On 18 August 2021, the Charity Commission published a summary of responses to the consultation it held earlier in 2021 on revised draft guidance about charities adopting a ‘responsible’ or ‘ethical’ approach to investing charity funds. The revised guidance defines ‘responsible’ investment as investing in a way that reflects the charity’s purposes and values.
The consultation
The consultation published revised guidance on ‘responsible’ investment, with a number of supporting documents.
The consultation questions asked how clear the reader felt, after reading the draft guidance, about what a ‘responsible’ investment approach is and the duties and good practice that apply to decisions about a charity’s financial investments (whether or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). It also asked how confident the reader would be that adopting a responsible investment approach is a valid option.
The draft guidance also explained some situations where ‘extra rules’ apply before a responsible investment approach can be taken and the consultation asked if it was clear when these rules are relevant to the decision to take a responsible investment approach.
The consultation also questioned whether the phrase ‘responsible investment’ is an appropriate term for the approach to investing in line with a charity’s purpose and values.
The responses
The Commission received 211 responses to the consultation, 173 of which were from charities. The respondent charities ranged from large to small and held investment assets which vary considerably in size, complexity and the contribution to their charity’s financial position and delivery of purposes. 21 responses were from investment and legal advisers and 17 ‘other’ responses were received. The Commission also engaged with large investor foundation charities and the Association of Charitable Foundations, smaller charities and the Small Charities Coalition, as well as with HMRC and the Scottish Charity regulator OSCR.
The summary of responses suggests that, overall, respondents found the guidance revision to be a positive development. Generally, charity respondents were more positive about the proposed changes, while professional adviser respondents were more neutral or less favourable.
Terminology – ‘responsible investment’
Charity respondents were split on whether or not the term ‘responsible investment’ was helpful, while 95% of adviser responses commented that the term was unhelpful. This was in part because respondents found the Commission’s definition too narrow, as it did not encompass wider ESG (environmental, social and governance) factors. A ‘significant number’ of respondents also commented that the term is not helpful because it implies that other approaches are less responsible or not responsible.
Focus on financial return
A number of respondents, including a majority of adviser responses, found there to be an implication in the draft guidance that following a ‘responsible’ investment approach would generate lower investment returns. They found the guidance suggested that ‘responsible’ and ‘financial’ approaches were mutually exclusive and that trade-offs would be required in choosing a ‘responsible’ approach. Respondents commented that ‘responsible’ investments can match or outperform ‘traditional’ ones.
Duty to invest
The revised draft guidance presents a shift in emphasis by the Commission. It presents a more permissive approach to ‘responsible’ investment for most charities, and restricts the conditions set out in the current guidance (allowing ‘responsible’ investment where an investment conflicts with the aims of the charity, where the charity might lose supporters or beneficiaries if it does not invest responsibly / ethically or otherwise if there is no significant financial detriment from such an approach) to where there is a ‘duty to invest’, primarily for investment of permanent endowment. It is important, therefore, that charity trustees understand this distinction, so that they are clear when these ‘extra rules’ apply.
The summary of consultation responses reports that some charity respondents found the revised guidance relating to ‘duty to invest’ to be clearer and helpful in setting out a useful decision-making framework. A higher number of responses, and a significant proportion of adviser responses, found that section of the guidance to be problematic, with some citing possible confusion between terms such as ‘endowment’ and ‘permanent endowment’. It was also suggested that examples would be helpful.
A Commission role in encouraging responsible investment?
A significant minority of charity and adviser responses suggested that the draft guidance presented an opportunity for the Commission to do more to encourage charities to adopt a responsible investment approach.
Respondents suggested that charities should be required or expected to invest with reference to their objects, rather than given a choice, and that giving charities a choice is not forward-thinking and is out of step with other government developments around responsible investment. While some of these respondents called for the Commission to introduce an expectation or requirement for responsible investment, others suggested the Commission should encourage it.
A similar point was made in the House of Lords Second Reading Committee on the Charities Bill on 7 July 2021, where there was argument on one side for the Commission to do more to encourage ‘responsible’ investment while argument on the other raised concerns about any move to require charities to invest in this way, rather than leaving it to the trustees’ decision to do what is best for their charity.
Trustee expertise
A number of charity respondents noted their trustees’ reliance on their finance / investment committee and on professional advisers in making investment decisions. A lack of expertise among trustees in this area can make it difficult for them to judge how responsible investment principles were incorporated into a fund manager’s approach.
What happens next?
From the summary of responses, there will be some areas where we can expect the Commission to review and amend the draft guidance to respond to the feedback. However, although the response overall was pretty positive, it is likely to be some time before the guidance is finalised and published.
As reported previously, while the Commission’s consultation was ongoing, the court gave permission to two charities to bring proceedings seeking clarity about their powers to adopt ‘responsible’ investment policies which would allow them to exclude investments that are not aligned with those charities’ purposes. The Commission’s summary reports that the charities’ case will be heard in 2022 and confirms that, as ‘the court’s decision may affect our final guidance, we will not publish it until the court has given its judgement’. It adds that, following the court judgment, the Commission ‘will look again at whether further engagement is needed to help us to develop our published guidance’.
This means that, in the meantime, charities making investment decisions are aware that the Commission considers that its published guidance is too restrictive in relation to responsible investment, but there is no clear replacement guidance in place.
