Charities – Feature
a factor in the management of their investment portfolios. In 2021, 85% of charities felt that ESG factors are either very or quite important in the management of their portfolio. This represents a 3% rise year-on-year, but more striking is the growth over the longer term. Between 2015 and 2021, the pro- portion of charities that felt ESG factors were important jumped to 85% from 61%. Furthermore, a stark statistic is that half of the charities questioned in 2021 stated that they are pre- pared to accept compromised levels of return in exchange for sustainable, responsible investment practices. “Wider societal concerns that have become increasingly prom- inent over the eight years of the survey have become more important, and more nuanced, in 2021,” notes the survey. There has interestingly been a significant shift to divestment from engagement when it comes to ensuring that climate change factors are considered in the management of portfolios.
Between 2019 and 2021, the proportion of charities who con- sidered engagement to be their preferred approach fell to 54% from 70%, while the proportion believing divestment is the best approach jumped to 35% from 24%.
While the level of charities with ethical exclusion policies appear to have plateaued, the nature of these policies is becom- ing increasingly broad. Tobacco remains the most barred investment, forbidden by 87% of those with an exclusion policy. Armaments, gambling and pornography are also each avoided by most policies, while 48% now exclude fossil fuels, up from 36% in 2020.
2022: A year of differing outcomes So, given the challenges of Covid, what is the outlook for 2022? “We’d expect continued inflation, lower than needed rates and a slow grind onwards – until there is a trigger event which we will probably come out of left field,” Brooke Turner says. “Be prepared for a range of outcomes remains our watchword.” Henrietta Gourlay, investment manager at the Grosvenor Fam- ily Office, which looks after the Westminster Foundation, is also positive on most markets, apart from fixed income. “Yes, inflation is here and is starting to look persistent, and this will inevitably result in central banks putting up rates. However, any rate increase will be from a low base and likely to be small increments.”
Europe is in more of a conundrum, with Covid infection rates surging. “This could encourage them to extend their quantita- tive easing program past March 2022,” Gourlay says. “But, with inflation likely to be at a 30-year high in November, there will be much debate about this, I’m sure.” In terms of markets, Gourlay is not optimistic about fixed income, believing that government bond yields cannot go
Be prepared for a range of outcomes remains our
watchword. James Brooke Turner, Nuffield Foundation
lower in the face of this inflation. “Which means they will likely have negative returns – particularly if the European Cen- tral Bank terminates its quantitative easing program in March, as that has been a huge buyer of sovereign bonds to date.” She adds on the inflationary environment outlook: “Credit spreads are tight and investment-grade credit is unlikely to give a positive real rate of return in an inflationary environment. “High yield credit spreads are also tight and there is not a risk- adjusted return at this point in time.” Gourlay notes that many investors are worried about equity val- uations. “I have less concerns, as inflation is good for equities as long as they have pricing power and can pass through their cost increases,” she says. “Obviously not all companies have this luxury, but a good investment manager should be able to act on this.” For Gourlay, financials should do well in a rising rate environ- ment – as they will become more profitable. “Infrastructure should do well, as cashflows will be linked to inflation. “The flip side to infrastructure stocks is that many do not score well on an ‘E’ perspective as they have high-carbon footprints, so this is something that needs balancing. Commodities should do well, but again there are ‘E’ considerations.” The investment challenges evident here, especially for ESG- aware charities, are balancing where the best returns are with a commitment to ESG. “Oil majors and tobacco are super cheap, super yieldy, with steady growth and pricing power, but generally are no go areas if you are trying to look good from an ESG perspective,” Gourlay says. The 2022 outlook and challenges for charitable founda- tions, and other institutional investors, will, therefore, not be on the same level as the past year, but will, nevertheless, contain challenges.
Issue 109 | December-January 2022 | portfolio institutional | 39
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