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Charity Commission identifies barriers to responsible investments

03 Dec 2020 News

The legal framework and a perceived need to maximise financial returns are amongst the barriers stopping charities from adopting responsible investments, the Charity Commission says.

In a blog revealing the initial findings of the regulator’s “listening exercise” on the topic, Paul Latham, director of communications and policy at the Commission, wrote: “The apparent barriers to making decisions to favour responsible investments fall roughly into two categories: ‘in principle’ or technical barriers; and those relating to practical issues.”

Technical barriers

The Commission says that some trustees consider the legal framework to be a technical barrier.

Latham said: “There are wide differences in interpretations of the legal framework which clearly breed uncertainty about decisions trustees are legally allowed to make. Some believe the case law is ‘outdated’ and at odds with public expectations of how charities should behave.”

A coalition of charities, which formed in 2019 and has the support of law firm Bates Wells, is already seeking a new legal ruling.

When the Commission launched its consultation at the start of the year, Luke Fletcher, a partner at Bates Wells, told Civil Society News that the Bishop of Oxford case, which dates from 1991 and forms the basis of the current legal framework, was outdated.

He said that the case did not mention climate change, which is now a major area for responsible investment, and that a new ruling would bring “clarity”.

A second technical barrier is trustees feeling an “overriding legal duty to maximise the financial returns when investing, regardless of any other consideration”, the Commission says.

The third technical barrier is confusion over trustee duties created by the Charity Commission itself, including in its main guidance Charities and Investment Matters: A Guide for Trustees (CC14).

Latham writes: “The way responsible investment is outlined in CC14 seems not give some trustees sufficient confidence and assurance that responsible investment is something they can consider, or that the Commission supports.

“In addition, some people highlighted that CC14 lacks practical advice, and felt that, given the complexity of the issue, this makes the subject difficult for trustees to navigate.”

Practical barriers

The blog also lists three practical barriers, the first of which is “insufficient discussion, diversity of thought and robust challenge at trustee boards”. This, it argues, restricts innovation and “may also hinder charities having meaningful discussions around responsible investments”.

The second practical barrier is the perception that responsible investment will lead to the sacrifice of investment returns.

Third, “the use of jargon or inconsistent terminology makes it harder for trustees to understand, challenge or hold to account those advising them”, Latham writes.

He adds that these highlighted themes “represent just a flavour of the points raised with us”.

What next?

The regulator launched its consultation in January this year. It said that it received over 40 written submissions and had taken part in six roundtables, as well as direct engagement with “sector bodies, trustees, chief executives, investment managers, and officials in several government departments and regulators”.

Latham’s blog states that the Commission will now “consider in more detail how we can best support trustees in future”.

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