Donor Advised Funds are becoming increasingly popular in the UK. They offer a cost-effective vehicle for long-term charitable giving. Donors can make Gift Aid qualifying donations to their Donor Advised Fund without immediately having to decide which charities will ultimately receive those funds. The donor can then award grants to multiple charities over a period of years.
In between a donor adding money to their fund and making grants to charities, the monies are often invested. This helps to grow the value of the funds, which means more money can be granted to charities over the long-term.
That all sounds great, but does raise the question: what happens to the money when invested? On this point, Donor Advised Funds have been criticised for warehousing wealth. Critics are concerned that, although donors get immediate tax relief, the funds are not immediately given to frontline charities. They claim that whilst the funds are invested, they are not doing good.
This article addresses the criticism by arguing that the way Donor Advised Fund monies are invested matters. It argues that the ethical investment of funds can contribute towards philanthropic goals through social and environmental performance.
Goal alignment
When a donor puts money into a Donor Advised Fund, they are choosing to use those monies for charitable purposes. Legally, the monies pass from being personal funds to charitable funds. As such, philanthropic goals, rather than the pursuit of financial gain, sit at the heart of how the funds should be used.
At the Charity Service, we strongly believe that philanthropic goals should drive everything that happens with the charitable funds that sit within a Donor Advised Fund, and that includes the investment of funds. To us, it doesn’t make sense to lay philanthropic goals aside whilst funds are invested, only to reengage them when it comes to charitable grant making. For us, the investment and subsequent granting of charitable funds are two sides of the same coin. Philanthropic goals should always remain central to decision-making.
Many of the problems philanthropists wish to address arise as a consequence of imperfect economic systems. Economic growth creates many benefits such as jobs and improved living standards, but economic systems also create harms. It is important to recognise this. To invest funds destined for charitable purposes without thinking about the potential harms caused by those investments risks moral and intellectual dishonesty.
Our philosophy is that our investments should not cause harms that we then try to solve through charitable grant making. There is simply no logic in generating financial returns from harmful business activities and then using those monies to address the problems created. An ethical approach is, therefore, desirable to ensure charitable investments work in tandem with the charitable grants that they ultimately fund.
How to go about ethical investment
Having established that an ethical approach helps to align philanthropic and investment goals, let’s now consider how to invest ethically. There are three common tactics for investing ethically. These are excluding, selecting and influencing.
Excluding
The first tactic for ethical investment is to avoid investing in companies that do harm. It makes no sense to invest in companies that create problems that charities are then asked to solve. For example, it makes no sense to invest in tobacco companies and then support health charities. It makes no sense to invest in oil producing companies and then support environmental and climate change charities. As such, the exclusion of companies that do harm is a necessary component of ethical investment.
Selecting
The second tactic for ethical investment is to invest in companies that positively contribute towards philanthropic goals. There are many companies that create and implement solutions to social and environmental problems. For example, the Charity Service recently invested in Renewi, a waste-to-product business operating in the Benelux and UK. They collect, sort and recycle all sorts of waste materials, ranging from old mattresses and fridges to old road surfaces. In doing so, Renewi creates new products from old. The company has set itself the target of recycling 75% of all collected materials by 2025 and is investing in innovative new technology and treatment methods to achieve this. Since the company’ primary purpose is to maximise the amount of waste it recycles, it makes for an excellent environmental investment.
By positively selecting companies, investments become a significant lever to support social and environmental change. Buying a shareholding helps to create demand for a company’s shares which helps to push up the share price and lower the company’s cost of capital. In effect, you are making it easier for ethical companies to obtain finance.
Influencing
The third tactic for ethical investment is to influence and change companies’ behaviour so that they align with philanthropic goals. This can be achieved by using shareholder rights to engage with companies. For example, ethical investors recently persuaded Unilever, one of the world’s largest food manufacturers, to start reporting on the healthiness of the food it sells. Unilever has also set itself targets to grow the proportion of its healthier products. Both these commitments were made after a shareholder resolution put to the company by a coalition of investors.
Similarly, shareholder voting rights can be used to support or oppose policies at a company’s AGM. For example, the Charity Service does not think it appropriate for companies to make political donations and our fund manager will always vote against a company resolution seeking permission to do so. By influencing company behaviour in this way, Donor Advised Funds can transform business practices and change the world for the better.
No need to sacrifice financial returns
Ethical investment has a long history dating back to the nineteenth century. For example, religious movements such as the Quakers and Methodists were concerned to support temperance and fair employment conditions. Yet, from these early days, ethical investment has been plagued by the notion that financial returns are sacrificed in pursuit of ethical goals. However, the argument that investing ethically will result in disappointing financial performance is increasingly difficult to sustain. Indeed, far from being detrimental to financial performance, there is growing evidence to suggest that an ESG approach may actually boost financial gains.
In 2020, Morningstar found nearly 60 per cent of ESG funds beat their conventional peers over the past decade. What is the possible explanation for this? Some clues lie in recent study of 80,000 ‘ESG incidents’ by Simon Glossner from the University of Virginia. He found that companies exposed to high ESG risks underperformed the market by an average of 3.5 per cent per annum. This suggests that companies that positively manage ESG issues are less exposed to ESG incidents that will damage performance and profitability. As such, it is increasingly clear that generating superior financial returns and staying true to your values are entirely compatible.
Why the Charity Service works with Castlefield
Given all the above, it will not surprise you to know that the Charity Service invests all Donor Advised Funds ethically. We place all funds for investment with Castlefield, a longstanding ethical investment management company. They have been at the forefront of responsible ESG investing for many years, long before it became popular. In 2021, Castlefield was one of just 125 investment firms that were successful in their application to become signatories to the UK Stewardship Code. The Code is recognised globally as a best-practice benchmark in investment stewardship and its adoption by investors should lead to sustainable benefits for the economy, the environment and society.
Castlefield has robust systems for incorporating environmental, social and governance factors into their investment process. They use both negative screens to identify companies not to invest in, and positive screen to identify companies with a good reason to invest. They also engage with companies to promote and support sustainable business practices. As well as reporting on financial performance, Castlefield provide clients with a quarterly Stewardship report that describes how they voted at company AGMs and influenced firms to address social and environmental risks.
Of course, implementing an ethical investment approach is not without its challenges. The global economic system is complex, and we can never be absolutely certain that investment choices and shareholder actions will have unintended outcomes that do harm. The recent war in Ukraine has illustrated some of these ethical dilemmas. Many ethical funds exclude weapons manufacturers. Yet with the onset of war and efforts to defend Ukraine sovereignty and democracy, some investment firms began to speculate whether weapons could be justified through an ESG lens. Then there was the withdrawal of businesses from Russia. Many firms halted business activities in Russia, but some did not. For example, Reckitt Benckiser, which supplies hygiene and health products, continued to supply products arguing that it had a duty of care to meet the needs of its 1,300 Russian staff and consumers. These examples highlight how ethical decision-making is not always straightforward.
Ethical dilemmas may be difficult to resolve but, in our view, that is no excuse for ignoring them. Failing to address ethical issues risks being complicit in financing companies known to cause social and environmental harm. That seems in no way justifiable when we are investing funds that will ultimately be granted for charitable purposes. Ethical investment provides the rational and moral means to align philanthropic goals with the investment of charitable funds.
Conclusion
So, let us return to the critics and their allegation that Donor Advised Funds warehouse wealth. Their criticism may have some traction where a fund’s investments are made purely for financial gain. However, the criticism is harder to sustain when a Donor Advised Fund adopts an ethical approach to investing. Ethical investment ensures that philanthropic objectives underpin both investment and grant making decisions. Thus, rather than warehousing wealth, Donor Advised Funds that invest ethically can activate wealth twice over.
