EUROPE - UK charity investment rules should be revolutionised to open up the social investment market as a destination for funds, according to a landmark government report.

The report was produced by Lord Hodgson of Astley Abbotts, appointed by the government last year to investigate whether the Charities Act 2006 was fit for purpose.

According to Hodgson, when making investment decisions, trustees should be entitled to consider the totality of benefit, including both financial and social return.

But they should still ensure the type of investment is suitable for their charity, and that investments are diversified.

Investment in this context means any outlay of money where the charity expects some form of financial return, whether or not that is the primary motive for making the outlay.

Hodgson said there were several factors deterring charities from making so-called "mixed motive" investments, such as investments blending both social and financial benefits.

First, there is no explicit legal power for trustees to place charity funds in these investments, even though it is widely accepted by charity lawyers that trustees can do so.

Recent Charity Commission guidance showing how powers can be exercised to make these investments does not have the force of statute law and has, in one case, been overturned.

Furthermore, there is currently no off-the-shelf vehicle that can be used for a social investment product, and charities are generally uncertain about the related tax position.

Social investments are also difficult to value, particularly in the first two or three years before it is clear whether they will be a success.

The report adds that the pricing of risk for individual proposals is a major challenge to market development.

"The lack of standard impact measures for assessing the level of social benefit delivered by a project, and the lack of available products to benchmark against, means a great deal of time and effort is required to quantify the level of risk associated with each investment," it says.

The report, therefore, recommends the following:

•    Changes to the Trustee Act 2000 entitling trustees to consider both financial and social benefit when making investment decisions. The other existing principles in the Act (for instance, the duty to take advice) should still, however, apply.

•    The government should consider amending the Act to underline the responsibilities of trustees to further their organisation's charitable purposes, rather than simply preserve capital.

•    The introduction of a legal power for non-functional permanent endowment to be invested in mixed-purpose investments, requiring that capital levels be restored within a reasonable period.

•    Development of a standard social investment vehicle, allowing funding from different sources to be invested, and maintained separately, in the same product.

•    Revision of the charities Statement of Recommended Practice to facilitate the appropriate reporting of social investments, with the professional accountancy bodies identifying a standard system for valuing them.

Richard Jenkins, consultant and author of the recent report "The Governance and Financial Management of Endowed Charitable Foundations", said: "Lord Hodgson's recommendations to make social investment more structured are to be welcomed.

"Among other things, his changes would put trustees' powers - currently contained in case law - on a firm statutory footing.

"In effect, he wants to show investors that the door is definitely open, but without pushing them through. That has to be the right approach, especially in an emerging market like this."

More generally, the report's other recommendations include allowing large charities - with an annual income more than £1m (€1.3m) - to pay trustees, the introduction of increased transparency in reporting, and requiring charities to help fund their regulator, the Charity Commission.

Some of the recommendations to reduce red tape, however, have not been wholly welcomed.
David Emerson, chief executive at the Association of Charitable Foundations, said: "I am concerned about proposals to reduce the role of the Commission and remove automatic registration from thousands of the smallest charities.

"Taken together, they place a burden on funders and donors to make checks before giving money, but with potentially much less information available."

There is no indication yet of when any changes might be made.

A Cabinet Office spokesperson said the government wanted the voluntary sector to debate the recommendations and suggest priorities for immediate action and issues for more detailed investigation.