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Enshrine social investment in charity law, says BWB 1

Finance | Vibeka Mair | 15 May 2012

Charity law should clarify that it is a charitable purpose to measure social impact, and also provide a statutory power of social investment, say lawyers Bates Wells and Braithwaite in a submission to the Charities Act Review.

In a special submission to Lord Hodgson’s Charities Act Review focusing on social investment, BWB recommends a series of reforms it believes can strengthen the social investment market.

The Charities Act currently does not refer specifically to social investment, and as part of his review, Lord Hodgson has sought views on removing barriers to social investment into charities.

BWB says there is a lack of clarity in charity law about the nature of trustees' investment duties, which acts as a significant barrier to the development of social investment approaches in charities’ investment portfolios.

The law firm recommends the introduction of a statutory clarification of the investment duties of trustees, which would “dispel charity investment myths” such as the view that charities must invest in the same way as other institutional investors.

Statutory power of social investment

It also proposes a statutory power of social investment that would confirm that charities are able to make social investment where the expected financial returns are lower than available elsewhere on the market or the investment risks are higher or less certain than available elsewhere on the market.

And it says this statutory clarification of social investment should explain in what circumstances a charity can raise social investment from the public by way of loans.

It should also clarify that charitable companies limited by shares can pay dividends to members like other companies and distribute assets, upon dissolution, to members proportionate to capital investment, provided that the distributions are used for charitable purposes.

This goes against the current position of the Charity Commission.

The Charity Commission currently advises that organisations which are subject to charity law cannot distribute profits.  

A Charity Commission spokeswoman told civilsociety.co.uk: "It is very rare for a charity to be formed as a company limited by shares. To be accepted as a charity, the company would have to have a constitutional prohibition on paying dividends on its shares or otherwise distributing profits (which would be incompatible with charitable status)."

Social impact as a charitable purpose

BWB also adds that charity law should clarify that it is a charitable purpose to advance social impact methodology and to promote social impact measurement for the public benefit. Luke Fletcher, an associate in the firm's Social Finance Group who authored the submission, stated:

“Social impact measurement and reporting is a key area of innovation which is in the public interest and there is presently no catch-all charitable purpose under which it is able to fall.

"This absence is likely to mean that organisations in this field will need to fit their work into other charitable purposes, such as the advancement of education and research, which may in turn inhibit the development of social impact methodology in areas which do not fit squarely within existing charitable purposes.”

Lord Hodgson is expected to present his completed review of the Charities Act 2006, which will consider further changes to the legal and regulatory framework for charities, to Parliament ahead of the summer recess this year.

As well as its submission on social investment, BWB has submitted a general submission on charity law.

Directory: Bates Wells & Braithwaite | Charity Commission
Who's Who: Luke Fletcher