Alice Unwin, Trainee Solicitor at BDB, considers the Charity Commission's publication 'Charities and Investment Matters: A guide for trustees (CC14)' and whether it provides charities with greater investment opportunities.
The publication contains important investment guidance for trustees and replaces the earlier version of CC14 published in 2004.
From the sector's perspective the new CC14 represents an important and timely step forward:
- it opens the door to a social enterprise marketplace in which charities may feel more confident about participating;
- and it addresses a growing appetite among the charitable trust and foundation community to apply their resources differently in a way that weds investment and philanthropy together to produce a social and economic return.
The guidance is just that - guidance - and rather than providing a prescriptive set of rules the purpose of CC14 is to provide a framework to enable trustees to establish investment objectives and manage investment activity and risk as is appropriate for their charity.
Purpose
The publication of CC14 coincides with the Commission's strategic review and a significant reduction in its funding. Accordingly, the guidance reflects the desire of the Commission to move away from a strict regulatory role by emphasising that it is the responsibility of trustees to make and justify investment decisions. The Commission was concerned that its recommendations as to good practice in previous guidance was being misinterpreted as law and as a result CC14 attempts to clarify the distinction between the two so that the guidance is not interpreted as being more prescriptive than intended.
CC14 provides trustees with guidance on how to make investment decisions and how to take account of the relevant trustee duties, however, its main focus is on what types of investment trustees can make. By broadening the activities and objectives that fall within 'investment' beyond the scope of traditional financial investment the Commission shifts it's emphasis away from the pursuit of the 'best financial return' and towards a 'whole portfolio approach'. This change reflects a growing desire among charities (as well as individuals and non-charitable organisations) to make decisions based on not only financial return but also ethical, social and charitable considerations.
Programme Related Investment (PRI)
CC14 expands the previous guidance by including PRI; this is described as investment that furthers a charity's aims, with the expectation of some financial return. The guidance distinguishes this from grant making, which is described as an 'investment' that directly furthers a charity's aims with no expectation of financial return. It is perhaps questionable whether PRI should be categorised as an investment in the first instance and as such, whether it belongs in this guidance.
Mixed Motive Investment (MMI)
What is often described as social investment is termed MMI by the Commission in CC14. MMI is a hybrid of traditional financial investment and PRI; such investment furthers a charity's objectives whilst also giving a degree of financial return and can only be justified by a combination of these outcomes.
Notably, the guidance does not rank different investment objectives (eg ethical, sustainable, financial or charitable) in any particular hierarchy; trustees can pursue all or any of these. The Commission itself acknowledges that the concept of MMI is in its infancy and in need of development but emphasises that if trustees adhere to the various legal and good practice requirements they are unlikely to be criticised or to be in breach of the fiduciary duties.
Stakeholder Activism
Another noteworthy addition to the guidance is that it now details how charities can engage in stakeholder activism. In particular, CC14 explains how a charity can engage in stakeholder activism for the purpose of PRI and/or MMI by using their voting rights to influence a company's policies in a way that reflects the charity's objectives.
Conclusion
CC14 further clarifies the Commission's approach to investment and removes many of the constitutional barriers to a wider use of charity funds, however, questions remain as to how successfully charities will be able to translate the guidance into working practice. In particular:
- The market lacks appropriate investment products for these new categories of investments. Some charities are looking in to this and Oxfam have launched its first investment fund with social and financial returns but how quickly will other social investment funds emerge?
- There is no clear guidance on how the success of PRI and MMI should be monitored, there is also a lack of clarity as to how it should be accounted for, particularly as the current Statement of Recommended Practice (SORP) does not address many of the accountancy issues. How adequately can the success of such investment be monitored?
- Given the role HMRC plays in the regulation of charities and the fact that they have a vested interest in sanctioning charities to ensure that no revenue is lost to them, it is important that it supports the guidance. The Commission has never prosecuted an investment regulatory breach but might HMRC?
The discretion and flexibility afforded to trustees in determining their charity's investments by the guidance is accompanied by a significant degree of responsibility. Trustees may need to draw upon accountants, lawyers and investments funds to help navigate these new waters and enable them to manage risk appropriately and make the most of the new guidance. However, If CC14 achieves its purpose it should allow trustees to use investment as a tool not only to protect and better their charity's finances but also to further the aims of the charity in a more direct and effective fashion.
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