Latest guidance from the Charity Commission on investing charity money

It’s here! The Charity Commission has updated and released its latest guidance and, as expected, following the Butler-Sloss¹ ruling, it focuses on social investment, as well as placing greater weight on the fundamentals of charity investing.

At Broadstone, we have advocated the need for further clarity to be given to trustees on investing charity money and, after active engagement with the Charity Commission, we are pleased to see the increased level of detail provided in this latest update. We have identified three key areas of interest and provided some further insight below.

1. Social investments – the guidance updates the terminology used for “programme-related” and “mixed-motive” investments, and the word “ethical” is removed altogether from the guidance. The updated guidance focuses on two areas instead – “Financial investment” and “Social investment”.
2. Independence of advice – the updated guidance reiterates the need for “taking advice and delegating”. Professional advice here is the focus, and we consider how both independent investment strategy advice and oversight of managers can benefit trustees.
3. Cash investments – we are in an ever-changing economic environment and whilst interest rates soar, the guidance has confirmed that even cash in savings or deposit accounts are included as investments. Identifying how to best to manage cash will be important for many trustees.

1) Social investments (we call it mission aligned investments)

Many charity trustees may not be aware of how common social investment opportunities are and how they can potentially align with their charity’s own purpose and missions.

At Broadstone, we have long championed the benefits of mission aligned investing for charities, and we are delighted to see that the Charity Commission’s guidance now provides clear support for trustees wishing to pursue this approach to investing. Social investments involve deploying charity money into investments that more closely align with the charity’s own purpose. We believe social investments have the potential to add considerable value in the context of a charity’s purpose, however it is still important to assess and manage the impact that any social investments have on the overall financial return.

Understanding the different opportunities that may exist for social investments can potentially help a charity significantly increase the effectiveness of their resources. For example, a charity supporting the elderly might focus on private market or social infrastructure investments which contribute directly to the building of better care homes. Similarly, a medical research charity could invest in thematic equities targeting allocations to pharmaceutical companies which will increase funding for research and development. There is a large range of investment strategies and funds readily available that could meet different social investment objectives.

In our view, more can be done to exploit potential opportunities for mission aligned investing, and collaboration will be important to delivering successful outcomes. Charities, working closely with their advisors, are well placed to encourage investment managers to create more social and environment impact strategies and funds that align with their causes. We believe the first step will be for charity trustees to assess, agree and document their most important objectives and policies before considering how these can be most effectively implemented through the investment strategy. For charities that have not recently reviewed their investment policy statement we believe that carrying out an investment beliefs workshop could be a valuable place to start.

2) Independence of advice

The Charity Commission expects all charity trustees to ‘take professional advice before making and reviewing investments’. The guidance allows for some deviation under certain circumstances, but it now provides further clarity to charity trustees on why independent oversight and advice may be beneficial in carrying out their fiduciary responsibilities.

Additionally, the guidance now states that investment managers should be reviewed regularly and ‘independently of the manager’. This could provide a valuable additional layer of governance for some trustee boards, but it may leave some boards wondering how best to carry out these reviews.

Amongst other things, advice from an independent professional party can assist charities with:

By acting as an extension of the trustee board, Broadstone can assist with all of these areas of investment strategy and oversight. We have also developed a ‘Health Check’ which is designed to be a high-level review of the key elements of a charity’s current investment strategy to identify any areas of potential concern, or where there are areas to improve or add value.

3) Cash investments

All investments are important and carry some element of risk. This includes cash held in the form of deposits with banks. Cash investments can also offer access to financial returns (as many savers are seeing at the moment).

Investing cash should be considered carefully, including the types of investment and the associated risk-return trade off. There are many options available for low risk, cash-based, liquid investments that are readily available to charity trustees, and the Charity Commission highlights a few of them in their guidance. Particular care should be taken when exposing the charity’s assets to counterparty bank(s) which could place significant capital at risk in the event of bank failure. Charities should seek professional advice, where appropriate.

Summary

The Charity Commission’s latest guidance emphasises the importance of taking independent professional advice. It also clarifies and supports the use of mission aligned investing where this can support a charity’s objectives. At Broadstone, we are driven to:

• Provide access to mission aligned investment solutions that meet your objectives.
• Be an independent source of oversight and expertise for charities of all sizes.
• Act as an extension of your team to create a comprehensive investment policy tailored to your needs.

We are pleased to see that the Charity Commission’s guidance is aligned with our beliefs. Please contact Broadstone if you wish to discuss your charity’s investment arrangements in more detail.

[1] Butler-Sloss & Ors v The Charity Commission for England And Wales & Anor [2022]