In late September 2014, the Law Commission published a new set of recommendations on social investment by charities following a review of the charity law, paving the way for potential changes to the Charity Commission’s guidance for trustees on investment matters. The most recent official guidance, known as CC14, was updated in October 2011 and is widely considered as conservative in outlining when and what kinds of social investment charities can consider.
Recently, TSIC attended a seminar organised by our friends at Stone King LLP exploring the changes recommended by the Law Commission and their potential implications for the power of charities with significant investment portfolios to make social investments if adopted.
The Law Commission’s recommendations were heralded as a key step because they pave the way for potential changes to the law which could further empower trustees to consider social investments. Among the changes recommended are that a new statutory power be created explicitly conferring on trustees the power to make social investments to eliminate any question over whether non-financial (i.e. social impact) criteria can be considered when taking investment decisions.
Furthermore, The Law Commission recommended that the requirement that charities avoid incurring any ‘private benefit’ through their charitable activities should not be construed so narrowly as to prevent charities from making equity investments into businesses that further their mission. It has previously been thought that charities could only safely make loans to mission-aligned companies while fulfilling this requirement, so an explicit clarification that social investments can be made by purchasing shares in private companies could usefully expand the social investment options a charity can consider.
There are, of course, still some grey areas that are left unaddressed in the Law Commission’s review. Notably, the Commission did not weigh in on the programme-related investment (PRI) vs. mission-related investment (MRI) debate, instead choosing to define social investments as those which have an identifiable ‘mission benefit’ which is ‘in furtherance of one or more of the charity’s objects’. As TSIC found in its research on institutional investors and barriers to making social investments earlier this year, many charities feel restricted to only considering social investments in the same areas as their programming. Where a charity might have a narrowly defined mission, this can prove quite prohibitive to considering investments into social funds and/or ventures that may have an obvious public benefit, but are outside the charity’s specific remit (for example, a youth charity wanting to make an investment into a social housing project).
Furthermore, the discussion at the event pointed out that, while the Law Commission recommends that trustees consider taking advice on social investments, there is no readily identifiable industry that can advise on anticipated social returns alongside financial returns. Charities are hence left to work out for themselves whether social investment decisions should be taken by their grant-making and/or investment committees, and similarly whether their standard financial advisors are appropriate to weigh up the various considerations surrounding social investments – or whether they should engage with the wider church of socially-focused advisory organisations (of which TSIC is one) that look after different aspects of the discovery through to due diligence process surrounding social investment.
We believe that the Law Commission’s recommendations are helpful in suggesting steps which could make social investment more feasible for several charities. It will be interesting to see whether and how the Charity Commission engages with the Commission’s recommendations in any update to CC14. We certainly support any changes that would create a more enabling environment for the sector to invest sustainably in itself.