Special Report - How to ruin your saintly image

<em>Corporate Social Responsibility</em> - Are charities socially responsible? Mat Smith finds some

''RSPB investments linked to TotalFina oil spill" - the Guardian, 15 November 2000. "Heart charity invests in tobacco indus-try" - Independent on Sunday, 6 Decem-ber 1998. And on 20 March 2002, the Guardian revealed that the Leukaemia Research Fund had invested in 152,769 BAe shares worth £520,942.

Investments such as these can wreak untold damage to a charity's reputation. Yet according to a recent report, more than half of all UK charities still invest in potentially controversial companies. With more than £68bn of assets, of which £47bn is invested in equities and bonds, this sector is big business: any change in its pattern of investments will affect not only the image of a particular charity, but also the interests of some of the country's key industries.

Do UK Charities Invest Responsibly?, by Duncan Green of Just Pensions, is based on a survey of more than 100 of the UK's leading charities and foundations. According to the report, 60 per cent of the charities have no written ethical or socially responsible investment (SRI) policy. Of those that do, an overwhelming number take a "negative screening" approach, ensuring that they do not invest in those sectors or products that are incompatible with the charity's aims. Thus, Cancer Research UK will abstain from buying shares in tobacco manufacturers, and Barnardo's would not buy stocks in a company linked to child exploitation.

The wildlife and nature conservation charity WWF practises an even more ambitious approach to clean investment: it bought shares in the oil company BP and, as a significant shareholder, was able to speak out against the company's environmental policies at its annual general meeting last year. The negative publicity that ensued brought about a change in policy on drilling in Alaska - a major victory for environmental campaigners.

Friends of the Earth pursued a similar tactic when it purchased £30,000 worth of shares in Balfour Beatty so that it could raise a shareholder resolution to persuade the firm to withdraw from the Ilisu dam project in Turkey. Balfour Beatty withdrew from the project last spring.

Yet tailoring investments in this manner is something that smaller charities cannot afford; they invest instead in pooled funds, or "common investment funds", which are notoriously difficult to monitor. It was one such fund that unwittingly led the Royal Society for the Protection of Birds (RSPB) to invest in a firm linked to the TotalFina oil spill off the coast of Brittany in December 1999. The charity has since managed to invest in a fund that allows it to exclude certain stocks.

The Charity Commission has approved only about 30 common investment funds and, of these, only a few are screened. "If they can't invest in an appropriate common investment fund, charities should be talking to their fund manager and asking why," says Duncan Green.

Some charity trustees still fear that ethical investment will produce lower returns, but Green's report finds that there is a negligible difference between ethical and non-ethical funds.

Last year, the Cabinet Office Strategy Unit proposed that large charities follow the practice of pension funds by reporting on the degree to which social, environmental and ethical issues affect their investments.

Some charities, however, still claim that socially responsible investment is not an issue for them. Charles Watton, head of finance at the Royal National Lifeboat Institution, which has a £200m equity fund, says: "We have no investment constraints. Our mission is saving life at sea, and our goal is to maximise the total return, to put us in the strongest position to fulfil our objectives. It's horses for courses. If we were in animal welfare, I could understand avoiding companies that carry out animal testing. But we are not aware of companies whose objective is to drown people at sea."

But Les Jones, finance director of WWF-UK, says: "The greatest asset any charity has is its reputation. With no SRI policy, or an inadequate one, charities are hugely exposed."