Investing responsibly: Charity Commission Guidelines

1. Investing responsibly: Charity Commission Guidelines Stephen Roberts Policy Legal Adviser

2. Investment of Charitable Funds: Detailed Guidance • Underpins CC14 Investment of Charitable Funds: Basic Principles • Current version dated February 2003 • Currently being reviewed

3. Issues in investment guidance • What is an investment? • What is the proper use of an investment power? • Role of derivatives • Ethical Investment • Mission Connected Investment • Blended investment

4. What is an investment? • Investor/investee • Company shares • Land let to produce a rental income • Tradeable debt • Non-tradeable debt • Units in collective investment schemes

5. What does the Detailed Guidance not consider as an investment? • Commodities e.g. gold, vintage wine • Works of art • Premium bonds • Land purchased with a view to sale • Derivatives

6. What is the proper use of an investment power? • The general power of investment (section 3 Trustee Act 2000) • Standard investment criteria: • Suitability of class of investments and particular investment • Need for diversification so far as is appropriate to the circumstances of the trust (section 4 Trustee Act 2000)

7. What is not a proper use of the investment power? • Trading • Gambling • Speculation • Use of derivatives other than as ancillary to investment

8. Ethical Investment • Ethical investment (also known as socially responsible investment) is investing for financial return, but having regard to other criteria such as environmental protection, health, human rights.

9. Screening and disclosure • SRI/Ethical investment often involves • positive screens (focussing on companies that do good); or • negative screens (avoiding investments in a particular) • Examples include: • alcohol, tobacco, gambling; the environment, global warming; employment policies and practices; products/services; arms manufacturing/supply; animal testing; human rights/equality. • Disclosure of policy • any investment policy for charities over the statutory audit level must be disclosed • these charities are also required to state the extent to which environmental or ethical considerations are taken into account • this should apply to all charities as a matter of good practice

10. Making an ethical investment • A charity’s governing document sometimes imposes specific ethical restrictions on the scope of trustees’ general power of investment – trustees must comply with these • Power of investment has to be used to further the purposes of the trust. Purposes will normally be best served by seeking the maximum return consistent with commercial prudence • Consider whether*: • a type of investment is in direct conflict with the aims of your charity • a type of investment might hamper the work of your charity (e.g. alienate beneficiaries or donors) • The financial return will be just as good even if other moral/ethical considerations are taken into account * Harries (Bishop of Oxford) v Church Commissioners [1992] 1 WLR 1241

11. Positive considerations • Financial return more secure where company committed to sustainable development • Long term profitability secured by a particular moral approach to development of business

12. Programme Related Investment/Social Investment • Not investment at all. • Their purpose is to directly further the purposes of the charity and not to secure a financial return to the charity. • Issue is extent to which furthers the purpose and whether the amount applied justifies that.

13. Private benefit • Any private benefit arising from a social investment has to be incidental to the furtherance of the charity’s purposes • An educational charity investing in a profit making private school would not be an appropriate way of furthering the charity’s purposes by way of a social investment. It may be justified as a financial investment if the financial return justifies it.

14. Mission Connected Investment • “We define an investment as an MCI if it: Targets a market rate of return and also helps a foundation to achieve its mission.” (Mission Possible: Emerging opportunities for mission connected investment – New Economics Foundation)

15. Mission Connected Investment • Other definitions: “The term Mission Investing covers two distinct categories of investments: market rate investments that support program goals; and Program Related Investments (PRIs) structured to create specific program benefits while earning a below- market return.” (More for Mission website)

16. Blending social investment and socially responsible investment • Mixing two different things: one is about a financial return to the charity and the other is about directly furthering the purposes of the charity. • Trustees need to be clear what they are doing in applying funds so they can be sure they are complying with the appropriate duties.

17. Common Investment Funds • Corporate Manager has power to invest equivalent to general power of investment • CC14 detailed guidance applies • Difference between a charitable collective investment fund and a non-charitable collective investment fund

18. CC14 Detailed Guidance • New style • Must/should • Legal underpinning • Discussion with sector