Guidance: use of the word 'direct' in Ethical Investment Policies

n recent years there has been an increasing use of the phrase ‘direct investments’ in Ethical Investment Policies, but different universities seem to mean different things when they use it.

• Definition 1: For some, ‘direct’ is understood to refer to individually held shares in specific companies (e.g. Shell). This is used to distinguish from ‘indirect’ investments, understood as those held via financial instruments that pool investors' money, like mutual funds or unit trusts, where capital is dispersed across a number of companies held as part of a pre-set group of investments. Often there is little transparency around what companies are held within these types of funds. Usually it is only possible to find the top 10 holdings of the fund, and so it is difficult to figure out from the outside whether an excluded company forms a part of the holdings. It is, however, within universities’ power to make clear to their investment managers - who are able to see detailed information about fund holdings and exclusion criteria - that they should not be invested in any collective funds with exposure to the sectors the university has committed to excluding in their investment policy.

• Definition 2: For some, ‘direct’ is used to distinguish between those investments that the university has control over and those which it does not. Therefore, all investments mentioned in definition 1 would fall within the category of ‘direct’, while ‘indirect’ investments are understood as any holdings the university has no/limited control over. This would include external entities the university contributes to such as the investment holdings of external pension funds.

• Guidance: For People & Planet to award points, it must be clear that those investments defined as ‘indirect’ in definition 1 are included within the scope of the university’s investment policy, with fund managers instructed to adhere to these exclusions. When a university says that their exclusions apply to all ‘direct investments’ but do not make clear which of the above definitions they are using, we are unable to award points as this statement is only sufficient if using definition 2 of ‘direct’ - unless the university has already confirmed to People & Planet the meaning of the word. Therefore, we recommend that you remove the word ‘direct’ to ensure your policy scores the points it deserves, or include language clarifying the meaning of ‘direct’ and/or confirm that fund managers will be instructed to adhere to all restrictions detailed within the policy across all the investments they make on behalf of the university.