financial risk and return. As the field of social investment expands and the concept of fiduciary duty evolves, charitable foundations may eventually be required to factor in the social dimensions of their investments. Currently of course we are a long way from this more congruent relationship. It is far more likely that charity foundations agree to put 10 per cent of their portfolio in risky assets than 1 per cent into a mission driven investment. And the responsibility for that lies mostly with the misaligned, entrenched, motives of the bulk of the investment community whose narrow definition of wealth creation still prevails. gburnand@investingforgood.co.uk www.investingforgood.co.uk