New Charity Commission guidance may have dropped the phrase “ethical investment” but the need for charities to understand whether they must, should or can invest in line with their ESG aspirations has never been more pressing, as the UK Government presses ahead with its new oil rush following the recent announcement that more than 100 oil and gas drilling licences will be granted for the North Sea in the autumn.

After years of calls for updated guidance for charities on how they can invest their free reserves and a High Court case, the Charity Commission has now published its updated guidance on clients and investments: Investing charity money: a guide for trustees - GOV.UK (www.gov.uk)

The guidance has been redesigned to offer greater clarity and to give trustees confidence to make investment decisions that are right for their charity. It weaves together relevant strands from other commission guidance but still runs to 25 pages, so here is our distillation of the new guidance for trustees.

SUMMARY OF NEW CHARITY COMMISSION GUIDANCE

• The first words are key. As trustees your principal duty is to further your charity’s purposes (which may or may not be to save the planet).
• As trustees you must not allow your personal motives, opinions or interest to affect the decisions you make.
• In deciding how to invest your charity’s funds, follow the principles of good decision-making set out in guidance CC27
• Keep a record of your investment decisions and how you reached them.
• Check your governing document for any restrictions on use of your investment powers.
• If your objective is to generate the maximum return – so your charity can do more good – then consider:
  • whether investments are suitable;
  • the need to diversity your portfolio to spread risk;
  • taking advice unless you have good reason not to; and
  • reviewing your investments at appropriate intervals.
• Trustees have statutory power to make social investments – where you use money or property with a view to both achieving your charity’s purposes directly through the investment and to making a financial return.
• A ‘return’ on social investment might be where your charity expects to receive back only some or all of the money invested – never mind any capital growth or income.
• Factors to consider when setting your investment policy include:
  • timeframe;
  • liquidity; and
  • risk appetite
• Financial risk includes ESG risk – loss because of poor ESG practice by a company you have invested in
• Remember that investing in your charity’s trading company should be regarded like any other investment, in a detached and measured way in deciding what is best for your charity.
• Take particular care before deciding to invest in a company connected to a trustee.
• Take advice where appropriate, and while you may delegate investment decisions, as a charity board you are always ultimately accountable for those decisions.
• Regularly review your investment decisions (including social investments).
• Consider whether a total return approach is appropriate to managing any permanent endowment property you have i.e. essentially, property the charity must keep rather than spend.

WHAT IS OF PARTICULAR INTEREST IN THE RENEWED GUIDANCE?

Part of the revised guidance which is likely to attract attention is ‘Example approaches – financial investments’. Many boards will want to know to know whether they can or should invest in stocks such as fossil fuels, which are generating high returns at the moment, when their purposes are not connected with protecting the environment.

When making financial investments (as opposed to social investments) the commission suggests that a board’s investment approach may involve one or more of:

• aiming only for the best financial return you can achieve;
• alongside this, avoiding investments that conflict with your charity’s purposes;
• alongside the financial return aimed for:
  • avoiding investments that could reduce support for your charity or harm its reputation, particularly among its supporters or beneficiaries;
  • avoiding or make investments in companies because of their practice on ESG factors, on the basis this could be in your charity’s best interests by enhancing the financial value of your investments over time, or because it will support delivery of your charity’s purposes more directly; and
  • using your shareholder vote to influence practice at companies in which your charity has invested, for the above reason.

But as the guidance makes clear, highlighting the Butler-Sloss judgement in 2022 Charity trustees' powers of investment: Does the Butler-Sloss decision change the law? (shoosmiths.com), trustees need to be careful in relation to making decisions as to investments on purely moral grounds: your charity is here to do good - but it’s the “good” set out in your charity’s objects. Among a charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues.

A HYPOTHETICAL EXAMPLE OF HOW A CHARITY MIGHT APPROACH FINANCIAL INVESTMENT

Take a small charity whose objects are to advance and promote public education and appreciation of Early Music by the presentation of public concerts and recitals in conjunction with the Trumpton Symphony Orchestra, based in the Home Counties. The charity has an elderly supporter base.

If the charity was left a valuable vacant property in a supporter’s will which the charity intended to sell, using the funds to put on as many concerts as possible over the next ten years before winding itself up then, considering the above checklist, on what basis could a trustee with strong green views be able to persuade the rest of their board not to invest a chunk of the charity’s funds in fossils fuels if the returns over the next decade – in terms of increased share prices and dividends - are likely to be strong? 

We think it would struggle to do so.

However, if circumstances changed and if say the board wanted to continue the charity into the long term and engage with a more youthful audience by promoting the appreciation of modern music especially in urban areas, then as well as potentially widening its charitable objects Charities legal and regulatory preview (shoosmiths.com) it might also alter its investment strategy, if its timeline for investment lengthened and this meant investing in fossil fuels was not the wisest long-term investment strategy, and if the demographic of its supporter base altered – even though the charity’s purposes would still not include protection of the environment.  Back in 2019 the Royal Shakespeare Company changed its donor policy after school students threatened to boycott the charity over its links to an oil company.

The new guidance on charities and investment is welcome in providing in clear language and in one place the key considerations for charity trustees when deciding how to invest spare funds and whether it may be appropriate for them to do more than seek the best financial return.