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This publication is available at https://www.gov.uk/government/publications/charities-and-investment-matters-a-guide-for-trustees-cc14/charities-and-investment-matters-interim-guidance
1. Social investment
The Charities (Protection and Social Investment) Act 2016 (’the 2016 Act’) introduces a new statutory power for charities to make social investments. This came into force on 31 July 2016.
This interim guidance is part of the commission’s guidance Charities and investment matters: a guide for trustees (CC14) and has been issued to let trustees and their professional advisors know that the statutory power is now in force and to describe in general terms the considerations for trustees when making social investment decisions. It will be reviewed in 2017. The existence of the power and its practical application for charities will be one of the issues the commission will consider as part of a future review of its investment guidance.
2. What is a ‘social investment’?
In the legislation, a ‘social investment’ means a ‘relevant act’ of a charity which is carried out ‘with a view to both directly furthering the charity’s purposes and achieving a financial return for the charity’. In this interim guidance, the term ‘social investment’ has the same meaning as it has in the 2016 Act.
A ‘relevant act’ means one of two things:
- an application or use of funds or other property by the charity; or
- taking on a commitment in relation to a liability of another person which puts the charity’s funds or other property at risk of being applied or used, such as a guarantee
In this context, an application or use of funds or other property achieves a ‘financial return’ if its outcome is better for the charity in financial terms than expending the whole of the funds or other property in question and this interim guidance generally uses the term in this way. However, the concept of ‘financial return’ differs slightly when taking on a commitment in relation to a liability of another person and this is discussed in section 8.
It is important to remember that whether or not a social investment is being made is determined by the motivation of the charity – if the reasons for applying funds in a particular way include both directly furthering the charity’s purposes and making a financial return then the proposed action will be a social investment. The definition is wide and may include some actions which would not ordinarily be thought of as investments.
In view of this, charities should consider which (if any) activities of their charity fall within the definition of ‘social investment’. This is because trustees have specific legal duties which apply when making social investment decisions and they should be able to show that they have made these decisions in good faith.
The new power does not change the fact that a charity must only act to pursue its own charitable purposes (except where it is investing funds to produce a financial return for the charity). The power allows charities to make what the commission describe as a ‘mixed motive investment’ in section 11 of Charities and investments (CC14), and programme related investment where the motivation for making that investment includes obtaining a financial return as defined in the new Act. In many cases, social investments may be things which a charity could have done before the introduction of the new power.
3. What is not a social investment?
A financial investment, as that term is used elsewhere in the commission’s investment guidance (CC14), will not be a social investment. A financial investment is an investment made solely for the purpose of achieving a financial return for the charity.
A programme related investment (PRI) will not be a social investment unless the financial return to the charity forms part of the motivation for the charity making the decision to carry out the relevant act.
4. Can all charities use this new statutory power?
Most charities have power to make social investments. This is a new power set out in legislation, meaning that, in many cases, the law gives this power to charities without the trustees needing to change anything.
It is important to note that the statutory power can be restricted by a charity’s governing document, so it will still be necessary to check a charity’s governing document before making any investment to ensure that the charity has the necessary power. If trustees are in any doubt about their charity’s powers then they should take specialist legal advice. If trustees would like to amend their charity’s governing document, they should refer to the commission’s guidance How to make changes to your charity’s governing document.
The new power does not apply to charities established by, or whose purposes and functions are set out in, legislation, or charities established by Royal Charter. These charities will need to continue to rely on their existing constitutional powers, which will not be affected by this new legislation.
5. The trustees’ general duties
The new legislation does not alter or override trustees’ general duties, and these duties apply to any decision regarding social investments.
These include duties to:
- act in your charity’s best interests
- manage your charity’s resources responsibly
- act with reasonable care and skill
When making decisions, trustees must (amongst other things):
- act in good faith and only in the interests of their charity
- make sure they are sufficiently informed
- take account of all relevant factors
- ignore any irrelevant factors
- make decisions that are within the range of decisions that a reasonable trustee body could make
When deciding if the making of a particular social investment is in the charity’s interests, trustees should consider the following matters before proceeding:
- the duration of the social investment and how (and when) funds might be withdrawn
- the risks of the social investment failing to deliver, or under-performing in the delivery of, the expected mission benefit and financial return
- how the performance of the social investment will be measured, assessed and monitored
- the relationship between the social investment and the charity’s overall investment portfolio (if any) and its spending or grant-making policies
- the tax treatment of the social investment
- the expected financial return and the expected benefit to the furthering of the charity’s purposes, from the investment, and
- the likely cost of making the investment (in terms of any foregone financial return and/or any foregone benefit to the furthering of the charity’s purposes)
Trustees are not required to attach a precise monetary value to either the expected financial return or the expected benefit to the furthering of the charity’s purposes as part of that assessment (although they may choose to do so), but we would not expect trustees to authorise a social investment without having assured themselves that the level of financial return and the benefit to the furthering of the charity’s purposes which will be obtained by the charity will, taken together, be in the charity’s interests.
6. What statutory duties does the 2016 Act impose in respect of social investments?
The 2016 Act imposes on trustees some new duties that specifically apply to all charity trustees when making decisions about social investments. These duties apply in place of statutory duties which relate specifically to financial investments.
These new duties mean that, before exercising any power to make social investments, trustees must:
- consider whether in all the circumstances any advice about the proposed social investment ought to be obtained;
- obtain and consider any advice which they conclude ought to be obtained; and
- satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect it to achieve for the charity, by directly furthering the charity’s purposes and achieving a financial return
Depending on the context, a range of advice might be required. This could include advice on legal, financial, accounting or other aspects of the proposed action. The advice does not have to be provided by professional third parties, and could be provided by a charity’s staff or volunteers. Advice should be given by someone who is reasonably believed by the trustees to be competent to give the necessary advice.
Trustees must make these decisions reasonably, considering all relevant factors.
It is the trustees themselves who must comply with these duties in their decision making. The legislation does not allow for compliance with these duties to be delegated. This does not mean that the trustees must take all of the actions necessary to enable compliance with the duties – for example, trustees might delegate to an officer of the charity the task of finding an appropriate person to give the advice, briefing that person and then reviewing and presenting the advice to the trustees – but it is the trustees who must make the decisions required by these duties.
This does not necessarily mean that the trustees of a charity must personally consider every proposed act of the charity which might amount to making a social investment – but they must take the required steps before they (the trustees) exercise any power to make social investments. For example, if the trustees of a charity are asked to approve a programme of transactions where each one would be social investment, with the intention that the charity’s officers then implement this programme, then it is the approval of the programme, and the delegation of authority to officers, which would be the exercise of the trustees’ power.
Trustees must also review their charity’s social investments from time to time. There is no specific period of time after which a review should be carried out, and the appropriate amount of time will vary depending on the circumstances applying to a particular charity. This should be decided by the trustees in each case.
When reviewing social investments, trustees must:
- consider whether any advice about the social investments (or any particular social investment) ought to be obtained; and
- obtain and consider any advice they conclude ought to be obtained
These duties apply whenever trustees do anything which meets the definition of social investment, whether or not they are using the statutory power. This means that trustees must always consider whether or not a particular action might constitute the making of a social investment, and comply with the duties if they decide that it does.
7. Can trustees use a charity’s permanent endowment to make social investments?
The statutory power only allows a social investment to be made using assets which are held as permanent endowment, or the giving of a guarantee which would put permanent endowment assets at risk, where the trustees of a charity expect that the making of the social investment will not contravene any restriction with respect to expenditure that applies to the permanent endowment in question.
This means that trustees of charities with permanent endowment will need to ensure that they understand the restrictions which apply to its expenditure before making social investment decisions regarding it. Trustees may need to seek professional advice on this subject.
The new power does not override any existing restrictions on the use of permanent endowment, and these will need to be observed in any event.
Where the trustees conclude that they expect that restrictions will not be contravened, this expectation should be reasonable, and should be determined based on a consideration of all of the available evidence, including professional advice if required.
Find out more about Permanent endowment: rules for charities
The definition of an act which can be a social investment includes the taking on of a commitment in relation to the liability of another person. In this interim guidance, for ease of reference, we have referred to this type of commitment as a ‘guarantee’, although there are other types of such commitments. A person who gives a guarantee (in other words, agrees to take on a commitment) is referred to as a ‘guarantor’. There are a range of situations in which this type of commitment might be taken on.
The giving of guarantees needs to be approached with caution. Giving a guarantee means agreeing to be responsible for paying costs or liabilities which would otherwise be paid by someone else. An example would be agreeing to pay a tenant’s rent to a landlord if the tenant does not pay it, or agreeing to repay a loan to a bank if the borrower does not keep up their repayments. Depending on the terms of the guarantee, the costs which a guarantor might be required to pay may be unpredictable. For example, a guarantee given to a landlord might include the guarantor being required to compensate the landlord for breaches of the tenancy agreement by the tenant.
If a charity is asked to give a guarantee, the trustees will need to consider carefully whether they have the power to give it. The power to make social investments includes a power to give guarantees if they meet the definition.
It is important to remember that, in order for a guarantee to be a social investment, it must be made both with a view to directly furthering the charity’s purposes and achieving a financial return.
The legislation says that a guarantee is regarded as ‘achieving a financial return’ if it is not called upon, or if it is called upon without resulting in the expenditure of the whole of the funds or other property put at risk. This means that, in order for a guarantee to be a social investment it does not need to result in any money coming back to the charity (whereas other forms of social investment do).
As referred to earlier in this interim guidance, trustees must continue to comply with all of their general duties when exercising any power to make social investments. This includes making decisions in the best interests of the charity, and not putting their charity’s assets at undue risk.
Where a charity has the power to give a guarantee as a social investment, it is important to remember that part of the reason for giving the guarantee must be directly furthering the charity’s purposes. That means that the giving of the guarantee itself must be intended to further the purposes of the charity. For example, a homelessness charity might give a guarantee to a landlord in respect of a tenant’s payment of rent on the basis that, in the absence of that guarantee, the tenant would be unable to find accommodation.
9. Private benefit
Trustees must ensure that any private benefit which arises from the actions of their charity is: * necessary in the circumstances * reasonable in amount * in the interests of the charity. This must be considered in relation to any proposed social investment
Find out more about Public benefit: rules for charities