New Charity Commission guidance on charitable investments

1. Changes in the New Guidance

Like the previous Guidance, the new Guidance emphasises the key principle that charity trustees must make investment decisions to further their charity’s purposes. From there, it is up to them to decide how best to invest in order to support delivery of your charity’s purposes over time.

Within the options available to each charity, charity trustees must always:

• 1. Comply with the legal duties and requirements set out in the CC14 Guidance;
• 2. Make decisions in the best interests of their charity; and
• 3. Keep their investment approach under regular review.

So far, so similar to the previous Guidance. However, there are some key differences. In particular:

• 1. The new Guidance sets out the key duties applicable to charity trustees when making financial investments, and a useful list of some example approaches that trustees can take when doing so. We have set these out in section (2).
• 2. It takes into account the Butler-Sloss case, and offers a more permissive approach towards the inclusion of “non-financial factors” being included in financial investments. We have explored this further in section (3).
• 3. The new Guidance no longer uses the terms “ethical investment” or “responsible investment”, following feedback in its consultation that these terms were not particularly clear or inclusive. Instead, it refers simply to two types of investment:
  • 1. “financial investments“, which are made primarily in order to obtain financial returns for the charity, but can take into account non-financial factors such as sustainability and impact characteristics; and
  • 2. “social investments“, which are made primarily in order to directly achieve the charity’s purposes, while ideally also making a financial return.

In a similar vein, the Commission has now retired the use of “mixed-motive investment” or “programme-related investment”, clarifying that these both fall into the category of “social investment” above.

• 4. It makes it clear that all charities which invest are expected to have a written investment policy, and sets out guidelines for charity trustees to use when setting that policy, encouraging them in particular to think about returns, risk, time horizon and liquidity. Further details about this are set out in section (4).
• 5. Finally, the new Guidance requires trustees to take professional advice when making and reviewing investments (which can include advice from one of the charity trustees, if they are suitably qualified), and offers direction on how to delegate their investment duties to an investment manager. We have explored this further in section (5).

2. Trustee Duties when Making Financial Investments

The new Guidance sets out the duties of charity trustees in relation to charitable investments, and states that in addition to the general trustee duties (which always apply), the following specific duties apply when making financial investments:

1. Consider whether the investments are suitable for your charity and whether they will meet its investment objectives. This means taking account of how suitable any investment is for your charity: both the investment type (for example, shares) and particular investments within that type (for example, shares in a specific business).
2. Consider the need to diversify investments. This helps to spread and alleviate risk, for example by owning shares in a number of different companies or sectors.
3. Take advice from someone experienced in investment matters, unless you have a good reason for not doing this. For example, this might not apply if you have enough expertise in your trustee group or you have limited or low-value investments.
4. Review your charity’s investments at appropriate intervals. The new guidelines for reviewing and reporting on a charity’s investments are set out in section (6) below.

To offer more clarity, the Guidance also offers a non-exhaustive list of some example approaches to financial investments which trustees could adopt. These include:

1. Aiming only for the best financial return you can achieve, within the level of risk that you have decided is acceptable for your charity.
2. Avoiding investments that conflict with your charity’s purposes. For example, a health charity may decide to avoid investment in companies that mainly produce alcohol, tobacco, or highly processed food, or an environmental charity might decide to avoid investment in fossil fuels.
3. Avoiding investments that could reduce support for your charity or harm its reputation, particularly amongst its supporters or beneficiaries. For example, a charity may decide to avoid investment in fossil fuels where the trustees can show that this would be in its best interests by avoiding damage to its reputation or fundraising. Investments in this category are sometimes described as bringing an “indirect” conflict with a charity’s purposes.
4. Avoiding or making investments in companies because of their practices on environmental, social and governance (ESG) factors. These could include the climate, human rights, sustainability, community impact and board accountability. Taking this approach could be in your charity’s best interests if it could protect or enhance the financial value of your investments or returns over time, or because it will support delivery of your charity’s purposes more directly.
5. Using your shareholder vote, or other opportunities that come with your investment, to influence practice at companies that your charity is invested in. As with the example above, taking this approach could be in your charity’s best interests because it could protect or enhance the financial value of your investments or returns over time, or because it will support delivery of your charity’s purposes more directly.

4. Setting a Written Investment Policy

The new Guidance clarifies that charities must have a written investment policy if:

1. Its governing document requires it to have one; or
2. It is structured as a charitable trust or unincorporated association, and gives an investment manager powers to make investment decisions on its behalf.

Charities which are companies or another type of corporate entity are not legally required to have a written investment policy (unless their governing document requires it), but the Commission expects all charities which invest to have a written policy.

All of the charity’s trustees, relevant staff, sub-committees and professional advisers must be familiar with the policy and capable of implementing it where appropriate.

A charity’s investment policy must include the charity’s purposes and plans, and how its investments fit with these.

It may include the following (depending on the size and complexity of the charity):

• What the charity’s governing document says about how it must invest;
• The charity’s investment objectives, including any relevant reputational and other non-financial factors;
• Any sectors or organisations which the trustees consider are in conflict with the charity’s purposes;
• The charity’s timeframe for investment – short, medium or long-term;
• How easily or often the charity needs access to its money;
• The charity’s attitude to risk;
• Its approach to ESG factors and engagement with the companies it invests in;
• How it will monitor and review its investments, including key benchmarks; and
• Who the charity’s investment advisers and managers are, their responsibility and remit, and how it will work with them.

The policy should be reviewed regularly and discussed with all new trustees.

Importantly, the Commission states in the new Guidance that it is unlikely to have concerns about a charity’s investment policy provided the trustees can show that they have:

• Complied with their trustee duties and the charity’s governing document;
• Considered and balanced relevant factors for the charity;
• Taken advice, unless they have a good reason not to; and
• Reached a reasonable decision.

Final thoughts

The new Guidance offers clarity to charity trustees, by setting out their legal duties when investing their charity’s assets, while also acknowledging their discretion to make decisions within a wide possible range of investment options.

In particular, trustees of charities which invest are clearly expected to take professional advice and put an appropriate written policy in place, and as always, must look to further their charity’s purposes when making investment decisions. The new Guidance gives clearer guidance on how, specifically, trustees can do so.

The incorporation of the Butler-Sloss ruling into both the new Guidance and the legal underpinning which accompanies it would appear to signal greater freedom for trustees in their decisions regarding investments going forward, particularly in relation to excluding investments which conflict with their charity’s purposes, or could harm the charity’s reputation.

Addressing charity trustees directly, Helen Stephenson CBE, Chief Executive of the Charity Commission noted in the press release which accompanied the new Guidance that “We want to stress that investment approaches are your decision to make, and this guidance is designed to help you do so with confidence, and in line with the law.”

If you have any queries about the topics discussed above, or there are any other issues we can help you with, please do get in touch with Laura Sherratt or Ben Brice.