The UK’s Charity Commission has launched a public consultation on revised guidance covering socially responsible investing (SRI) by charities.
The revisions are based on a listening exercise which the Commission carried out last year to help it understand the barriers deterring trustees from making responsible investments.
Some respondents to that exercise had identified the Commission’s investment guidance as one of those barriers.
Trustees generally have a legal duty to seek the best financial returns from investments within the level of risk considered acceptable, but they can also make financial investments in ways that align with their charity’s purpose and values.
They can therefore use an SRI approach as long as they can show it is in the charity’s best interests, such as an environmental charity choosing to invest in renewable energy.
However, some trustees said they felt unable to make responsible investments because they perceived they have an overriding legal duty to maximise financial returns when investing, regardless of any other consideration.
There was also a feeling that the existing guidance lacked practical advice.
The latest consultation aims to find whether the revised guidance will provide greater clarity about the discretion trustees have to make responsible investments, and reassure trustees that they can decide to adopt a responsible investment approach in most circumstances.
Research last year from Cazenove Capital – one of the UK’s largest charity investment managers, with £8.7bn of the sector’s assets under management – backed up the Charity Commission’s findings.
Kate Rogers, the company’s co-head of charities, said: “Most trustees felt that the language in the [existing] guidance suggests a trade-off between return and responsible investment practice – which brought about concerns over fiduciary duty.”
She continued: “We do not think charities need to sacrifice returns to adopt a best practice responsible investment approach, and think the guidance should evolve to reflect the huge amount of research that now exists to support this statement.”
But she said she believed current practice had moved ahead of the guidance: “We have seen a dramatic increase in responsible investment practice, and our default recommendation for clients is our sustainable investment approach.”
And she added: “The guidance, as drafted, still implies a trade-off between responsible investment and returns, which should be corrected. I’d also like to see responsible investment put forward as a baseline expectation for public benefit organisations, to ensure mission and aims are part of investment strategy,”
Meanwhile, the UK government has signalled acceptance of two related recommendations in the Law Commission report Technical Issues in Charity Law:
- Trustees should be given a statutory power to borrow from their permanent endowment by allowing them to resolve to spend up to 25% of its value, subject to recouping that expenditure within 20 years.
- They should also be given a power, once they have opted into the regulations governing total return investment, to resolve that the permanent endowment restrictions be further released to permit them to make social investments with a negative or uncertain financial return (which would not otherwise be permitted as “investments”).
The government said these powers would be useful for trustees in seeking to further their charity’s purpose, while protecting the enduring nature of permanent endowment.
The full report can be found here.