Research and analysis

Charities and social investment: analysis of findings

Published 1 March 2013

Applies to England and Wales

1. About the research

Social investment is expanding rapidly. As regulator of charities in England and Wales, the Charity Commission neither encourages nor discourages charities to enter into this market. Its focus instead is on ensuring that trustees are able to confidently make decisions about social investment in the best interests of their charities.

In 2011 the commission updated its guidance ‘Charities and investment matters (CC14). Having done so, it wanted to explore in more detail the issues that social investment presents for charity trustees and charity regulation. It therefore commissioned the Institute for Voluntary Action Research (IVAR) to deliver a research project.

The purpose of the research was to learn more about charities’ experiences and the regulatory issues emerging from them, and to do so by exploring the challenges, risks and opportunities facing charities in the field of social investment.

The Commission welcomes the research findings, and provides this initial analysis as part of its on-going work to protect the public’s interest in the integrity of charity, and to ensure that charities focus on the charitable purposes for which they were established.

2. Social investment needs to be more clearly understood by charity trustees

The evidence provided by this report suggests that charities involved with social investment are sometimes unclear about exactly what is available in this field and what social investment means for them.

This is particularly true of charities in receipt of social investment (charity investees). Trustees must be able to make informed and independent decisions about any investment they are involved with, either as investees or as investors. Therefore it is vital that trustees make every effort to get to grips with a particular investment before embarking on it: this includes seeking external help and expertise if they need to.

Charity trustees will be assisted in this if intermediaries, investors and other social investment specialists are also doing all they can to explain their products in a clear, transparent and accessible manner.

3. Charity trustees need to highlight the unique nature of charitable status

The Charity Commission notes that some of the research participants, particularly those involved in facilitating the development of the social investment market, demonstrated little awareness of the significance of charitable status.

Therefore, it is all the more important that charity trustees make sure that the intermediaries and partners they work with are aware of their organisational status as a charity which exists for the public benefit, and the legal and regulatory framework within which they operate.

They may wish to point out:

• If making a programme related investment, charity trustees must ensure that the investment directly furthers the charity’s aims
• Any private benefit arising from charitable investment must be carefully considered and assessed by trustees
• Charities cannot distribute profits and there are strict rules surrounding the payment of interest on share capital.

This is not to suggest that charities face unnecessary restrictions when it comes to making choices about investment options. On the contrary, some trustees of investment charities might be surprised by the wide range of options available to them, as well as the overall permissiveness of the commission’s guidance.

But it is important to remember that the core characteristics of charitable status must not be overlooked when it comes to investment, social or otherwise. By explaining this to investors and intermediaries, charity trustees will help to prevent their organisations from becoming involved in inappropriate investments.

4. Charities should take note of the success factors and be mindful of the risks

Charities that are considering entering the field of social investment, or have already done so, will find that this report provides a wealth of useful information. The factors that led to success for those in receipt of investment may be of particular interest. An engaged board, a properly researched business plan and a clear vision and strategy for what the investment will achieve were all seen as providing a solid foundation for receiving investment.

Collaboration within and across sectors is also a key ingredient. As with charity governance and management generally, peer learning and networking will help trustees get to grips with the issues and challenges that social investment presents.

But the most crucial relationship is that between investor and investee. Both sides must be clear on their motivations for entering the investment and the research findings show that a shared sense of mission is vital. The evidence suggests that if investees and investors start discussions early, work closely together and share the same goals they are more likely to achieve a positive result from the investment.

The primary risk identified by investors was, unsurprisingly, that of the investment failing, incurring not only a financial loss but also damage to their reputation. Doubts were also raised about the relative effectiveness of social investment, compared to conventional investments where the revenue generated might be spent on making grants.

Some of the research participants felt that the trustee boards of charity investees were nervous about, and wary of, taking on investments. However, as one participant remarked, this nervousness ensured that the trustees conducted research and properly assessed the risks, and only then did they feel able to make an informed decision. The Charity Commission is encouraged by these examples of trustees seeking to make informed, evidence-based decisions.

Alongside this positive evidence of trustees assessing risks at the outset, the research also showed that some of the social investment intermediary organisations saw charity trustees’ caution as indicative of a lack of interest in delivering a greater social impact. Whilst this is perhaps a little unfair, striking the right balance is a crucial challenge for all charity boards: there is a fine line between being overly risk averse and making decisions that aren’t adequately considered or planned.

The research found that some investee charities, when analysing the costs and benefits, had sought advice from investment intermediaries whose primary focus is to develop particular models and products. However, in the interests of independent decision making by charity trustees, the Charity Commission would suggest that trustees consider seeking out independent investment advice in addition to this if possible.

5. Implications for public trust and confidence in charities

The Charity Commission’s core role is to protect the public’s interest in the integrity of charity. It is reassuring to see that the charity participants in this research were mindful of the need to safeguard public confidence in charities. In the wake of the global banking crisis, it is more important than ever that charities are able to explain their decisions whilst exercising financial prudence. Above all, charities must clearly and transparently communicate how an investment enables them to further their charitable purposes.

Finally, the research found that charities themselves are often unaccustomed to approaches that link social outcomes with financial returns. In that sense, social investment represents something of a culture shift for those involved with the charity sector, as well as the wider public. As regulator, the commission asks trustees to be alive to public perception and think about their charity’s reputation when making investment decisions. By taking considered, informed decisions which weigh up all the factors, including public perception and reputational risks, charities are better placed to succeed in social investment.

6. Feedback on the commission’s investment guidance is welcome

This research report contains some interesting and constructive feedback on the commission’s investment guidance. The commission is pleased to see the evidence showing that, in general, the guidance has improved understanding on the part of charity investors. However, more work is needed to raise awareness of it outside the South-East of England and particularly in Wales.

Several participants reported that the commission’s guidance on mixed motive investment is not especially relevant to them, and that the guidance on programme related investment was clearer and more appropriate.

The Commission accepts that making a mixed motive investment might appear complex. Mixed motive investment has a dual purpose and therefore cannot be entirely justified either on programme related or financial grounds alone. Ultimately, charity trustees must find an investment model which serves the best interests of the charity and with which they feel comfortable.

Although it has no immediate plans to make major revisions to its investment guidance at this stage, these comments will be considered again by the Commission when it comes to reviewing the guidance in full later on.

The commission recommends that all charity trustees currently engaged in or considering social investment, either as investee or investor, read the full research report, together with the commission’s guidance, Charities and investment matters: a guide for trustees (CC14).