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Pension trustees do their best in an imperfect world

I WAS seven years old when I won a fancy dress competition.

My outfit? I was dressed in black crepe paper that had cigarette packets glued all over it and a sign that read: "Coffin nails".

Then, there were still sceptics who denied the link between tobacco and cancer. Not now. Those who invest in tobacco companies know smoking causes accelerated death. And yet I felt for the trustees of Scotland's local government pension funds when this newspaper exposed them yesterday for having £220m invested in tobacco. For I thought: "There but for the grace-"

I have sat as a trustee of charities and scanned their quarterly investment reports. I have allowed my eye to drift over names like British American Tobacco and to register only the rise or fall in its value. I admit it. Many trustees do it. I'll tell you why.

The primary duty of a trustee is to oversee the best, safest management of funds – in the case of Scotland's voluntary sector that amounts to investments of more than £8bn. Those in charge are aiming for the highest possible rate of return at the lowest possible risk.

Many of the larger charities have professional investment managers looking after the day-to-day running of their portfolios. Depending on the capital amount, tobacco shares could be among scores of different investments chosen because their track record as investments is a good one and they pay out rising dividends.

That's not a good enough reason to buy their shares, many will say. Surely there are other, more ethical investments?

Setting aside the argument about tobacco companies providing portfolio diversification and reduced volatility, let me ask a question in return: where would you draw the line?

First, let me say I support ethical investment. I argued for it on boards when it was considered a girly question. Now a majority of Scottish charities with £1m or more to invest have adopted an ethical policy.

But that still leaves millions being invested in companies of which many people wouldn't approve. So, if you're a pension or charity fund trustee, often it's a matter of choosing your poison.

Let's drink from this chalice by considering the purpose of the fund and the policy governing it. For example, if you are a medical charity, clearly tobacco would be off the agenda. Alcohol might also be removed (and yes that would include Scotch whisky). What about sugar? What about fast food companies? If you were a trustee would you stop at the manufacturers or would you pull investment from distributors and retailers too?

If you are an education charity you might be choosing between a clothing manufacturer (inadvertently using child labour in India) versus a tobacco company investing in schools in Africa. Do you choose neither? Do you support the school projects by investing in the shares?

What about buying into cheap tracker funds instead of individual shares? It cuts costs but many of these funds simply mirror the performance of their underlying indices which include tobacco, oil, mining and defence companies.

There is no hard and fast law governing all of this. The Office of the Scottish Charity Regulator (OSCR) simply expects trustees to act in the best interests of their charity – and that includes investment decisions.

If a board gives sway to the personal ethical concerns of every trustee, it could find itself ruling out too many good investments. Income could shrink and charitable causes could suffer as a result. Trustees would be in dereliction of their duty.

I suspect the guardians of Scotland's Local Government Pension Scheme nursed similar fears. How do you balance the financial security of pensioners against the constituents of your investment portfolio?

What matters is that ethical issues are aired and debated. What is essential is that each board makes a decision it can stand by.

Here is another conundrum: should charities and local authorities invest in armaments companies?

Yesterday, in its leader column, this newspaper expressed the view that arms deals which enable democratic governments to protect their citizens are ethical. What about non-democratic governments?

I ask because in November, in Remembrance week, David Cameron travelled to Saudi Arabia and the United Arab Emirates (wearing a poppy) to assist the sale of Eurofighter Typhoons. UAE were interested in 60 jets, Oman 12. The Saudis were thinking of adding to the 72 they already have.

That's a colossal amount of income for the UK just when we need it.

Mr Cameron called his mission "entirely legitimate" and "right". He reminded us there were 30,000 BAE Systems jobs at stake in the UK. That includes Scottish workers in Bishopton and Rosyth.

Tony Blair cut similar deals. Prince Andrew smoothed the path for arms deals when he was the UK's special envoy for trade. If the Prime Minister and the Royal Family support BAE why shouldn't the trustees of charities buy the company's shares? Should those managing local authority pension funds?

What tends to happen is that each charity avoids companies that are in contravention of what it stands for but turn a blind eye to other issues.

It's reality in an imperfect world.

Tobacco stands apart, some will maintain. It causes cancer and cancer kills. But alcohol abuse destroys lives, damages families and costs society fortunes.

Diabetes maims. We heard just this week about the increasing numbers of sufferers who lose limbs or lose their sight. Sugar plays its role there.

Our levels of obesity are rising to the point where our young may have shorter life expectancy than their parents. A recent news item from America told of families having to buy super-sized coffins that required the width of two graves.

How long before we follow suit?

So yes, let's pay heed to where we lend our pension savings and the hard- earned pennies generously donated for good causes. Let's not make a mockery of the owners and donors.

But spare, too, a thought for the trustees who wrestle with these questions. The answers too often lie shrouded in grey.

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