A guide to ESG and socially responsible investments

Recent years have seen an ethical awakening with businesses and consumers becoming more aware of the impact of consumerism on our environment and society. But what about the impact your money has? Have you considered whether you are as green or ethical in your investment choices as you are in your personal life?

The first socially responsible investment fund – the Pax fund, set up in 1971 in the US as a stance against the Vietnam war – was launched 50 years ago, but it is only far more recently that ESG – investments with environmental, social, and corporate governance – and socially responsible investing (SRI) has begun to be taken seriously by industry and investors.

In October 2020, The Big Exchange – Co-founded by The Big Issue – launched with the mission of make everyone’s money count for more. The investment website offers ESG and SRI solutions for adults and children, providing access to 36 funds that generate positive social and environmental impact.

Covid-19 has been a watershed moment; with research from the ethical bank Triodos suggesting that over a third of Britons consider ESG and SRI to be fundamental to addressing climate issues and to avoiding future pandemics.  In this blog, the Generation Charity Consultancy experts discuss what this type of investing is, the different ways to invest ethically and importantly how to get started.

What are ESG and SRI?

ESG and SRI are in essence investment decisions which align with your individual beliefs and values – be they social, moral or religious. Areas such as climate change and the environment, animal testing, workers’ rights, tobacco, the arms industry and gambling are all areas taken into account by ethical investment specialists.

At its simplest, ESG and SRI are about believing there are other important aspects to consider, not just whether or not investments are making money. Historically, the focus of these type of investment funds was more on the screening of companies to remove those that produced products or services in conflict with an ethical investor’s values. But in recent years the sector has progressed to deliver positive screening, which focuses on businesses that both aim to achieve a positive social impact and have leading ESG – environmental, social, and corporate governance – credentials. Investing is increasingly about choosing investments that strive to have a positive impact on the world in some way.

How big is the ESG and SRI sector?

Ethical investing is still relatively small in the grand scheme of things, but it is experiencing rapid growth. Funds that specialise in ESG investment principles attracted net inflows of $71.1bn globally between April and June 2020 (according to the financial research firm Morningstar) meaning that ESG fund flows equated to almost a third of all European fund sales.

The investment industry has been quick to respond to demand, with in excess of 70 such funds being launched during the first three months of 2020, although not all of these are open to UK investors.

How can I start investing in a social responsible way?

How you choose to invest depends on numerous factors, including your confidence with investing, your skill, experience, attitude to risk, the size of your investment portfolio and how long you intend to keep your money invested. There are several things to consider whatever option you take, each with their pluses and minuses.

If you are already an investor – you pension counts as an investment – identify the ESG and SRI characteristics of each investment you hold. If they don’t align with your values, investigate whether you can change your investments or funds, if your current provider can’t help another may be more accommodating.

There are a great number of ways to invest ethically, including a stocks and shares ISA, general investment account and through your pension. As with any investment the value can fluctuate over time so expect troughs as well as peaks. You can use a self-invested pension (SIPP) or personal pension to save for your future while investing in everyone else’s future by using an ESG and SRI specialist provider.

If you would like to speak to one of our experts to discuss the specifics of your requirements please do get in touch.

 

A solid business plan is important in any climate, but during economic uncertainty and recession, it’s imperative. Strong finances underpin the success of any business including charitable organisations. Even with the best product or service, poor bookkeeping or financial organisation can be catastrophic. The pandemic has been difficult for many businesses including charities, as a loss of income for donors and fundraising events cancelled has resulted in a decline in donations. So, while the world is full of hope as Covid-19 vaccines start to take effect, we need to focus on how charities can navigate the coming months?

Importance of recession strategies: understanding the economic climate

The importance of recession strategies cannot be underestimated. We are consistently hearing doom and gloom predictions from financial experts about the economy’s recovery, which is expected to continue well into the next few years. The tricky thing about predicting how the economy will recover is that some parts of it remain hanging in the balance. Many factors are at play, including how effective the vaccines prove to be at limiting a third wave, how long the furlough scheme will be around for and what support will continue to be available for businesses as we move into summer, autumn and winter.

In order to better understand the effects on your market, it’s important to keep up to date with the latest guidance. While much of the pandemic remains unpredictable, there are certain patterns we see emerging as the situation progresses. The current Covid-19 roadmap is progressing well but things can quickly be derailed by new spikes and unforeseen developments. This means fundraisers should continue to prepare for socially distanced ways of raising funds. It also means that finance managers should be proactive in investigating government support options.

Preparing your business strategy during a recession

The key to creating a strategy for business survival during a recession is to be adaptable and flexible. This can seem counterproductive; after all, you’re planning to have to change your plan. However, this is crucial. In a volatile market, it’s key to keep an eye on how things progress. Don’t always be reactive, if you sense a change is coming that may affect your charity, explore the possibilities before the event happens. If you’re unsure, now is a good time to speak to a charity consultancy expert. Create internal processes to help streamline any changes. This helps to make uncertainty easier to deal with and can help reassure employees and beneficiaries. Invest back into the business wisely.

Don’t be afraid of change: Preparing business for recession

It’s important to focus and regroup during times of change. A good business strategy during a recession will put your priorities in order. Being forced to think differently or emerge into new markets / ways of fundraising can be the start of futureproofing. This isn’t easy so it’s crucial to gain buy in from all areas. Provide a supportive environment for staff and time to reassess what your mission is and how you can achieve it.

Recession planning for employees

During economic uncertainty, it’s important to undertake recession planning for employees. A recession is not only unsettling for charities and beneficiaries, but also staff members. The key is to communicate. No business strategy in a recession is complete without considering how you can preserve jobs and minimise impact on team members. Having your finances in order and thinking about potential unforeseen costs ahead of time can help with this.

At Generation Charity Consultancy, we know that a recession is a tumultuous time for charities, so if our experts can help please get in touch.

 

Investment managers – also known as fund managers and asset managers – strive to help their clients’ money grow, allowing them to enjoy a more comfortable future.

Historically the evaluation and selection of investment managers – and funds – has relied on a level of trust as each manager provides their own investment performance figures. However, recent events have shone a spotlight on the economy and inevitably on the performance of investment managers and the need for more transparency.

To fully understand investment management performance we need to look at all aspects of the portfolio including:

Returns

Investment is a data centric environment. The Covid-19 pandemic and subsequent market fall will mean many would have lost substantial value in their investments in the past year, but, the acceptable level of loss will depend on the overall objectives and timescales.

Performance versus risk and return

When it comes to investment performance, risk management is the process of identification, analysis, and acceptance – or mitigation – of uncertainty in investment decisions. Essentially, risk management occurs when a fund manager analyses and attempts to quantify the potential for losses in an investment, and then takes the appropriate action (or inaction) given the investment targets and risk tolerance.

The true test of performance comes from comparisons against its competitors. Has your manager achieved a better risk adjusted return than his competition, have they given you a better return, but taken less risk, or have they taken greater risk but achieved a higher return?

Risk is inseparable from return

Every investment involves a degree of risk. A thorough understanding of risk in its different forms can help investors to better understand the opportunities, trade-offs, and costs involved with different investment approaches, your firm can help provide this to its investors. The value of investments can fluctuate over time, so falls – as well as increases – are to be expected.

Consistency of team and approach

Performance consistency is not an indicator of fund manager Skill. Performance ‘reliability’ is encouraging but objectively, robust decisions can at times go unrewarded for prolonged periods.

Performance in context

Returns should not be examined in isolation but considered in the context of the risks taken. It is also important to consider whether they are being delivered in adherence with the mandate and the strategies agreed.

The Generation Wealth Management central investment proposition

In 2008 our Investment Director, Shai Patel – following substantial research and due diligence – concluded that the best outcome for clients was achieved by employing the services of Discretionary Fund Managers (DFM) who could provide clients with excellent portfolio and risk management.

The principle was built around four key pillars of our central investment proposition:

  • Bespoke Active Discretionary Fund Management
  • Active Asset Allocation
  • Active Risk Management
  • Selecting Only ‘Best of Breed’ in Discretionary Fund Management

By adhering to these principles, our intention is to pinpoint the top risk adjusted performing managers, ultimately helping to reduce investment risk and provide a superior investment experience for our clients.

Essentially, the Generation Wealth Management team act to ‘police’ the discretionary fund managers for the benefit of our clients.

We are confident we are one of only a handful of Independent Financial Advisers in the UK offering this method and level of governance. Contact one of our experts today.

 

 

Charities are able to claim a number of valuable tax reliefs but knowing the rules can make the difference between a project being financially viable or being a financial liability. In this blog our experts aim to provide clarification on this complex area.

Firstly, are all non-profit organisations charities?

To be considered as a charity an organisation must have secured charitable status. Not all non-profit making bodies have charitable status and are therefore not charities.

To claim charity VAT reliefs in the UK, organisations must now meet the following conditions;

  • Charities must be based in the
    • UK,
    • Isle of Man
    • or an EU member state
  • Charities must be established for charitable purposes only
  • Charities must be registered with the Charity Commission or corresponding regulator
  • Charities must be run by ‘fit and proper persons’
  • Charities must be recognised by HMRC.

If your charity is not currently recognised by HMRC, it is possible to apply for recognition online. To demonstrate recognition of charitable status simply quote your HMRC recognition reference.

What are the implications of VAT for charities?

In essence, VAT is a tax on consumer expenditure. It’s collected on business transactions, imports and acquisitions. A charity will pay VAT on all standard-rated or reduced-rated goods and services they buy from VAT-registered businesses. VAT-registered businesses can sell certain goods and services to charities at the reduced rate or zero rate.

Do all charities need to register for VAT?

Any business – including a charity or its trading subsidiary – that makes taxable sales in excess of the VAT registration threshold must register for VAT.

Taxable sales are classified as business transactions that are liable to VAT at the standard, reduced or zero rate. If the level of income from taxable sales exceeds the VAT registration threshold you will need to register the charity for VAT. This is not optional, the organisation can be penalised for failing to register.

How does VAT affect charities?

Charities receive income from numerous sources; some of the sources may be liable to VAT if the charity is VAT registered. However, charities will be able to claim relief from VAT on some of the goods and services they buy, regardless of whether the charity is registered for VAT.

It is a confusing area, as although charities can claim tax relief if they’re unregistered,  many of the goods and services that charities buy will be subject to VAT, regardless of whether the charity is registered for VAT. But importantly, charities that are VAT registered may be able to reclaim some of the VAT they’re charged from HMRC.

What VAT can a charity reclaim?

A charity needs to consider the VAT on its expenses in 3 stages.

Firstly, non-business (outside the scope)

A charity cannot reclaim any VAT charged on purchases directly relating to non-business activities. Once a VAT-registered charity has determined which of its activities are non-business it will also have to consider how much of the VAT on its general expenses (such as telephone and electricity) relate to those activities. The charity will not be able to reclaim the proportion of VAT that relates to non-business activities.

Secondly, taxable sales

A VAT-registered charity can reclaim all the input tax charged on purchases directly relating to taxable goods or services. Only a charity that is VAT registered will be able to recover the VAT it is charged on standard-rated or reduced-rated goods it buys from VAT-registered businesses.

Thirdly, VAT exempt activities

A VAT-registered charity isn’t able to reclaim the input tax it has been charged on purchases relating to exempt activities – unless these are below a set level (known as the de minimis limit). If the total exempt input tax is below the de minimis limit, then the charity can reclaim it.

What VAT must charities charge?

A VAT-registered charity must charge VAT on all the standard-rated and reduced-rated goods and services. The charity does not charge VAT on any income from non-business, zero-rated or exempt sales.

Best practices when accounting for VAT

At the end of a set time period – normally every three months – a VAT-registered charity will be required to complete a VAT return. This VAT return details the VAT the charity has charged on sales of standard-rated and reduced-rated goods and services, and the VAT it has paid on goods and services it has bought that relate to taxable sales.

If the calculated VAT on the charity’s sales equates to more than the VAT on its purchases the charity must pay the excess to HMRC. However if the VAT on purchases is more than the VAT due on the sales the charity can reclaim the difference from HMRC.

If you would like independent advice on your charity’s finances please do contact a member of our team.

Good governance empowers and supports a charity’s compliance with relevant legislation and regulation. It promotes positive attitudes and a culture driven towards fulfilling the charity’s vision. Poor governance within the charity sector can have devastating – and far-reaching – effects, especially when it affects the charity’s investments and financial viability.

Investment approach

As a Trustee, you should always ensure that you record the key decisions regarding the charity’s investment approach in writing. This will allow you to demonstrate that you have considered the relevant issues and asked for the appropriate level of advice in order to provide proof that you have reached a reasonable and justified decision. It is highly unlikely that your decision will be criticised, if you can demonstrate that you sought advice before reaching a considered and reasonable conclusion.

Appreciate the risks

independent governance - risk

Financial investments always include a level of risk. The most important aspect is to fully appreciate and clearly understand level of risk in the context of what it means for the charity.

Lack of understanding of investment risk often proves to be a significant barrier for Trustees; you must be satisfied with the level of risk you consider to be appropriate for the charity and the reasons behind that decision.

Have a clear objective 

To ascertain your investment requirements you need to have clarity on certain points. These include;

  • How is your charity funded?
  • What is the purpose of the money you are investing?
  • What is your ideal time scale?
  • Do your investments need to deliver an income?
  • How much cash may be required in the near future?
  • What future spending plans do you expect?
  • Is there cash available to cover shorter term expenditure?
  • Is the liquidity of your investment important?
  • Is the board tolerant of losses, if so at what level?
  • Could the charity survive without one of its income streams?

There may be correspondence answering at least some of the above questions, but it isn’t uncommon for these elements to be unknown if investments of this nature haven’t been considered before.

Investment policy

To work out the right investment policy you need to first understand your objectives. The objectives will be heavily influenced by the charity’s situation and goals. This is an area which needs careful consideration; things to bear in mind include timescales, income requirements, ethical policy and any investment restrictions.

Investing ethically

Investing ethically is important for charities for numerous reasons. But what is considered ethical or sustainable to one person often isn’t to someone else, so the first step is to iron out these grey areas. There is significant disparity between how fund managers approach ethical investments, which is why professional and impartial advice is crucial.

Trustees wanting to invest ethically must be able to substantiate why it’s in the best interests of the charity. Ethical or Environmental, Social and Governance (ESG) investments may require additional considerations as well.

The choice of investment manager

Investment objectives and requirements will affect your choice of manager. Many charities conduct a tender process, to ensure they consider a variety of options.

You should feel comfortable and at ease with the organisation you choose, after all you are entrusting them with the charity’s assets. You should have confidence that they can accommodate your investment choices.

How to tender

Charities will typically ask investment managers to submit a proposal, before meeting with a select number who will present their proposition. The process usually includes the below stages:

  • Summary of your charity
  • Amount available for investment
  • Investment policy
  • Link to latest report and accounts
  • Deadline for proposal along with key dates for presentations
  • A named point of contact
  • A deadline for any questions
  • How you expect to receive the proposal (email / post etc)
  • Word or page limit for the document

The process of selection is often called a Beauty Parade, but the charity must consider and document how they selected the fund managers to attend the beauty parade. This will often consist of two or three fund managers, so reasons behind why ‘they’ were selected and the 100 + other fund managers ignored, should be considered and documented.

Reflection and time for review

It is common to receive annual reports; you should also expect your manager to meet with your board of Trustees in person or via video at least once each year. Yearly reviews are good, but our quarterly reports allow quicker reaction to any issues with the fund manager and provide the opportunity to review your manager against the agreed objective.

It is important to remember that there will be time periods when the value of your investment portfolio goes down, quarter-on-quarter, or year-on-year. It is important at these times to focus on the objective you set for your manager and to remember the reasons behind your investment; it can be easy to be distracted by focussing too heavily on the short term.

Ongoing, substantial poor performance or poor service are grounds for a formal review. It may seem counter-intuitive, but significant over performance is also a concern, as your manager may be working outside of your risk parameters.

To speak to me in more detail or to ask further questions please do get in touch.

For Trustees overseeing decisions affecting the financial future of a charitable organisation, buyer’s remorse can be triggered by concerns that the board may later question the chosen investment strategy or claim to know better alternatives. In this blog the experts at Generation Charity Consultancy aim to support and inform readers about what buyer’s remorse is and more importantly how to avoid it.

What is buyer’s remorse?

As mentioned above, buyer’s remorse is a form of what is known as cognitive dissonance. This occurs when a person holds two or more contradictory beliefs, ideas, or values and experiences psychological stress as a result. Put more simply once a purchase decision is completed, cognitive dissonance produces a feeling of mental discomfort and anxiety based on an underlying lack of confidence in the purchase decision.

Is it possible to mitigate buyer’s remorse?

Good news, yes it is, at least to a degree. At its heart buyer’s remorse is caused by a lack of confidence in the purchase decision; by completing due diligence this lack of confidence can be mitigated.

Due diligence refers to the investigation, audit, or review performed to confirm the facts of a proposal under consideration. In a financial sense, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

For Trustee’s in the charity sector due diligence can be enhanced by receiving independent, regulated financial advice.

I’m looking for independent investment advice, what do I need to know?

At Generation Charity Consultancy we believe it is crucial that your adviser is regulated by the FCA and that your adviser and fund manager are not working in the same company. We believe that someone should be policing the fund manager and we are therefore passionate about independent governance.

Independent governance aims to protect you from investments that may be unsuitable and encourage good stewardship of investments.

What questions should I be asking?

Sadly, we often find that fund managers have been targeting standard indices with no relevance to your portfolio’s asset allocation. It is incredibly important to ensure your fund manager is transparent, but how do you do that? We would always suggest peer-to-peer analysis.

At Generation Charity Consultancy our analytical quarterly Peer Reports take data from circa 250,000 live client portfolios to ensure your manager is a credible performer and is managing risk appropriately.

To illustrate our point, a charity approached Generation Charity Consultancy recently having invested £26m in a popular balanced multi-asset fund, the fund had achieved 33.2% growth over the last five years and on the face of it the charity was happy with the performance.

However, our peer analysis of over 250,000 investor records confirmed a competitive return for that time period – and risk profile – should have been 41.6%, not the achieved 33.2%. That equates to a difference in excess of £2m; a sum of that size would make a substantial difference to any charitable organisation and its beneficiaries.

This highlights why it is crucial to compare the whole market, to ask questions and to understand who the consistent performers are by regularly reviewing peer performance.

How we can help

At Generation Charity Consultancy we strive to provide clear and expert advice to deliver product and service innovation which exceeds our clients’ expectations!

If you are uncertain of your portfolio’s performance and  looking for independent, regulated and unbiased investment governance (based on detailed analytical data from thousands of clients’ portfolios), then get in touch with one of the Generation Charity Consultancy team.