Investing responsibly: Charity Commission Guidelines

Stephen Roberts

Policy Legal Adviser

Investment of Charitable Funds: Detailed Guidance

• Underpins CC14 Investment of Charitable Funds: Basic Principles

• Current version dated February 2003 • Currently being reviewed

Issues in investment guidance

• What is an investment?• What is the proper use of an investment

power?• Role of derivatives• Ethical Investment• Mission Connected Investment• Blended investment

What is an investment?

• Investor/investee• Company shares• Land let to produce a rental income• Tradeable debt• Non-tradeable debt• Units in collective investment schemes

What does the Detailed Guidance not consider as an investment?

• Commodities e.g. gold, vintage wine• Works of art• Premium bonds• Land purchased with a view to sale• Derivatives

What is the proper use of an investment power?

• The general power of investment (section 3 Trustee Act 2000)

• Standard investment criteria:– Suitability of class of investments and particular investment– Need for diversification so far as is appropriate to the

circumstances of the trust(section 4 Trustee Act 2000)

What is not a proper use of the investment power?

• Trading• Gambling• Speculation• Use of derivatives other than as ancillary to

investment

Ethical Investment

• Ethical investment (also known as socially responsible investment) is investing for financial return, but having regard to other criteria such as environmental protection, health, human rights.

Screening and disclosure

• SRI/Ethical investment often involves – positive screens (focussing on companies that do good); or– negative screens (avoiding investments in a particular)

• Examples include: • alcohol, tobacco, gambling; the environment, global warming;

employment policies and practices; products/services; arms manufacturing/supply; animal testing; human rights/equality.

• Disclosure of policy – any investment policy for charities over the statutory audit level

must be disclosed– these charities are also required to state the extent to which

environmental or ethical considerations are taken into account– this should apply to all charities as a matter of good practice

Making an ethical investment

• A charity’s governing document sometimes imposes specific ethical restrictions on the scope of trustees’ general power of investment – trustees must comply with these

• Power of investment has to be used to further the purposes of the trust. Purposes will normally be best served by seeking the maximum return consistent with commercial prudence

• Consider whether*: – a type of investment is in direct conflict with the aims of your charity– a type of investment might hamper the work of your charity (e.g. alienate

beneficiaries or donors)– The financial return will be just as good even if other moral/ethical

considerations are taken into account * Harries (Bishop of Oxford) v Church Commissioners [1992] 1 WLR 1241

Positive considerations

• Financial return more secure where company committed to sustainable development

• Long term profitability secured by a particular moral approach to development of business

Programme Related Investment/Social Investment

• Not investment at all. • Their purpose is to directly further the

purposes of the charity and not to secure a financial return to the charity.

• Issue is extent to which furthers the purpose and whether the amount applied justifies that.

Private benefit

• Any private benefit arising from a social investment has to be incidental to the furtherance of the charity’s purposes

• An educational charity investing in a profit making private school would not be an appropriate way of furthering the charity’s purposes by way of a social investment. It may be justified as a financial investment if the financial return justifies it.

Mission Connected Investment

• “We define an investment as an MCI if it:

Targets a market rate of return and also helps a foundation to achieve its mission.”

(Mission Possible: Emerging opportunities for mission connected investment – New Economics Foundation)

Mission Connected Investment

• Other definitions:

“The term Mission Investing covers two distinct categories of investments:

market rate investments that support program goals; and Program Related Investments (PRIs) structured to create specific program benefits while earning a below- market return.”

(More for Mission website)

Blending social investment and socially responsible investment

• Mixing two different things: one is about a financial return to the charity and the other is about directly furthering the purposes of the charity.

• Trustees need to be clear what they are doing in applying funds so they can be sure they are complying with the appropriate duties.

Common Investment Funds

• Corporate Manager has power to invest equivalent to general power of investment

• CC14 detailed guidance applies• Difference between a charitable collective

investment fund and a non-charitable collective investment fund

CC14 Detailed Guidance

• New style• Must/should• Legal underpinning• Discussion with sector