UK: Clarity Or Confusion? - A Review Of Investment Guidelines

Last Updated: 17 June 2011
Article by Adrian Taylor

The previous guidance on investment (CC14) was set out in the Trustee Act 2000 and a review of the advice in this area is therefore appropriate.

It is important to note that the new guidelines are still in the proposal stage, and the following comments are therefore subject to change once the final version is published. However, it is clear that the Commission is keen to promote greater clarity over how charities can incorporate an ethical stance should they wish it.

While an ethical investment approach has always been respected as part of an investment strategy, many charities have adopted the guidelines that followed the so-called 'Bishop of Oxford' case, where the judgement stated that "most charities need money, and the more of it there is available, the more the trustees can seek to accomplish". The aim of investment was to make money, with any ethical requirements only being accommodated if certain hurdles were cleared (e.g. that not adopting an ethical stance may restrict the charity's ability to carry out its objectives). The Commission has acknowledged that this position now needs further clarification, particularly with the increasing emphasis on the duty to demonstrate public benefit.

The latest draft guidance suggests that investments will fall into one of four categories, and the rules which apply depend on which category the investment falls into. The good news is that the first three use the same investment rules and only the fourth category is different. The proposed categories are as follows.

1. Financial investment Simply aim to achieve the best financial return possible. This is the closest in terms of adherence to the Bishop of Oxford case: follow the rules for financial investment.

2. Ethical investment Acknowledging an ethical requirement by aiming for the best financial return which also reflects the charity's ethos and does not run counter to its aims: although it is classified as social investment, follow the rules for financial investment.

3. Mission connected investment This category moves further along the ethical road. Although there is a requirement to make the best financial return, there is also an objective to further a charity's aims. In effect this could be seen to appeal to trustees wishing to adopt a positive screening approach rather than a negative screening process which would normally apply under ethical investment above: although it is classified as social investment, follow the rules for financial investment.

4. Programme related investment (PRI) Here the prime investment objective is to further the charity's aims. Potentially some financial return will also accrue: again classified as social investment, but follow the rules for programme related investment.

While these categories may appear similar, it is perhaps easier to look at the list in descending order in terms of placing less emphasis on financial return and more on achieving charitable aims. It could well be, however, that most charities will still want to follow the first of the categories, as in most cases better financial returns will allow objectives to be more easily met.

It is important to note the appropriate investment rules that apply. The first three categories (financial, ethical and mission connected) share a common main purpose which is to secure the best financial return. There is a need to exercise necessary care and skill (the statutory duty of care) which entails an appropriate balance between risk and return, along with a requirement to review investments on a timely basis. In addition, an ethical approach needs to be justified in terms of not conflicting with the charity's aims and a belief that supporters and beneficiaries might be alienated if another approach was adopted. Finally, in both ethical and mission connected investment, trustees need to target a strategy that will not result in significant financial detriment.

The rules under the PRI approach are different. Although there are similarities with both an ethical/mission connected approach, the main purpose here is to further the charity's aims rather than securing the best financial return. As such there is a need to demonstrate that this would result in public benefit and that any private benefit is incidental or recoverable to the charity.

As some charities try to aim for both a financial as well as a charitable return it can be difficult to decide which category is applicable. It is proposed that some may wish to follow a 'mixed purpose' investment with part of the funds allocated to financial/ethical/mission connected investment and part to PRI. Any such split should be clearly indicated at the outset and the appropriate investment rules applied accordingly.

The above may appear confusing and many will feel that the Commission has not added the clarity it intended. However this is probably an unfair conclusion. If one looks beyond the initial guidance, the process is logical and gives help to those who want to incorporate differing levels of charitable objectives. The Commission is keen to emphasise the importance of an appropriate investment policy statement. Given the potential opacity that these new investment guidelines propose, this is surely sensible advice.

Although these guidelines are still in the consultation phase and some changes are likely in the final version, trustees may welcome this early call to start considering whether the broad aims of the proposals will affect their charity's investment approach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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