Heather Lamont highlights some common anxieties about ethical investment – and explains why there’s no need for trustees to worry

Ethical investment can mean a lot more than just excluding certain things from your portfolio. But that is the aspect which most often causes confusion among trustees, especially when considering an ethical policy for the first time.

"Who’s to say what’s ethical?"

You can spend as much time as you like in lively debate with your friends and indeed with fellow trustees about what ethical means to you personally, but as far as your charity is concerned it is quite simple. The organisation’s mission and objectives are presumably known and understood by all the trustees. Adopting an ethical investment policy just means that you want your investment portfolio to be consistent with that mission and those objectives.

Top tip: stay focused on the issues that are relevant to your organisation’s work, not trustees’ individual interests and views

Your duty is to act in the charity’s best interests, including assessing whether you risk damaging its reputation by holding investments contrary to its mission

Heather Lamont

"But we have a duty to seek the best possible financial returns".

Actually, your duty is to act in the charity’s best interests. That will include an assessment of whether you risk damaging the charity’s reputation, or its ability to raise funds from other sources by holding investments that stakeholders would view as contrary to the charity's mission. You may well conclude that you don’t face any significant risks like that, but you should at least record your thinking.

Meanwhile if you do identify one or more business activities that you think you would be best to avoid, here’s the good news: there is no evidence that any reasonable ethical policy will have a noticeable effect on long term returns.

Top tip: don’t assume that an ethical policy will damage the portfolio’s performance. You’re far more likely to do that by having the wrong financial risk and return priorities or failing to control costs.

"You can never be whiter than white".

Trustees sometimes worry that you’re just inviting embarrassment by claiming to have an ethical policy when so many companies might turn out to be involved in something disagreeable somewhere down the line.

Today’s corporate structures can indeed be pretty complex but this doesn’t present an excuse for not addressing the risks that matter to your charity. The expectation is that you should minimise your reputational risk without having the unintended consequence of excluding so many companies that you can’t have a wide enough spread of investments to control financial risk. This is usually achieved by applying a turnover threshold, so that a company’s shares would be excluded if it gets more than (say) 10% of its turnover from the offending activity.

Top tip: make sure your fund manager has the resources to identify which companies are involved in which activities and to what extent, and can apply a consistent approach to excluding those that fall foul of agreed criteria.

Heather Lamont is a client investment director at CCLA