It is strange that many Western charities still invest their funds in companies whose activities create the very difficulties they are trying to alleviate. But such problems can be minimized if charities create well-designed ethical investment policies.

In a 2009 UK survey, the Charity Project and the Charity Finance Directors Group (CFDG) found that of its 164 member charities with investments over £1 million, 60% had an ethical investment policy, while just 25% of smaller charities with investments under £1million had one.

A prime example of the dilemma charities face without a strong ethical investment policy was exposed in a Los Angeles Times January 2007 article. It detailed an absurd situation that the Bill & Melinda Gates Foundation found itself in. This foundation is probably the largest in the world and was founded by Microsoft co-founder multi-billionaire, Bill Gates, and his wife Belinda.

The Los Angeles Times stated that, "the [Bill & Melinda] Gates Foundation has poured $218m into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time that the foundation is funding inoculations to protect health, The Times found, it has invested $423m in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France-the companies responsible for most of the flares blanketing the delta with pollution."

Continuing, "oil workers... and soldiers protecting them [in the Niger Delta] are a magnet for prostitution, contributing to a surge in HIV and teenage pregnancy, both targets in the Gates Foundation's efforts to ease the ills of society, especially among the poor. Oil bore holes fill with stagnant water, which is ideal for mosquitoes that spread malaria, one of the diseases the foundation is fighting."

But why wouldn't all charities have strong ethical investing policies and thereby limit such potential conflicts of interest? The answer usually is that there is a 'hands-off' approach between charities and their financial advisors. Charities often believe they know little about investing (though that is untrue of larger charities such as the Bill & Melinda Gates Foundation) and primarily want the highest returns possible on their investments. Charity funds' managers also seek the highest returns and so invest their funds in the ways they believe make safe and good returns.

Charities wanting to invest ethically and screen for environmental, social, and governance (ESG) issues, have to engage their investment consultants in the discussion, as it is unlikely that their investment consultants will bring up the subject themselves.

This is clear from a 2009 U.S. study, "Investment Consultants and Responsible Investing," where researchers found that, "investment consultants are still cautious about raising ESG issues with their clients. Only 22% said that they raise the issue of ESG integration as standard procedure when meeting with clients. The majority-71%-said that they discuss ESG integration only when clients ask about it." Though U.S.-based, the results of this study are probably reflective of the situation in most countries.

Charities have excellent opportunities to further their missions with appropriate ethical investing policies. If working to alleviate poverty, they may consider putting some of their funds in the microfinance sector where small loans are made to help individuals build emerging businesses. If they are concerned with the environment, they could put funds into the alternative energy sector and avoid investing in companies with large greenhouse gas emissions.

Also, as stockholders, charities can engage in "shareholder advocacy" by lobbying particularly companies in ways that advance their causes.

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