Charities opt for active strategies with strong ESG credentials in 2024

This is according to new research commissioned by Investec Wealth & Investment (UK) whereby the market research company Pureprofile interviewed 100 senior executives at some of the UK’s largest charities to capture their views on the financial health of their organisations and the challenges they are facing. Those taking part in the survey included board directors, finance directors, investment managers and investment directors at the charities.  Collectively, the charities interviewed have £3.34 billion of investible assets.

Active or passive income remains important

Charity investment managers expect to increasingly switch to active investment strategies from passive strategies, our study found.  Two out of three charity investment executives (68%) we questioned forecast a switch to active investment to beat volatility over the next three years with 11% predicting a dramatic switch to active instead of passive.

Around 79% say the move is being driven by the view that active strategies perform better during volatility while 66% believe active managers’ performance is improving due to the data revolution which is enabling better use of data to make more informed investment decisions. Around 52% say active strategies are becoming more transparent and 34% say fees are falling.

But generating a strong income on their portfolio will remain an important part of the overall investment strategy for almost all (95%) charities. Nearly half (47%) questioned said a strong income was very important. Achieving a strong income flow has been difficult over the past two years. Around six out of 10 (59%) questioned say the level of income generated from their portfolio has dropped over the past two years with 15% saying it has fallen dramatically and just 11% saying it has increased.

ESG is moving up the agenda

While income and financial returns are key drivers for charity investment strategies, another reason the demand for active management has increased is charity requirements around responsible investment. ESG integration and stewardship are crucial for charities who are looking to demonstrate that their investments are aligned with their values and this is more effectively delivered through an active strategy.

Our research found that 75% say ESG credentials are currently important when selecting investments for their portfolios with 29% saying it is very important. Around a quarter (25%) say it is of average importance.

Over the next three years, 84% say ESG will become more important when selecting investments with 23% saying it will become significantly more important. Just 1% questioned say it will become less important.

That will put pressure on investment management advisers working with charities, our research found. Currently a third (32%) questioned say investment managers’ ESG credentials are very important when awarding investment mandates, with 49% saying they are quite important.

The importance will increase according to 82% questioned with 17% saying it will become much more important. Just 3% believe ESG credentials will become less important over the next three years.

At Investec Wealth and Investment (UK), the integration of ESG risk factors alongside effective stewardship is fundamental to our investment process and helps us to make better investment decisions for our clients. From a charity perspective, ESG goes further than that and often translates into ‘doing good’. Many charities wish to add a values-based overlay to the portfolio with the addition of ethical restrictions, whilst also demonstrating a positive impact – this can be done using metrics such as the UN SDGs or through the outcomes of our stewardship activities.

What is clear is that the ESG demands from charities are only increasing and becoming more widespread – this can only be a good thing and will allow us to continue to help our charities help others.