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Phil Young: The socially responsible investment advice quandary


The new types of socially responsible investments pose a quandary for advisers. Neither regulation nor legislation need to change but advising on these SRIs does not fit into the usual pattern and process of advice.

They can come in all kinds of formats, not just a fund. The SRIs I discuss here are typically single businesses organised around a common social good.

They differ from traditional ethical or “green” investments in that ethical funds seek to achieve investment returns while avoiding certain types of business, such as tobacco and weapons. Advising on these ethical investment funds is a specialised subset of advising on investment funds. In contrast, the new breed of SRIs are specifically seeking to invest in specific projects or people who need help.

They are not a charity, as an SRI includes the possibility of a financial return, not simply an emotional one. But where does the priority lie? An investment return could be far more predictable elsewhere. Is the thrill of investing in something risky mixed with the emotional return in helping good causes the real attraction? Inevitably, as SRIs start to professionalise, the costs and charges of running them as investments will direct some of the money into the business of financial services administration.

We already see this in the bigger, more professional charities regularly criticised for investing too little of the donations received into charitable causes and too much into themselves. The counter argument is this professionalism allows them to gather far more money in absolute terms and a sustainable charity is better for donors and donees alike. So they are a business but probably a very high risk one.

It is possible an investor in an SRI is interested purely in the best potential returns from the universe of all qualifying SRIs but it is likely they will be more interested in the cause in which  they are investing.

The pitches from SRIs I have seen to date have focused on the causes, with a very limited financial track record to point to. A reasonably diverse portfolio of SRIs with a demonstrable performance record might emerge over time but right now many of the new ones look like a bit of a punt.

Social investment tax relief gives them a tax break similar to a  venture capital trust or an enterprise investment scheme through deferral of capital gains tax. Older, wealthier clients may pick up on this first. However, they can be small, single companies with limited track records, so potentially harder to research and validate than a VCT or EIS.

Affordability and education

As a pure investment with no altruistic considerations, no adviser would ever recommend one. So how do you help a client interested in investing in an SRI?

As part of their financial plan, you can advise them how much of their portfolio they can afford to lose. You can explain this is a high risk strategy and not something you would advise as part of your own investment advice. You can explain what part of their portfolio needs to be traditionally invested and what can be used on a discretionary basis for philanthropic work. The expectation can be set that there will be no expected return. It might be they do not have this money to spend comfortably and they need to understand something else in the plan needs to be sacrificed to pursue this course.

Should a client come to you with an SRI they have selected and ask for your assessment of it, you are being asked in a professional capacity. If it is a fund it may be simple enough but undertaking due diligence on a small company will be difficult. It is also worth checking if the instrument used is covered by your regulatory permissions.

It is important to communicate what you can and cannot do and where responsibility lies. If you do not want to advise in this area, do not include anything that could be construed as an initial or ongoing advice charge on this part of a client’s portfolio.

Philanthropy is a growing area in the UK and is already huge in the US. Broader questions will be  asked about whether it is right to make charitable giving contingent on returns if it will take money away from charities or help privatise state functions in the longer term.

Conflating charity and investment means there is a danger neither will be done well and that poses a problem in the context of “professional” investment advice and the broad spectrum of choices available. Serious thought is required before advising on it but it will appeal  to some very wealthy clients.

Phil Young is managing director at Threesixty


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