Social Investment by Charities

Social Investment by Charities
by Pauline Hinchion
August 2014


During the summer months, the Law Commission (England and Wales) consulted on the issue of ‘Social Investment by Charities’.  The consultation was brought forward after the Office for Civil Society indicated that the issue of Social Investment and barriers to it was a priority for them.  The Law Commission invited interested parties to respond to concerns that the current legal framework is confused about the exact powers and duties of charity trustees in relation to Social Investment.


Whilst acknowledging many charities have governing documents with a clause that already allows them to undertake Social Investment, the Law Commission believes there is still a lot of ambiguity and uncertainty about what Charitable Trustees can and cannot do in relation to the relatively new field of Social Investment.


The Law Commission defines Social Investment as ‘any use of funds from which a charity seeks to achieve both its charitable objectives and a financial benefit’


The Law Commission proposals are twofold.  The first one involves the introduction of a new statutory power that would confer on charitable trustees the power to make Social Investments. This power would be a default power that applies to all charities unless it is expressly excluded or modified by a charity’s governing documents.  Secondly, it is proposed that this new power should be accompanied by a non-exhaustive list of factors that would guide charitable trustees when making Social Investments.


Interestingly, the Law Commission considers that the existing laws governing charities operating ‘Permanent Endowments’ does not prevent trustees from making Social Investments.  The Law Commission cites the example where the permanent endowment is used to make a Social Investment which itself furthers the charity’s objectives rather than generating money to then be used to further the charity’s purpose. (See example A below)


Although it will be later on in the year before the result of the Law Commission’s consultation is made available, this is a very interesting development as it will clarify for charitable trustees the law governing how they use their money to meet their objectives.  In particular, it will permit a charity to use its own money to meet its charitable purpose directly through the provision of services and indirectly by investing its money in other charities that seek to achieve the same social objectives. 


This is not dissimilar to the aspirations of the Scottish Community Reinvestment Trust (SCRT) which seeks to encourage all Third Sector organisations to use a percentage of their reserves to invest in other Third Sector organisations thereby aggregating both the individual social impact and the collective social impact of the Sector.


Those who have worked for a long time in the third sector are well aware that external advisors – i.e lawyers, accountants etc – can put pressure on Trustees to prioritise their fiduciary responsibility often at the expense of their social ethos. Therefore, if these proposals strengthen the confidence of Trustees to adopt a more balanced view of their role in meeting their charitable objectives then they are to be welcomed.


In Scotland, neither OSCR nor the Scottish Law Commission are considering this issue presently and have no plans to do so in the near future.   When charities seek OSCR advice on Social Investing, they are referred to the Charity Commission’s 2011 Report “Charities and Investment Matters: A Guide for Trustees” as representing the views and advice of OSCR.


Example A

A charity has a Permanent Endowment of £100k invested in traditional investments, offering an anticipated income of 3% pa. This would result in an income of £3k to be spent on its charitable objective(s).  The charity may instead prefer to use the £100k to a make a Social Investment that might only generate 0.5% pa, resulting in an income of £500 to be spent on its charitable objectives. Although at first glance it looks like the Permanent Endowment has generated less income, the loss of the potential £2.5k is justified by the mission impact achieved by the Social Investment.  The £2.5k has effectively been spent on the charities objectives but it has cut out the Income Generation middle step.


Charity Commission Report – ‘Charities and Investment Matters: A Guide for Trustees’ (Oct 2011)


Law Commission Consultation on Social Investments by Charities – Executive Summary (April 2014)