Prepare for new charity investment guidance

It has been 12 years since the Charity Commission’s guidance on charity investment (CC14) was first published. Some updates have been made to the guidance since it was first released, most significantly the supplementary guidance on social investments issued in 2016. However, given the shifting landscape of investment, a more substantive refresh of CC14 is overdue.

ESG. Sustainable investment. Negative screening. Responsible investment. All concepts which evidence the growing demand for investment approaches and products that reduce the negative impact that investing can have on the environment and society. Charities have also been part of the movement towards more conscious investing as seen in the recent case of Butler-Sloss¹. In declaring that the claimant trustees could align their charities’ investment policy with the Paris Climate Agreement notwithstanding the potential negative impact on returns, the High Court clarified the law on balancing financial and non-financial considerations when deciding whether to make an investment. In summary, furthering the charity’s purposes is normally achieved by maximising financial returns. However, potential conflicts with charitable purposes may occur across the investment universe and trustees can exercise discretion to exclude certain investments where they are of the reasonable view that such investments give rise to potential conflicts.

Butler-Sloss has shaped the journey of the soon-to-be-released CC14, including the Charity Commission’s approach to seeking feedback from the sector on revising the guidance. In January 2020, the commission undertook a listening exercise in which it sought the charity sector’s views on the barriers trustees face when considering non-financial considerations in the context of making financial investments. This was followed by a consultation in April 2021 on a draft revised guidance on adopting a responsible (or ‘ethical’) approach to investing charity funds and, most recently, the commission ‘road-tested’ its proposed investment guidance. As part of this, a sample of charities, charity lawyers and stakeholder groups were invited in April 2023 by the commission to share their views on the draft.

With this backdrop, what can we expect from the new CC14?

In with the new?

Clarity and accessibility

The Charity Commission has indicated² what we can expect from the reworked guidance and it appears that accessibility will be a key feature. The Charity Commission wishes to make the guidance “shorter, and sharper” in the “hope that this alone makes [it] easier to navigate”. Helping trustees to understand the law on charity investment and their duties is important and therefore greater clarity, in this regard, is positive.

Terminology

Updated terminology is another welcome change. It seems that the terms “programme related investments” (PRI) and “mixed motive investments” (MMI) will no longer feature in the commission’s guidance. This change reflects the fact that PRI and MMI are forms of “social investments” rather than distinct categories of investments in their own right (and reflects the Law Commission’s recommendation).

The terms “ethical investments” and “responsible investments” in the context of financial investments will also be retired given their inherent ambiguity.

Butler-Sloss

It is hoped that the guidance will reflect the clarity that the Butler-Sloss judgement brought for trustees on their discretion to take into account non-financial considerations when making investments. This is particularly important in light of feedback from the Charity Commission’s listening exercise. The exercise noted the perception that “the commission does not accept that trustees can comply with their duties fully if they adopt a responsible investment approach” and some respondents felt that the current CC14 lacked practical advice. The revised investment guidance should, therefore, accurately reflect the ruling of Butler-Sloss that trustees can exercise discretion to exclude certain investments where they are of the reasonable view that such investments potentially conflict with the charity’s purposes. In such circumstances, trustees are to balance all relevant factors including the likelihood and seriousness of the potential conflict, and the likelihood and seriousness of the financial impact of excluding the investments, which would also involve considering possible reputational damage and the risk of alienating supporters and donors, particularly amongst the charity’s beneficiaries. Practical examples of how to undertake such a balancing exercise would be a helpful aid to trustees.

What should you consider?

Charities can take steps now to ensure that their policies and practices align with the law on charity investments (although some may prefer to wait for the revised guidance). Here are some practical actions for charities to consider:

• Ensure that trustees understand the legal principles of charity investment. For example, would the board and the investment committee (if any) benefit from some upskilling? Would training sessions on financial investments and/or social investments be helpful?
• Review your financial investments and your financial investments policy in light of the recent case law. Does your policy reflect the principles of the Butler-Sloss case? Does your charity hold investments which conflict or potentially conflict with your charitable purposes? If so, do you need to undertake a balancing exercise and assess the seriousness of those conflicts against relevant factors such as reputational risks, financial loss and diversification?
• Document discussions and decisions. Charities should be minuting the decision-making process in relation to the adoption of new investment policies, the making or exclusion of a particular investment or investment class, and other related matters. Template board minutes which provide a framework for discussions and guide the board on the particular considerations that should be had may be useful in this regard.