Do Charity Trustees Have to Choose Between Values and Returns?

Ask whether a charity's trustees should simply chase the best possible investment return, and the instinctive answer is often yes: surely maximising performance is the whole point. That instinct misses something important about what makes charity money different from a private investor's portfolio. As Nicola Toyer, Acting Head of Charities at Quilter Cheviot, puts it, “when you’re a trustee of a charity, it’s not your own money.”

That distinction shapes everything else. A charity has multiple stakeholders with a claim on how its money is handled, from the trustees who make the decisions to the beneficiaries the charity exists to serve, and often staff too. “You’ve got to think about what it is that they would want you to be doing with your investment policy,” Nicola explains. The goal isn’t simply maximising the return on the investments themselves. It’s maximising the return to the whole organisation, since investments are usually only one part of a much bigger picture. Charity Commission guidance backs this framing directly: a trustee’s principal duty is to further the charity’s purposes, and investment decisions must be made in service of that duty rather than in isolation from it ^[1].

Untangling ESG, Stewardship and Ethical Investing

Part of what makes this territory difficult is the sheer volume of jargon. ESG, ethical investment and responsible investment get used almost interchangeably, despite meaning different things, and the Charity Commission’s own listening exercise with trustees found that inconsistent terminology was one of the biggest practical barriers to charities engaging with the subject at all ^[2].

Quilter Cheviot’s own definition of responsible investment splits it into three parts. “For us this encompasses three things,” Nicola says. “One is ESG integration, one is stewardship, and then one is ethical investing.” ESG integration is about risk management: assessing the environmental, social and governance risks and opportunities within a company and factoring them into the investment process to protect returns. Stewardship goes further than analysis. It’s engagement, using voting rights and direct conversations with company management to push for better outcomes on the issues the research has flagged. Ethical investing is the layer that most people mean when they talk about a charity’s values: deciding which sectors to avoid, such as tobacco, defence or alcohol, and in some cases which to actively support.

Regulators are increasingly alert to the confusion this jargon can cause. The FCA’s anti-greenwashing rule now requires any claim a regulated firm makes about a product’s sustainability characteristics to be accurate and not misleading, precisely because loose use of terms like “sustainable” and “ESG” had become widespread across the industry ^[3].

Does an Ethical Policy Really Cost Trustees Returns?

“I think it’s a fallacy to say that having ethical restrictions automatically means that you’re going to give up investment returns,” Nicola says. What restrictions do is shrink the investable universe, and how much they shrink it depends on how tightly they’re drawn. Excluding armaments sounds simple, but it can be defined narrowly, around weapons manufacturers themselves, or broadly enough to catch a components supplier or a tyre maker whose products happen to end up on military vehicles. Without a pragmatic, nuanced approach, a charity can end up excluding far more of the market than it intended.

The more meaningful effect isn’t on returns but on volatility. If a charity measures itself against a benchmark that invests in everything, and its own policy excludes 10 to 20% of the market, its returns will simply have a different profile to that benchmark from year to year. Over a five to ten year period, Nicola notes, that needn’t stop a charity reaching the same destination in terms of overall performance. The ICAEW’s summary of the Charity Commission’s refreshed guidance takes a similar view: trustees can adopt an ethical approach where it protects the charity’s reputation or supports its purposes directly, and this can sit alongside the financial return objective rather than automatically working against it ^[4]. Even within the investment profession, opinion remains divided on how far ESG factors should be built into formal fiduciary duty, which is one reason for leaving the judgement to trustees and their advisers rather than prescribing a single approach ^[5].

When Trustees Disagree About What Is Acceptable

Every board contains people with different personal views on where the ethical line sits, and Nicola is clear about how that should be handled. “The key thing when you’re a trustee and you’re having this conversation is to leave your own personal opinions behind when you go into the room,” she says.

The starting point instead is the charity’s own purpose. A medical charity excluding tobacco and alcohol is a straightforward call. A faith-based charity weighing sanctity of life issues faces a different set of questions entirely. A children’s charity thinking about excluding social media companies needs to go further still, and consider how its own beneficiaries would feel about that decision, not just how the board feels about it. Balancing the views of beneficiaries against the views of donors is where some of the hardest conversations happen, and Nicola suggests trustees keep coming back to what the charity is actually there to do.

Testing a Policy Against the Charity's Own Donations

One test cuts through a lot of the debate quickly. “We always say you should take it back to your donations policy,” Nicola explains. “Would you accept money from the companies that you’re saying you wouldn’t invest in from an investment standpoint?” If a charity would happily accept a donation from a company but refuses to hold its shares, that inconsistency is worth examining. Nicola describes the conversation as one that consistently produces some of the most interesting and revealing debates she has with charity boards, precisely because it forces trustees to apply the same standard in both directions rather than treating investment and fundraising as separate questions.

Reviewing an Investment Policy Once It Is Set

An ethical policy isn’t a document to file away. “From a governance perspective, you should always be looking at it around once a year,” Nicola says. Circumstances rarely shift dramatically within twelve months, but reviewing the policy with an investment manager on a regular basis stops it drifting out of date the way many charities’ policies do when nobody revisits them for years at a time.

That ongoing relationship is, in Nicola’s view, the real case for using a wealth manager in the first place. “Ultimately it’s about advice, and the advice that they receive is what they should value, not just the underlying investment performance,” she says.

The question trustees actually need to answer isn’t whether an ethical policy will cost them money. It’s whether their investment approach reflects a charity that has genuinely thought through what it stands for, and is willing to test that thinking against its own decisions, not just measure it against a benchmark.