The Charity Commission has updated its guidance Investing charity money: a guide for trustees (CC14). The intention of the revised guidance is to give trustees increased confidence when making investment decisions.
Why the change?
The refreshed guidance has been published following a trial involving around 1,000 charities with investment income, lawyers, and other groups representing the interests of charities with investments. The overriding message was that the CC14 needed to be revised to offer clear guidance with minimal risk of misunderstanding.
The update also reflects a significant High Court judgement on charity trustees’ investment duties (the ‘Butler-Sloss’ case). The case dealt with a request for trustees to be able to exclude investments that did not align with the Paris Climate Agreement 2016.
Essentially the question was, if an investment conflicts with a charity’s purpose, or if it may cause reputational damage, are trustees able to exclude those investments even if returns would be lower?
Legal duties of trustees
Following the High Court judgement, there was continued uncertainty amongst trustees as to whether their legal duties had changed and if they would be in breach of these duties if they excluded certain investments.
The updated CC14 states that, when considering investments, trustees must:
- Make decisions in the best interests of the charity;
- Comply with the requirements set out in the CC14; and
- Regularly review their approach to investments.
Mr Justice Green states: “Charity trustees’ primary and overarching duty is to further the purposes of the trust. The power to invest must therefore be exercised to further the charitable purposes. That is normally achieved by maximising the financial returns on the investments that are made”.
However, the revised CC14 does acknowledge there is an opportunity for discretion when it comes to investment choices – particularly when considering environmental, social and governance factors or any potential conflicts of interest.
Overview of the updated guidance
The Charity Commission’s intention was to update the CC14 to make it shorter and sharper with simplified terminology – clarifying the responsibilities that trustees ‘must’ adhere to and those they ‘should’ follow.
It clarifies that alongside financial return, trustees should aim to
- Avoid investments that could reduce support for their charity or harm its reputation;
- Avoid investments in companies because of their practice on environmental, social and governance (ESG) factors such as climate, human rights, sustainability, community impact and board accountability; and
- Use their shareholder vote, or other opportunities that come with an investment, to influence practice at companies that your charity is invested in.
The updated guidance includes
Clarification of social investment
The guidance makes a distinction between specific trustee duties based on financial and social investments. It includes previously separate guidance on social investment and no longer uses potentially confusing terminology such as ‘ethical investment’ or ‘programme related investment’.
The Charities Act 2011 (as amended) says that a social investment is where charity trustees use money or property with a view to both:
- Achieving their charity’s purposes directly through the investment; and
- Making a financial return.
Specific examples are provided.
Importance of an investment policy
The guidance outlines the value of having an investment policy. The policy should include
- Investment objectives;
- Any sectors or organisations in conflict with the charity’s purpose;
- Timeframe for investing;
- Access to charity’s money;
- Attitude to risk;
- Approach to ESG factors;
- How investments are monitored and reviewed; and
- Who investment advisers and managers are.
The importance of taking professional advice before making and reviewing investments is stressed. This should be impartial and given by someone experienced in financial and other matters relevant to the charity’s investment approach.
Charities should familiarise themselves with the updated CC14 guidance and consider what it might mean for their investment responsibilities. Trustees may identify any investments that could offer a conflict of interest or any wider reputational risks.
Investment policies should be reviewed to ensure they are in the best interests of the charity’s purpose and take into account the requirements outlined in the CC14.
For any queries on how the updated CC14 guidance may impact your charity’s investments, please get in touch using the details below.