Not many charities would think of investing their cash in an interest-free loan to a fruit company, so when the Ashden Trust did just that in 2004 (see box), it was one of the UK's few not-for-profit organisations to dabble in programme-related investment.
The Charity Commission defines programme-related investment as "primarily, if not exclusively, concerned with furthering the objects of a charity". Such investments, it says, are usually loans or loan guarantees to charities or social enterprises, or direct investment in the equity of a company whose activities contribute to the aims of the charity. Some forms of property purchase also count.
The primary purpose of PRI is social rather than financial gain and it is, in many cases, a way to recycle grant-making budgets. It should not, however, be confused with the ethical screening strategies applied to ordinary invested capital. An intellectual grey area exists where charities 'screen in' the stock market-listed shares of companies that complement their mission, or where they invest in the shares of companies of which they disapprove in order to influence them.
Greenpeace did this in 2000, buying shares in Shell so it could lobby the oil giant to set up a solar power division. Adrian Warburton, head of the environmental group's finance unit, says: "We are a campaigning organisation without an endowment. The only reason we take minor shareholdings is to attend AGMs." However, for the purposes of accounts filed with the Charity Commission, this still counts as ordinary, not programme-related, investment.
Charities are allowed to make PRIs from any resources available for application for the purposes of the charity. So income, reserves over and above those set out in the reserves policy and any expendable endowment can also be used; permanent endowments cannot, according to Charity Commission guidance from 2002. Nevertheless, according to a commission spokesman, it depends on the specific terms of each endowment. Given this uncertainty, the best advice is probably to consult a lawyer or the commission.
Loans are the most common form of PRI. David Carrington, a consultant specialising in PRI, says these are most commonly made out of distributable funds rather than capital. "One reason," he says, "is that not many operational charities have a significant endowment."
According to Carrington, the complexities involved mean that many foundations prefer to invest in an intermediary such as Charity Bank or a community development finance initiative rather than make loans directly. "They do not want to be the one that calls in the debt," he says.
Charities cannot issue shares, but social enterprises can; the purchase of equity in these businesses can be another form of PRI, albeit one that is risky and potentially illiquid.
There is, of course, nothing like bricks and mortar, and the Oxford-based Ethical Property Company, which provides premises for charities, has seen its shares (not listed on the stock exchange, but traded publicly via stockbroker Brewin Dolphin) snapped up by a number of trusts.
One of these is the £80m Rayne Foundation, which made an investment from its endowment in the second half of last year. Chief executive Tim Joss says: "We noticed the charities we support often have poor workspaces, so we decided to look into this. The Ethical Property Company's name came up several times, so we met managing director Jamie Hartzell. From there, we consulted our investment managers, Kaupthing Singer & Friedlander, and it carried out the purchase for us."
Shares in the Ethical Property Company are currently valued at £1.25 each and pay an annual dividend of 3.25p. That's not going to float the average City trader's boat but, as Joss says: "It is a return - and there's a significant social return too."
FOOD FOR THOUGHT
Established in 1990 by the Sainsbury family, the Ashden Trust makes grants from income generated by its £25.9m endowment. Since 2004, it has made a number of programme-related investments - not from income, explains grant executive Victoria Hornby, but directly from its expendable endowment.
Hornby says the most interesting was a £100,000 interest-free loan to fair trade company Tropical Wholefoods. In lieu of interest, Ashden took a 1 per cent equity stake, which it then gave to another beneficiary: the Ashden Awards for Sustainable Energy. The loan itself is repayable after five years.
The trust has now made six PRIs, with a total value of £270,000. It is unusual, however, in making loans directly to other organisations rather than through an intermediary. "We vet potential investments, then take independent advice from experts in small business support or other social investment banks and advisers," Hornby says. "We invest in fields we know well, so most problems wouldn't come as a surprise."
The trust did have to write off £45,000 when one beneficiary went into liquidation. But Hornby is sanguine about this, and about the possibility of having to foreclose on loans in future. "The benefit of using our endowment outweighs the threat of having to take difficult decisions," she says. "It's not so different from making hard choices about withdrawing grant funding from underperforming projects."