The Charity Commission publication CC3 The Essential Trustee – What you need to know states that trustees must take special care when investing the funds of the charity, or borrowing funds for the charity to use.
The Trustee Act 2000 gives trustees a general power of investment. This allows trustees to place funds in any kind of investment as though they were the owners of those funds but when exercising this power they must:
- Exercise such care and skill as is reasonable in the circumstances (the more skill you have the more care you must take)
- Take proper advice from a suitably qualified person
- Consider the suitability of an investment
- Consider the need to diversify to reduce risk
- Review the investments regularly
In exercising their duty of care, trustees should also consider if there are any restrictions or exclusions regarding investments in the charity’s governing document.
The main source of guidance is the Charity Commission publication CC14, Charities and investment matters, A guide for trustees (October 2011) which provides summaries legal and practical considerations regarding financial investments, programme related investments and mixed motive investments. The guidance summarises the legal and practical considerations regarding each type of investment.
Also in October 2011 the Charity Commission published a summary of the legal underpinning of its investment guidance, intended to reflect law and practice at December 2010 applicable to the duties and obligations of trustees of charities. The position described is based on the law relating to trust law except where otherwise indicated. As such this guidance does not directly apply to directors of charitable companies. However, as directors of a charitable company are also acting in a fiduciary manner in furthering charitable purposes, they have similar responsibilities.
You may also see references to ‘social investment’: this is generally a form of investment by people and entities other than charities, and has as its main objective the achievement of social and environmental outcomes. It is therefore covered in more detail under charity fundraising, as a source of income.
The objective of financial investment is to achieve the best financial return given the level of risk considered to be appropriate. Trustees will often appoint investment managers to acquire and manage investments on their behalf, but the trustees retain ultimate responsibility for the suitability of the investments and risk management, so they must give clear instructions about their objectives and satisfy themselves as to the safe custody of their funds.
The financial return sought by charities is usually to meet one or a combination of the following needs
- income to fund current expenditure
- preservation of capital; and
- long term capital growth to ensure the future sustainability of the charity
The financial return objective will depend on each charity’s aims, operating model, timescales and resources. For example, some charities need to maximise their investment income to fund expenditure because they do not have sufficient incoming resources from other sources, whereas others, such as endowed charities, may need to balance capital growth and income return in order to meet their aims and their beneficiaries' current and future needs.
The current economic conditions are particularly difficult for charities, many of which are facing the twin challenges of falling or less certain voluntary income and significantly lower investment returns, particularly on cash deposits and similar less risky investments. The investment objective needs to be realistic: if income cannot be generated from other sources, the trustees may have to consider scaling back some of the charity’s activities.
Where the charity holds investments, the trustees should have a formal investment policy and objectives, including the extent (if any) to which social, environmental or ethical considerations are taken into account.
The objective of programme related investments is to further the charity's aims directly in a way that might generate a financial return. For example, a charity that works to relieve poverty may give a loan to another charity that helps unemployed people back into work. This will satisfy the charity’s aim of relieving poverty, will be for public rather than private benefit, and is expected to produce some financial return for the charity in the form of loan repayment at the end of the agreed period and possibly interest payments along the way, but the financial return is not the main reason for making the loan.
Programme-related investments are similar to making grants, but grants are made to further a charity's aims with no expectation of a financial return. However, some charities might choose to make a grant alongside a PRI, for example to help build an organisation's management capacity thus helping to ensure loan repayment.
CC14 recognises that charities may make investments that are not wholly financial or programme-related, combining some, but not all, of the objectives of both. The Commission calls this type “mixed motive investment”. CC14 gives some practical examples of mixed motive investments, and when these might be appropriate, but suggests that as this is a developing area, professional advice may be required on specific proposals.