Developing an Ethical Investment Policy: Navigating Potential Conflict

Spurred by global events – from areas of conflict to the climate emergency, several of our clients have begun to reconsider whether their wider strategic aims and the expectations of stakeholders are reflected across multiple areas of their businesses. Finance and treasury functions are no different and many are reviewing their ethical investment policies as a result. Often though, there is uncertainty on where to start and how to manage competing objectives.

Across corporate, public sector, third sector organisations there continues to be an increase in focus on how activities impact on the wider world. The spotlight comes from customers, service users, suppliers, boards, regulators and employees. It has manifested itself across corporate reporting, marketing, public relations, product development and investing, as well as more generally. It is a trend that has gathered pace over the last 15-20 years and show little sign of abating; many will say for the better.

Clients increasingly consider ESG linked financing, and we’ve supported King’s College London (King’s College London – Private Placement – QMPF), the University of Essex (University of Essex – QMPF) and others in issuing “Green” or sustainability linked debt. More recently we’ve also had clients considering their Ethical Investment Policies and how these should evolve and fit with wider treasury management policies.

While many clients use sector specific and other guidance or precedent to shape treasury management policies there are fewer reference points to developing ethical investment policies – but there is increasingly a high level of scrutiny.

In supporting clients we’ve identified a number of areas that organisations can consider on a case by case basis. This has given clients:

• greater structure and rationale for future investments;
• reassurance that their policy is up to date and in line with others in their sector;
• consistency with wider strategy and commitments
• greater clarity on how to incorporate ethical investment considerations
• allowed them to be more responsive to enquiries from third parties regarding how they respond to ethical concerns; and
• in many cases, set a clearer process through which the policy can be revisited and reconsidered in a structured manner.

Balancing different considerations

Concluding on a policy is not simple. It can be an emotive area and there are several, often conflicting, considerations:

Determining the extent of the policy

There is no ‘one size fits all’ approach to developing an ethical investment strategy and there is more limited guidance from regulators, sector bodies or legislation than is often the case in other areas of policy development. Policies have become increasingly detailed and transparent. The broad subject areas newer policies adopt include:

• Purpose and Aims of the Policy
• Policy and Legislative Context: including the interaction with fiduciary and statutory obligations, often including a requirement to maximise returns.
• Responsibility and Reporting
• Scope: The policy will also frequently clarify what aspects of treasury are covered or are out of scope, for example financial investments, subsidiary/associate investments, spinout investments, treasury instruments, borrowing facilities, banking provision, pooled investments, related pension schemes, endowment funds etc.)
• Undertakings: these vary widely by institution. Different organisations are comfortable with varying extents to which the policy can limit them. They may choose wording across a spectrum, including wording like “consider”, “seek to” or “will not knowingly”, through to definitive statements. This can take considerable work to agree.
• Investment Principles – these can vary in level of detail and include:
  • Direct alignment with recognised principles: some organisations have evolved from a simple set of investment exclusions (see below) and now more include requirements linked to UN Principles for Responsible Investing (“UNPRI”) signature, the UN Global Compact and alignment with UN Sustainable Development Goals.
  • Investment exclusions: these often formed the initial basis of ethical investment policies and continue to evolve. They are often grouped under Human Rights/Labour requirements, Environmental considerations, Governance metrics and Controversial Business Activities (which can benefit from being defined, quantified (e.g. percentage revenue) and limited (e.g. geographical presence may not infer breach)
  • Positive requirements: most commonly to encourage and promote specific objectives where without detriment to investment risks or returns.
• Role of a Third Party Investment Manager including:
  • how they are procured
  • requirement that they align their investments with the policy, requirements on them in relation to judicious acquisition of investments. monitoring and engage with companies and relevant divestment actions
  • certifications/signatories (e.g. UNPRI, Net Zero Asset Manager Initiative, ability to measure contribution towards UN Sustainable Development Goals)
• Monitoring and Approach to Breaches: an increasing area of focus, this can include how expressions of concern can be raised, how they will be managed and assessed, and periods for subsequent reconsideration.
• Publication Undertakings: as organisational transparency has increased more generally some institutions have undertake to publish their investments on a regular basis, but you need to have adequate systems to ensure this is deliverable and complete.
• Review and Revisions: creating clarity on when policies will be reviewed and revisited.

The policy also needs to be aligned to other governance arrangements, including your treasury management policy and investment policy, and should be developed in a way that is capable of being monitored reviewed within existing governance arrangements.

Turning intention into policy

Determining that you would benefit from a clearer policy and establishing its scope is challenging enough. Delivering a policy can be equally challenging, particularly given the interest it can stimulate from a number of parties. It is QMPF’s view that a clear process can aid this and we can support clients through this process:

• Define: Confirm the purpose and audience, review organisations beliefs, confirm limitations and obtain stakeholders input.
• Identify a structure: including and its extent, including clear definitions, limitations, application to different types of investment /treasury holdings and counterparties, position statements, responsibilities and processes
• Establish and gain approval: as well as writing the policy, this step should include considering how the policy can be implemented and managed.
• Reporting and transparency: when implementing the policy review the frequency of reporting, who it is from and to and ensure responsible parties have support and time to implement the policy and continue to review regulatory or other context.
• Review and monitoring – building in gateways for future review, update and accountability.

QMPF can support you in considering your need for a policy, your approach to its development, provide detailed relevant precedent and context, and support you through governance processes. We frequently support clients in this both alongside wider treasury management policy development and as retained treasury advisers – giving you expert and accessible independent support.

How we can help

QMPF supports a range of clients, particularly in the higher education and social housing sectors, in considering treasury management issues.

Combined with a long-standing sector understanding, we offer retained treasury management advice, treasury management reviews, debt options appraisals and support clients raising and refinancing debt in both the bank and capital markets.

If you are reconsidering your treasury management approach, would like more information on the matters discussed above or have a need for corporate finance support we would be delighted to speak to you.

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