Charity

Why the National Trust is not so bad

Blickling Hall, Norfolk - where a water-source heat pump has been installed in the lake to replace the existing oil-fired system

Blickling Hall, Norfolk - where a water-source heat pump has been installed in the lake to replace the existing oil-fired system

The National Trust is the latest charity to become embroiled in an ethical debate around investing. It is one of a number of not-for-profit organisations to fall into the public spotlight due to a perceived conflict between the charity’s mission and its investment policy.

This case revolves an investigation by the Guardian newspaper that highlighted the charity invested “tens of millions of pounds in oil, gas and mining firms – despite the conservation charity pledging to cut down its own use of fossil fuels and warning about the impact of climate change”.

The Green Party has added to the fossil fuel fire with their co-leader Caroline Lucas Tweeting, “It’s disappointing to see @nationaltrust so dedicated to protecting our natural heritage undermining its good work with significant support for dirty fossil fuels.”

Is the National Trust so bad? After all, as a member of the Climate Change Coalition the charity stated that climate change poses the single biggest threat to the sites they look after. They are actively adapting, managing coastal change and the impacts of severe weather. The National Trust has pledged to reduce its energy use by 20% by 2020 with 50% coming from renewable sources. Furthermore, it will be spending an additional £300m over the next ten years to clear a backlog of conservation work.

Of the £1.3 billion the charity has in reserves, it invests £166.7 million in the CAF UK Equitrack Fund. This is a tracking fund that aims to replicate the performance of the FTSE All Share index. As a result, the fund invests into BP, Royal Dutch Shell, Rio Tinto, etc, but the Trust’s exposure to these companies is less than 2% of the total investments. Legal & General, who manages the fund on behalf of CAF has a very strong record in corporate governance and responsible investment.

The conundrum does highlight the level of detail that might be employed to match a negative screen. In this case excluding mining, oil and gas producers is easy, but should this also include Weir (world's leading engineering business that is involved in mining and aggregates) or Marshalls (who operate their own quarries for the manufacture of natural paving stones)? There will be many active fund managers who will argue that they have the resources to screen these issues from a portfolio, but this adds to the time and cost of managing investments. There has to be a level of proportionality in making Ethical, Social and Governance (ESG) judgements.

National Trust has responded to the criticism, stating they adopt a policy of not investing directly in companies which derive more than 10% of their turnover from the extraction of thermal coal or oil from oil sands. They also engage with companies to improve their environmental performance and see their role as one of actively influencing behaviour and driving environmental improvements.

The charity has adopted a proportionate stance to ESG investing, knowing that it is very difficult to totally exclude certain issues that might be at odds with its mission. The charity has opted for a charity tracking fund to reduce its overall cost of investment and the Trust actively engages with companies to influence behaviour, while investing directly in renewable energy projects on its estate.

The National Trust is a high-profile charity that often attracts criticism. This case highlights the fundamental difficulty for a charity investing with clear ESG perspectives. There are often grey areas and trustees need to be proportionate in managing investments and reputation.

When trustees can lose it all

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This blog celebrates Trustees Week.

Trustees have many responsibilities and significant power to guide their charity for good or ill. Occasionally circumstances become so stressful, particularly during a stock market panic, that long held strategies can be quickly abandoned.

In one scenario trustees might have instructed their investment manager with a high earning but high risk mandate, only to find that it falls by 30% (so far). Not knowing how much further it will fall, they change their mandate to one focussed on preserving the remaining capital, usually by selling equities and holding cash. Too often the market then recovers, but the portfolio doesn’t. Only trustees can do this.

We should always remember that being a trustee is very rewarding but can involve a variety of stressful situations: think of safeguarding, expenditure decisions, data and of course investing. It is not as simple as rolling some dice and hoping for the best outcome, as it is rarely that simple. The key is to be prepared and rehearse these situations as far as possible – which is a good use of the Risk Register.

Where organisations have mission critical components it is important to make sure they are resilient and well supported. It is up to senior staff to make sure that their trustees are properly supported so they can exercise their duties and responsibilities as effectively as possible.

Grant-making, a moral dilemma

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Q. When is a gift not a gift?

A. Most of the time.

A group of friends were discussing this question as we drank coffee sitting outside a café. A woman passed by and politely introduced herself as homeless and soon we had given her some money. Our friend said “you see – a genuinely gratuitous gift” to which we asked “…or did we pay her to leave?”

It is the fashion now to focus on impact and measurement in grant-making and charitable activity, but these terms are badges of commerce, not giving. ‘Getting better value from your gift’ is a laudable goal, but how often can an alcoholic return before our charity is exhausted? Limitless charity enables endless drinking, but only that would be a true gift, made regardless of the consequence. A requirement to stop drinking is no longer a gift but a transaction.

Once we set criteria we trade, and only haggle over the price. What matters is who sets the criteria.

A false stop - having confidence and conviction on future returns

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We've just come across an old report dated 2013 from an investment management firm.

It sensibly suggested that portfolio returns had been so good that they must now be unsustainable and charities should begin to reduce the spending they funded from their endowment. There were many other similar reports making the same point and also suggesting charities should reduce their spending. So what did happen?

In fact the world’s stock markets went up by almost 16% a year for the next four years, an astonishing rise by any standards, especially when inflation barely moved above 1% a year. Longer-term analysis, based on Barclays data, shows the real return on UK and US equities, from 1900 to 2016, was 5% and 6.6% respectively.

If you were a charity trustee or executive in 2013 and received that advice from your professional adviser, what did you do? Did you do as advised and accept a lower distribution and lower spending? If you did, what choice did you have in the face of such confident advice?

Think of it another way: if a fundraiser had said that they wanted a lower their fund raising target for the year because they had done so well recently it couldn’t carry on, what would you do? Both markets reply on past performance and there is no guarantee that this will continue.

A trustee should listen, understand, push back and then decide. Trustees and CEOs are much better at pushing back when they are familiar with the subject, such as fund raising, but in a world such as investment management it often appears too complex or high risk to ask some of these very basic questions.

This shouldn’t be the case, and trustees have a duty to push back to make sure that the advice they are being given is reasonable and reliable - whether its comes from a fund raiser or a fund manager. That’s the law and this responsibility lies ‘upstream’ of the normal business of the investment management community and amongst trustees and the executive themselves. One common barrier to this taking place is the absence of any ‘neutral’ support that charities can call upon when trying to push back – everyone has an angle - so the key is to find the one that is most trustworthy for the task in hand. 

For most charities, they have a degree of discretion on both income and expenditure. Even the best budgets allow or forecast for some volatility of these measures as there is no certainty. 

There can be no doubt that where trustees did push back against such advice in 2013 and stayed with their spending plans (or even increased them), their charities would have made a distinct additional contribution for many people who were experiencing times of considerable hardship. If they had been wrong, they still had the chance to pull up the drawbridge, but not before they had made sure everyone was inside.