Consultation outcome

Responsible investment: draft guidance for consultation

Updated 1 August 2023

Applies to England and Wales

1. Reasons to invest

All charities are able to invest.

You can invest to:

• generate money which you can spend on your charity’s purposes - ‘financial investment’
• achieve your charity’s purposes more directly - social, programme-related, or mixed motive investment

You can choose one or both of these aims for your investments.

Be clear about which of these options you are aiming for when you are planning, managing, and reviewing your investments. This will help you to follow the different rules and considerations that apply to each, and which we describe in this guidance.

If your charity mainly invests cash, look at the:

• next two sections of this guidance on financial investment
• section on savings and cash deposits

The rest of this guidance provides detail for charities that are interested in a wider range of investments.

2. Investing to make money - financial investment

Here you invest with the aim of making money, and that is the ultimate objective of any financial investment. You can do this by one or both of the following:

• generating income
• increasing the value of your charity’s investments (capital growth)

Any money you make is called a financial return. You can usually spend or use it for your charity’s purposes.

There are a range of ways to carry out financial investment. Some examples are:

• renting out a building, aiming to generate income
• buying shares, aiming to generate income or growth in share value
• placing cash on deposit, aiming to get interest

You have overall responsibility, with the other trustees, for planning, managing, and reviewing your investment approach. For your financial investments, you should be clear about the following factors, covered later in this guidance:

• the level of income or growth you are aiming for, based on the amount you have to invest and the charity’s financial needs in the short and longer term. Reviewing the level of financial return is a useful starting point when considering any financial investment
• whether your charity should invest in a way that reflects your charity’s purposes and values (a “responsible investment” approach)
• what level of risk is appropriate for your charity
• the timescale for your investment - long or short-term
• your investment powers and whether you have a duty to invest any of your charity’s property

2.1 Responsible investment (sometimes called ethical investment)

You can decide that rather than just focussing on the financial return on an investment, your approach will also take into account your charity’s purposes and values. This is referred to as responsible investment in this guidance.

All charities can take this approach, and some already do - trustees have a wide discretion. But you must:

• base your decisions on what’s best for your charity
• follow the rules and considerations set out below

Some examples of taking this approach to financial investment are:

• a health charity avoiding investment in tobacco and alcohol companies - negative screening
• an environmental charity choosing to invest in the renewable energy sector - positive screening
• a human rights charity using its shareholder rights to influence company practice - stakeholder activism
• a heritage charity avoiding investments in fossil fuels because the trustees have evidence that this would damage its reputation, reduce donations and not be in the charity’s best interests

You can take a responsible investment approach even if there is no apparent direct conflict with your charity’s charitable purposes, if you can show this is in the best interests of your charity.

Extra rules apply to a small number of charities if they wish to take a responsible investment approach. These are charities with:

• money or investments which are permanent endowment
• other money or investments which must be invested (or kept invested)

Check if your charity is one of these.

3. Follow the law on financial investment

3.1 Make investment decisions in the best interests of your charity

When planning, managing, or reviewing your charity’s investments, you and the other trustees can delegate day to day decisions about investments to an investment manager.

This decision making may also be by a pooled or collective investment fund or scheme.

But you and the other trustees are responsible for ensuring that your charity’s investments serve its best interests. This means:

• deciding what approach to financial investment will best allow your charity to achieve its purposes
• making balanced and well informed decisions based on all relevant issues
• considering immediate and longer term risks, and reviewing risk regularly
• avoiding conflicts of interest
• not receiving any personal benefit from the decision (unless it is properly authorised)
• keeping a record of your decisions and how you reached them

As a trustee, you must not allow your personal motives or prejudices to affect the decisions you take.

You can use our decision making principles to help you to approach your decision in the right way. This will help you to show that you have acted properly.

The Commission is unlikely to have concerns about your investment approach if you can show that you have:

• considered the relevant issues
• taken advice, where appropriate
• followed the decision making principles

3.2 Follow the law and good practice that always apply to financial investment

Always:

• use any skills or experience you - as an individual trustee - have when making investment decisions
• choose investments that are right for your charity and that you consider will meet its investment goals. This means taking account of how suitable any investment is for your charity:
  • an investment type (for example, shares) must be right for your charity
  • an investment within that type (for example, shares in a specific bank) must be right for your charity
• consider the need to diversify investments, if appropriate to your charity, to spread the risk (for example, owning shares in a number of different companies)
• take advice from someone experienced in investment matters, unless you have a good reason for not doing this. For example, if you have:
  • enough expertise in your trustee group
  • simple or low value investments
• review your charity’s investments at appropriate intervals

These principles are legal requirements for you to comply with if your charity is a trust or unincorporated association. For other types of charity, you should follow them as minimum good practice.

This will help you show that you are acting in your charity’s best interests and managing its resources effectively.

Follow legal requirements if you are using someone to manage investments on your behalf. When using an investment manager there are factors you should consider when looking at charges, such as the reasonableness of fees and how much control your charity has over fees.

If your charity is a company you must also consider whether you must have regard to specific obligations for company directors in addition to those listed above, which include:

• how its operations affect the community and the environment
• the desirability of maintaining its reputation for high standards of business conduct

3.3 Check and follow your governing document

All charities can make financial investments, but your governing document may:

• say that you must or must not invest in some companies or sectors
• say that you must invest some or all of your charity’s money
• include other provisions about how you must or may invest

Check if your governing document includes any of these provisions and make sure you follow them.

You can take advice if you are unsure about:

• your charity’s investment powers
• provisions in your governing document

Your charity can pay for this.

3.4 Check if extra rules apply

If your charity has money or investments which are permanent endowment, extra rules apply to your financial investments. You must aim for the best financial return within the level of risk you have decided is appropriate for your charity.

You can still take a responsible investment approach if:

• you are satisfied that this is clearly in the best interests of your charity, and
• one or more of the following applies:
  • you are avoiding an investment that conflicts directly with the purposes of your charity
  • your charity might lose supporters or beneficiaries if you don’t take a responsible investment approach. You can balance any risk of lower returns ( in both the short and longer term) against the risk of losing support or damaging your charity’s reputation
  • taking this approach would not bring a significant financial downside
  • your governing document allows or requires a responsible investment approach
  • you have clear and compelling reasons, supported by evidence, about why your charity should follow a responsible investment approach

These different rules apply to permanent endowment because it is subject to a duty to invest.

This duty means that you must invest the money (or assets) or keep it invested. You don’t have a choice about whether or not to do this. You can’t spend the money or manage it in a different way.

In addition to permanent endowment, there are other limited circumstances where an investment is subject to a duty to invest.

Find out if you have a duty to invest any of your charity’s money by looking for rules which say that there is money you must invest or keep invested. Look at:

• your charity’s governing document
• another document that includes rules for managing part of your charity’s money or other property

You can take advice if you’re not sure whether you have a duty to invest some or all of your charity’s money.