The Charity Commission for England and Wales recently released its revised investment guidance. The guidance offers valuable advice to charity trustees on effectively navigating their investment decisions. Whilst we don’t provide legal or tax advice, we’ve taken a look at the main changes and noted the welcomed additions, as well as the areas where we believe there’s still room for improvement.
The main changes
Clearer language. The previous terminology around investment types was confusing and lacked clear definitions. The welcomed revision to these terms means they are now simplified into two buckets: financial and social investment.
- Financial investment refers to more conventional asset classes (think: bonds, equities, alternatives) and can include a variety of styles: traditional strategies, negative screening, consideration of ESG factors and stewardship, all with a view to making a positive financial return.
- Social investment pertains directly to realising the charity’s mission through investments – alongside generating financial returns – but hints at less mainstream forms of investment (think: private equity, loans, guarantees).
Expectation of investment advice. A newly added segment in the guidance directly confirms the Commission’s expectation that all charity investors seek professional investment advice unless a valid reason suggests otherwise. Trustees with suitable qualifications can be relied upon. Still, this advice is often sourced externally, and the advisors must be chosen wisely. Trustees should ensure advice is solely from accredited individuals or organisations.
Robust investment policy. A comprehensive and thoughtfully written investment policy is one of the greatest tools a trustee board can use to support investment decision-making. The revised guidance provides more detail on what the Commission expects to see in these policy statements. Topics such as diversification, assessment of suitability, time horizon, liquidity, risk appetite, and approach to ESG factors are all addressed.
The guide gets back to the basics and asks, why do charities invest? At the heart of it, charities invest to further their aims and objectives. Trustees are given investment powers to enable the charities they serve to do good work to the greatest extent possible.
In tandem with this investment authority, trustees are responsible for ensuring they act in the charity’s, and its beneficiaries’, best interest. This calls for trustees to use their discretion and consider the vast investment landscape with confidence. The revised guidance emphasises this point and brings empowerment back into the conversation.
It echoes the re-framed and modernised thinking from the Butler-Sloss judgement, which says if trustees reasonably conclude that an investment is in conflict or potential conflict with their charitable objectives, then they should look at all relevant factors (beneficiaries, community, donors, reputation, etc.) in making a balanced decision on their resulting investment strategy.
If the aim of the updated guidance was to give more clarity and confidence, we think it largely delivered. However, we were left wanting more on the sustainability agenda for charity investments.
Any room for improvement?
In short, yes. We believe investments aiming for positive financial returns can be synonymous with those targeting positive environmental and social returns. The updated guidance presented a chance to boost trustees’ crucial role in steering charity resources towards this progressive stance. In our view, this was a missed opportunity to inspire charities to think of their full investment pots as part of their available tools to achieve their objectives, not just the income derived from them.
Trustees hold a distinct position: they enhance financial outcomes for their charity while acting as deliberate changemakers for the communities and ecosystems they operate in and around. The Butler-Sloss judgement clarified that trustees can rightfully prioritise people and planet alongside charitable purpose. The pathway is there for trustees to take – but the Commission stops short of encouraging this in the guidance. We find the Commission’s use of phrases such as “non-financial objectives” and “non-financial factors” inadequate at capturing the factors involved in responsible investment decisions. We think “extra-financial” better reflects the rigorous scrutiny and diligence applied to the array of metrics used to evaluate investments, their impact and prospective long-term performance.
- Review your charity’s investment policy. The issuance of this refreshed guidance prompts an important reminder to review your charity’s policy. Go a step beyond the Commission’s guidance and reflect on how your investments further your charitable objectives. Consider dedicating a portion of your policy to your considerations around responsible investment.
- Listen to all the voices in the room. Elevate your decision-making process by considering your board’s diversity of expertise and skillsets. An easy way to add value to your investment strategy and help align with your purpose is to capture the voice of someone well-versed in your mission and include them in the room where decisions are being made.
- Start the conversation. Imagine your charity’s investments as its power, promise, and purpose all rolled into one. Every investment decision makes an impact and these choices have the power to drive purposeful transformation. If you’re feeling unsure of how to start thinking about this for your charity, our advice is to start with a simple question: Does the purpose of your investments further the purpose of your charity, or do they inadvertently work against the very issues you exist to solve?
We are here to lend a hand if you are looking for further guidance in getting started.