The Charities (Protection and Social Investment) Act in the UK has now received Royal Assent, giving foundations and charities in England and Wales the statutory power to make social investments from their endowment funds.
Historically, the legal position was that charities had a limited ability to invest where their investment decisions were based on considerations other than the expected financial return.
However, several years ago, the Charity Commission introduced into its guidance on investing the idea of mixed-motive investing by charities.
This means funding an acquisition or project to make a financial return, while helping the charity’s mission at the same time (but where the investment could not be justified on the basis of its financial return or its charitable impact alone).
But Elizabeth Jones, senior associate on the charity team at Farrer & Co, said: “This created some uncertainty because the existing law appeared to be stricter. While the Charity Commission’s guidance gave some support for social investment, there was also no confirmation from HM Revenue and Customs as to how this investment would be treated for tax purposes and whether it would be treated as a qualifying investment eligible for tax relief on income and capital gains.”
Jones added: “The new Act now gives trustees a statutory power to make social investments – within the parameters of the Act – where an investment works to achieve the charity’s objects. However, it is hoped HM Revenue and Customs will clarify its approach to social investments in the near future.”
The Act defines social investment as one made to directly further the charity’s purposes and achieve a financial return for the charity.
This can either be done by investing in assets or by taking on a commitment in relation to a liability of a third party that puts the charity’s funds or other property at risk of being applied or used.
Jones said: “In this context, ‘financial return’ does not mean getting back the original investment, plus an added amount. It means getting back anything at all, full stop.”
But she warned: “If the return is only going to be a small percentage of what was invested, the trustees need to be satisfied the investment can be justified as being in the best interests of the charity, with reference to the charitable impact of the investment and any other relevant considerations.”
The new law requires trustees to consider if they need advice before making a social investment.
If so, they must obtain appropriate advice and, if they decide to go ahead, satisfy themselves that this is in the charity’s interests.
However, the charity cannot use its permanent endowment unless its trustees expect this will not contravene any restriction on expending the endowment.
It may also not make social investments if this is prohibited by its trust deed, or if the charity itself is established by Royal Charter or by legislation.
The trustees must also periodically review the charity’s social investments.
The Act also gives the Charity Commission, as the sector regulator, new powers to issue a warning to a charity or trustee it considers has committed a breach of trust or other misconduct or mismanagement, to disqualify a trustee, and to remove from office a trustee or officer who has been disqualified.
It extends the list of criminal offences for which conviction means automatic disqualification from being a charity trustee to include terrorism, money-laundering and bribery.
The timetable for specific sections of the Act to take effect will be published shortly.
Meanwhile, Rob Wilson, the minister for civil society, has hinted at government plans to make social investing easier for pension savers.
Speaking in London, Wilson said he was contemplating requiring pension providers to offer products to scheme members where a specified percentage of their money went to social investments.
“It is something we already see working successfully in the French pension system, where billions of euros have been channelled to social impact investments,” he said.