30: When can charities take a responsible investment approach?

On 8 April 2021, the Charity Commission launched a consultation to update its investment guidance CC14 in respect of ‘responsible investment’, ie making financial investments in ways that align with a charity’s purpose and values (sometimes called ethical investment). The draft update sets out a change in approach, in most cases removing a number of conditions for taking a responsible investment approach.

Background to the new consultation

The consultation follows a previous informal consultation and listening exercise in 2020 from which the Commission concluded that its current guidance could be perceived as a barrier that may deter trustees from making ‘responsible’ investments. It was suggested that this may be where trustees might feel that their overriding duty is to maximise financial returns, regardless of other considerations, or because they derive insufficient assurance from the guidance that taking a responsible investment approach may be appropriate and in line with their duties.

The new draft guidance

To address these concerns, the Commission has redrafted the opening section of the CC14 guidance to include an explanation of trustees’ ability to adopt a ‘responsible’ investment approach. The aim is to enable trustees to have greater confidence in the discretion they have in deciding whether or not to adopt a responsible investment approach and greater clarity about their duties when making financial investments.

The Commission is clear however that it is not expressing a view on what approach is preferable – that will be for the trustees to determine according to the circumstances of their charity. In updating its guidance, the Commission is ‘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’. The Commission is also concerned to make clear that trustees have wide discretion ‘and may prefer to focus on financial return and choose not to use a responsible investment approach’.

From an initial review of the new draft sections, there is a significant shift in emphasis in terms of the principles to apply when deciding whether to adopt a responsible approach. As the Commission notes in the regulatory impact assessment it has published with the consultation, the draft guidance reflects ‘a reduction in the conditions these charities have to satisfy before they take a responsible investment approach’. In particular:

• the current guidance applies principles from the leading case law (permitting responsible / ethical investment where a particular investment conflicts with the aims of the charity, where the charity might lose supporters or beneficiaries if it does not invest ethically or otherwise if there is no significant financial detriment) to charities generally; and
• the new draft confines those principles to particular situations (such as investing permanent endowment) and sets out more general principles on investing in the best interests of the charity.

The consultation exercise

The Commission has published a number of documents as part of the consultation exercise:

• the proposed new section of CC14 on responsible investment;
• a list of proposed changes to the current CC14 guidance;
• a full version of CC14 with the proposed changes included;
• a draft legal underpinning document, updated to reflect the Commission’s approach to responsible investment; and
• a regulatory impact assessment.

In due course, the Commission plans to update the rest of its CC14 guidance, but for now the consultation is only seeking views on the redrafted section.

There are 6 consultation questions which ask about:

• whether the guidance is clear about the duties and good practice that apply to decisions about a charity’s financial investments, whether or not the charity adopts a responsible investment approach;
• whether the guidance is clear about what a responsible investment approach is;
• whether the phrase ‘responsible investment’ is an appropriate term for the approach to investing in line with a charity’s purpose and values;
• how confident you would be, as a result of reading the draft guidance, that adopting a responsible investment approach is a valid option;
• whether the guidance is clear about the situations where the additional principles identified above apply; and
• any other comments on the draft guidance.

Although the Commission’s regulatory impact assessment estimates that 85,310 charities will potentially be affected by the updated guidance, it anticipates that, as might be expected, the consultation will be of most interest and relevance to those charities which have larger or more sophisticated investments and those which are more dependent on investment income for their revenue (estimated at less than 13,000 charities).

The consultation is open until 20 May 2021 and responses can be made online.