Consultation outcome

Regulatory impact assessment: guidance update on responsible investment

Updated 1 August 2023

Applies to England and Wales

1. Regulatory impact assessment: guidance update on responsible investment

This is our draft regulatory impact assessment for this new regulatory provision, as required by the Better Regulation Framework.

“Regulatory provisions” are broadly defined and include new or updated guidance, or changes to any procedures which we require charities to follow. The Government sets a target to reduce the overall cost of regulation on business.

The purpose of a Regulatory Impact Assessment is to ensure that we have considered the potential regulatory burden on business (which includes charities) and have taken reasonable steps to reduce or avoid regulatory burden where possible, or ensure that any increase is reasonable or proportionate and necessary.

1.1 Responsible Investments

In 2020 the Commission conducted a listening exercise to identify the difficulties that trustees faced when considering a responsible investment approach. Over 40 key stakeholders and investor charities responded to this exercise.

This exercise identified that, although the Commission’s investment guidance allows for a responsible investment approach, some felt that its current form doesn’t give trustees sufficient confidence and assurance that they can take this approach.

1.2 Policy objectives

The purpose of the guidance update is to help charities understand in clearer terms that responsible investment is an option they can choose or continue with.

The Commission is explicitly not introducing any rule or expectation that investor charities should take a responsible investment approach, beyond what may be required by the terms of their governing document.

It is also an important purpose of the guidance therefore to clarify that trustees have wide discretion and may prefer to focus on financial return and choose not to use a responsible investment approach.

1.3 Policy intention

We anticipate that giving more clarity to charities with the capacity and appetite to align their investment approach with their purposes and values will allow them to better:

• manage risks to their reputation
• keep pace with evolving expectations and practice in comparable sectors
• contribute to trust and confidence in the charity sector
• achieve their charitable purposes

We also considered two other policy options:

• keeping the current guidance position and clarifying the availability of responsible investment as an option through other communications
• rewriting all of the Commission’s investment guidance

On balance, we preferred the chosen option because:

• focusing on revising the parts of our guidance which deal with responsible investment is the most expedient way to give trustees - responsible for the sector’s significant investment assets - clarity about their options and obligations ^{[footnote 1]}
• a full rewrite of the Commission’s investment guidance is planned

1.4 De minimis impact

Where a new regulatory provision will result in a net overall cost or saving to business greater than £5m, the impact assessment is subject to additional scrutiny and validation by the Government’s Regulatory Policy Committee. Below that figure, the department (in this case, the Commission) needs to be able to reasonably justify that the impact will be de minimis.

The net overall cost or saving to business will principally be based on the:

• number of businesses (charities) that have to comply with the new regulatory provision (or do in practice)
• net increase or reduction in the time it takes to read new or amended guidance
• net increase or reduction in time and cost to meet new compliance requirements (e.g. completing forms, obtaining and providing evidence, following processes)

1.5 Number of charities affected by the update

We estimate that the maximum number of charities potentially affected by this update is 85,310:

• 40,040 registered charities ^{[footnote 2]}
• approx. 45,270 unregistered charities ^{[footnote 3]}

Although this guidance update will technically apply to a wide range of investor charities - including those with simple cash deposit arrangements - we anticipate that it will be of most interest and relevance to those charities: ^{[footnote 4]}

• with a wider range of investments
• with larger sums to invest
• for whom investment income is a main source

1.6 Reading time for the update

The guidance update is 1,542 words and takes 7.7 minutes of reading time. It replaces current content for trustees on financial investment which is 2,818 words and 14 minutes of reading time.

1.7 New requirements or expectations imposed by the update

The regulatory burden is limited to the time spent by charities on reading the update.

1.8 Savings made by the guidance update

For charities with no permanent endowment investment property, there is some saving in the regulatory burden. This is because there is a reduction in the conditions these charities have to satisfy before they take a responsible investment approach.

1.9 Conclusion

Our assessment at this stage is that the guidance update is a proportionate way to help investor charities take legitimate actions that will help further their purposes and manage risks, without imposing expectations that would be unrealistic or undesirable for some.

Our assessment - at this stage of its development - is that there will be a de minimis upfront cost to charities represented by the time trustees would need to take to familiarise themselves with what has changed. This initial cost would be unlikely to exceed £165,000. This based on:

• number of charities: 85,310
• time taken to read update: 8 minutes = 0.13 hours (rounded)
• cost of time to read (based on £14.60 per hour ^{[footnote 5]}): £1.90
• 85,310 multiplied by £1.90 = £162,089

Following familiarisation the ongoing saving to affected charities is likely to be around £75,000 per year. We anticipate that charities will read this content on average 3 times every 5 years. This is based on an annual calculation of:

• number of charities: 85,310
• reading time no longer required: 6 minutes = 0.10 hours (rounded)
• saving (based on £14.60 per hour): £1.46
• 85,310 multiplied by £1.46 = £124,552

If further information comes to light which causes us to revisit this figure, then this will be taken into consideration.

The draft guidance update will be subject to a full public consultation which may affect the conclusions in this assessment.

1. Data from the Commission’s Register of Charities indicate that larger registered charities (those with incomes above £0.5m) together hold long term investments valued at around £144bn and have a combined investment income of £3.8bn. ↩

2. The number of registered charities whose Annual Return responses indicate that they have a written investment policy (23.7% of 169,808 registered charities). ↩

3. 23.7% of approx. 190,000 unregistered charities. ↩

4. 12,219 registered charities who complete Part B of the Annual Return report some investment income. Only 497 of these charities rely on their investment income as a main source. ↩

5. This is an average wage figure. ↩