Charity climate mandates turn into an effect test

For a trustee who approved a climate mandate in the boom years, the question on the table is harder than the one asked at the time: what effect did the money have in the world? That question hung over Longview Networks' Charities, Endowments and Foundations Investment Forum, where political pushback against ESG has coincided with closer scrutiny of sustainable strategies, and the assumptions that travelled with the sector's rapid growth have come unstuck.

Charlie Crossley, investment engagement manager at Friends Provident Foundation, set the timeline: his foundation ran the first Endowments Investing Challenge in 2020, at what he called the crest of the ESG boom, when a single portfolio delivering returns and impact together felt genuine. Five years on, he told the forum, impact, risk and return have become much harder to navigate — there is no perfect solution, and while the three can be balanced, they cannot all be maximized at once.

That concession is smaller than it sounds, because the trade-off has moved. Morningstar research published in August found ESG income funds delivering income without sacrificing sustainability, undercutting the argument that sustainable portfolios charge investors in yield; if the return half is largely settled, the pressure shifts to the other half, where the forum's discussion turned.

Leonora Rae, an endowments and foundations impact executive at EdenTree, said the firm's research found charities and foundations wanted greater clarity about what sustainable and impact investment could realistically achieve. One endowment framed the position in terms any equity manager would recognize: rather than doing good for its own sake, it was backing businesses that solve systemic challenges such as climate change, in the belief they would succeed — a conviction case with an impact label attached, where the sustainability is the reason to expect commercial success.

Sanjay Joshi, an impact and local investing specialist at Hymans Robertson, separated decisions made on ethical grounds from decisions made to produce real-world change. An investor who does not want to profit from a fossil-fuel company sells the shares — a defensible ethical act — but asked how effective such exclusions are at generating change in the world, his answer was "not very."

Jenny Segal, trust chief investment officer at Nesta, took the logic further: a seller transfers the holding to whoever buys it, and that buyer may have less interest in improving the company's behaviour, so an engaged investor selling to a hedge fund that does not engage could conceivably make things worse. Her position is that public-market investors can have an impact through stewardship, but the action needs sufficient scale, and Nesta has applied the principle in its own manager selection.

Put the two claims together and the premise of the divestment era comes apart. Selling changes the owner of a share; it does not change what the company emits, unless the buyer is a worse steward, in which case the exit has made the outcome worse by the seller's own measure. That is the ordinary shape of a public-market trade, and exclusion and engagement are not interchangeable instruments with the same destination.

Scale is the more awkward problem because it is unevenly distributed. If influence in a public company tracks the size of the position and the resources behind the stewardship, the smallest charities and foundations — the ones least able to run engagement in-house — have the weakest claim on a company's attention, which points toward pooled and collaborative engagement vehicles or a franker description of what a small foundation's climate policy is: a statement of values its trustees can defend on their own terms rather than a lever on corporate behaviour.

Fiduciary duty is now mapped legal terrain, and the allocators that treat ESG as a reporting capability rather than a voting record are the ones that win mandates. But the frontier has moved past that, the forum suggests: the reporting is largely solved, and the argument has migrated to whether the voting record changes anything. Crossley made the theoretical case in these pages on 1 September, when he wrote that additionality is a spectrum and listed-market engagement belongs in the impact toolkit; a spectrum implies degrees of effect, degrees of effect require measurement, and that measurement is the part the sector has not yet built.

Watch what lands in the investment policy statement. An impact objective with engagement milestones and vote outcomes attached is a mandate a manager can be held to, and the first version of a climate policy that could be audited for whether it worked; a screen with a paragraph of rationale behind it is a statement of values, which trustees are entitled to hold and defend as such. The managers still selling exclusion as climate action have the harder pitch ahead of them, because an exclusion can be counted but not audited for effect.