Feature – Charitable foundations

to address, with charities’ ethical exclusion policies growing in frequency and in breadth of coverage. As we found when speaking to charitable foundations.

The good, the bad and the offensive “We are increasingly conscious of which managers we delegate investment decisions to and how they think about ESG,” says James Brooke Turner, investment director at the Nuffield Foun- dation, which aims to improve social wellbeing. “We are now focused on knowing what we own and when managers vote against their proxy adviser.”

This strong ESG focus feeds through the whole investment process in a precise way. “We avoid unsustainable businesses, or those that routinely exploit vulnerable people. However, we also recognise that all companies have a mixture of good and bad, so we use an on-balance test to avoid the most offensive ones. We are very careful with illiquid assets too,” Brooke Turner says. The Church Commissioners for England also has big ambi- tions in this area. Tom Joy, chief investment officer at the char- itable foundation that runs the Church of England’s money, says: “We aim to be at the forefront, globally, of responsible investment. “We have a comprehensive set of ethical investment policies and apply our stewardship activities in an integrated way across all asset classes and continually assess the real-world impact of our investments.”

Important exclusions The Church Commissioners has an extensive exclusion policy, covering companies involved in weaponry, pornography, tobacco, alcohol, gambling, high interest rate lending, thermal coal extraction and producing oil from oil sands. “Our policies also allow for investment restrictions on a case- by-case basis, usually as a last resort if we are not satisfied with our engagement experience with a company,” Joy says. The commissioners has continued to invest in its responsible investment capabilities and now have a team of six, soon to be seven, working with its investment teams driving forward the ESG agenda. “We are committed to signing up to the new stew- ardship code and in 2020 joined the UN sponsored net zero AOA Alliance, and hence, have committed to being a net zero investor by 2050,” he adds. The commissioners’ engagement approach has evolved with this net zero target and as expectations of corporate responsi- bility and companies’ role in society have increased. “Our cli- mate change programme in particular has had a material impact on our portfolio in the past few years,” Joy says. This has also led companies to change their approach through environmental, social and governmental (ESG) engagement.

50 | portfolio institutional | April 2021 | issue 102

“Having committed to the General Synod in 2018 that we would divest from fossil fuel companies that do not align with the Paris Agreement by 2023 we have engaged heavily with high carbon sectors,” Joy says. “We firmly believe in the power of engagement to effect real change – of 21 companies originally at risk of failing our first ‘hurdle’ in 2020, 12 improved their performance sufficiently to avoid restriction.” The nine remaining companies were restricted in December 2020. “We are now engaging a broader scope of companies on our systematically increasing hurdles, seeking to push the world’s largest emitters towards Paris alignment,” he adds. “This is just one element of our push to reduce emissions in the real economy in order to meet net zero.” A small but growing allocation within the £1.12bn Esmée Fair- bairn Foundation’s endowment invests in funds looking to achieve enhanced ESG impact alongside financial return. “The idea has been to make incremental improvements each year,” says Matthew Cox, investment director at the Esmée Fairbairn Foundation. “It is about finding funds that invest in climate change solutions or exiting funds that are not thinking about ESG factors, through to writing letters to other investors to try and get corporates to change.” The foundation signed the Funder Commitment on Climate Change in 2019, committing to steward its investments for a post-carbon future. “This is something we helped launch,” Cox says. “It is a series of commitments and we encourage others to sign up.”

It also works with other foundations and investors through the Charities Responsible Investment Network and looks for opportunities to promote corporate and investment behaviour – which, it highlights, is in the interests of long-term share- holders. “This is a good example of a great networking organi- sation and getting a great deal of benefit by swapping ideas and hearing what other people are doing, which is invaluable.” There is, for Cox, also an evolution in the ESG investing pro- cess. “The next iteration of ESG investing is an upgrade to impact investing, where investors not only have financial tar- gets but non-financial ones as well.”

Overcoming Covid

The investment challenges posed by Covid-19 are numerous, but the long game played by many charitable foundations in the investment arena means they are unmoved, a point high- lighted by Nuffield. “Covid won’t change our approach, but it might make our ride a bit bumpier,” James Brooke Turner says. “However, our spending on research is beginning to establish how dramati- cally different the outcomes are for different parts of society, especially those most affected by austerity measures prior to the pandemic.

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