On 1 August 2023 the Charity Commission published updated investment guidance for charity trustees (CC14). The new CC14 now reflects the recent Butler-Sloss judgment (you can read our briefing on that here) and incorporates the Commission’s previously separate guidance on social investment.
Reflecting a trend seen elsewhere in Commission guidance, the updated CC14 is now significantly shorter. It relies to some extent on links to other documents (for example, guidance on private benefit and on managing conflicts of interest) which means trustees will need to click through to supplementary and underlying guidance in some areas.
The guidance sets out both trustees’ general and specific duties in relation to investment, including the duties to consider suitability and diversification, the duty to take advice (unless there is a good reason for not doing this) and the duty to review investments.
As it has done before, the Commission acknowledges that strictly speaking these specific duties apply only to trustees of charitable trusts – but explains that it expects trustees of other charities to follow these duties, too.
The guidance sets out some example approaches to financial investment:
- avoiding investments that conflict with a charity’s purposes,
- avoiding investments that could reduce support for a charity or harm its reputation, particularly amongst its supporters or beneficiaries,
- avoiding or making investments in companies because of their practice on environmental, social and governance (ESG) factors, and
- using a shareholder vote, or other opportunities that come with an investment, to influence practice at companies in which a charity invests.
Here it is noteworthy that the Commission avoids using the terms “responsible investment” or “ethical investment”, instead using examples of approaches it considers charities may lawfully take.
The guidance links to relevant legislation and directly to the Butler-Sloss judgment. This judgment has been woven through the new guidance.
The guidance makes clear that trustees can choose what investment approach is in the best interests of their charity in the circumstances and have a range of investment options open to them, provided they further the charity’s purposes.
In another nod to the judgment, the guidance warns trustees not to allow their personal motives, opinions, or interests to affect their investment decisions.
The guidance now also considers social investment, which is defined in charity legislation as investing with a view to both achieving a charity’s purposes directly through the investment and making a financial return.
The Commission has ceased to use the terms “programme-related investment” and “mixed-motive investment” (and HMRC has amended its guidance Annex iii: approved charitable investments and loans to reflect this).
The previous CC14 (which predated the charity law definition of social investment) used these terms extensively – but the Commission considers that social investment now covers activities that “programme-related” and “mixed-motive” investment have been used to describe. This is in many ways a helpful clarification, the status of these parts of the previous CC14 having been uncertain since the publication of standalone social investment guidance.
The Commission notes that, while charities that have investments they currently describe as “programme-related” or “mixed-motive” may wish to reconsider how they identify them, it is entirely up to an individual charity to decide which terms it uses to describe social investment.
The guidance also notes that the Charities’ SORP FRS 102 still uses (and defines) the terms “programme” and “mixed-motive” investments – and hence the terms are still relevant when considering the accounting treatment for these types of investments.
Further sections set out the Commission’s guidance on:
- setting a charity’s investment policy,
- investment types,
- taking advice and delegating,
- reviewing and reporting on investments,
- investing a charity’s permanent endowment (including adopting a total return approach),
- tax on investments, and
- advice for charities that mainly invest cash.
In a welcome development, the Commission has also retained and updated a “legal underpinning” document which sets out the Commission’s understanding of the law on charities’ investment powers.
The relationship between the two documents is not, however, as clear as one would hope.
In Butler-Sloss, Michael Green J set out an admirably clear summary of the law on “taking into account non-financial considerations when exercising … powers of investment”. In what feels like a missed opportunity, this does not appear in the new guidance.
Instead, the Commission briefly outlines the balancing act that trustees must carry out in deciding whether to exclude a conflicting investment. It then links to the legal underpinning document, stating that this “gives more information about the law on conflicting financial investments” – but without directing trustees to the right paragraph. Trustees hoping for a deeper understanding of what is expected of them will therefore need to search through the underpinning.
Neither the guidance nor the underpinning picks up one of the challenges posed by the Butler-Sloss judgment: clarity on the level of diligence expected of trustees in assessing the likely financial detriment involved in excluding a particular investment. This feels like another missed opportunity and leaves some doubt as to what trustees are expected to do in practice.
In general, while the guidance is accessible and easy to read, the Commission’s sparser approach means that trustees will not find the same level of detail as in the previous CC14. There is a risk that the guidance may therefore be less useful for trustees whose charities engage in more complex or innovative investments.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2023