The Charity Commission has produced new guidance clarifying that it is amenable to allowing charities to choose investments that provide social as well as purely financial benefits.

The regulator has finally published its long-awaited revision of CC14, its guidance on investment, and it appears to go a long way to answering charities’ concerns about whether they are allowed to pursue investments that may not maximise financial return.

Organisations in the sector have been complaining for some time that as much as they wanted to jump on the social investment bandwagon that is so favoured by the government, they felt largely prevented from doing so by CC14.  The feeling was that the regulator expected them to pursue the highest financial returns possible and would take a dim view of investment policies that did not.

The government took these concerns on board and has also been leaning on the Commission to adopt a more permissive approach.

According to the Commission, the new CC14 “reflects how policy and practice have moved on since the last revision in 2003”.

“Many charities are now investing to deliver both a financial return and a direct social benefit, often described generally as ‘social investment’,” the regulator said in a statement.

"This may involve considering ethical issues or how an investment helps further the charity’s aims directly.  Sometimes, these ways of investing can achieve even more for beneficiaries and can therefore represent the best overall return for the charity.”

The draft guidance merges the Commission’s previous CC14 guidance and its Charities and social investment guidance to present the whole range of investment approaches that a charity can consider within the law.

The draft defines financial investment, ethical investment, mission-connected investment and programme-related investment (PRI).  Trustees that choose any of the first three must follow the rules for financial investment, while programme-related investment has its own rules. Charities can use PRI to provide funding to other organisations.

With PRI, trustees should be satisfied there is a reasonable prospect that the funds they invest will be returned; however, this is not a requirement or the primary purpose of the investment.

Leather: Guidance has always allowed social investment

Dame Suzi Leather (pictured), the chair of the Commission, said the consultation was clearly important for many trustees, given that registered charities hold investment assets worth nearly £78bn.

She added: “The Commission’s guidance has always allowed charities to use a mix of financial and social investment to achieve their aims, and we hope our consultation clarifies this even further by explaining what charities can actively do within the law.”

The Commission started reviewing the 2003 guidance in September 2009 and had hoped to publish a new draft by the end of last year.  But this kept being delayed. The consultation on the new draft closes on 28 February and the final guidance will be published in the spring.

Click here to see the full draft guidance.

Separate consultation on total return approach

Later this month the Commission will also consult on regulations to allow charitable trusts with permanent endowments to adopt a total return investment policy by means of a resolution, using a power conferred by the Trusts (Capital and Income) Bill.  Currently charities must get the regulators approval to adopt such a policy.

Sector reaction

Geoff Burnand, chief investment officer of Charity Bank, described the consulation as "very welcome and a huge step forward".

“In recent years we have found ourselves in an absurd situation where many organisations have been obligated to invest in a way that is incongruent to the delivery of their core mission, despite a growing universe of social investments. 

"These changes also draw attention to an urgent need to find new criteria with which to measure returns on investment portfolios that deliver social as well as financial benefits.  Charity Bank has been working on alternative assessment systems for a number of years and we look forward to sharing our experiences with the Commission as it moves towards the development of a final guidance document.”

Stephen Hine, head of responsible development at EIRIS, added: "We are pleased that in their guidance the Charity Commission appears to maintain its stance on the legality of ethical investment and it is also more broadly seeking to define mission connected, programme related and social investment which is to be welcomed.
 
"EIRIS will be responding to the Charity Commission directly."