There is an opportunity for the UK to become the world centre of excellence in the increasingly important area of social investment by establishing a comprehensive and effective regulatory system, Lord Hodgson says in his review of the Charities Act 2006.
Social investment was unheard of until 2005 but is increasing rapidly round the world, he says. This country has led the "intellectual heavy lifting" and the challenge is now to move to implementation with a more permissive legal environment.
At present, investment is interpreted as an outlay intended to generate a financial return, the review says, and if an outlay is primarily intended to produce a social benefit it tends to count as part of a charity’s spending on achieving its purposes.
"There is no clear legal basis for investments of this type, causing nervousness among trustees and their advisers," says Hodgson. "This lack of clarity extends further, into the accounting and reporting processes that underpin investment.
"In this situation, social investment will always be the difficult option, discouraging those with a flicker of interest from pursuing the project further and presenting serious barriers to even the highly committed."
The review says the Trustee Act 2000 should be amended to entitle trustees to consider the totality of the benefit an investment is expected to provide, including both financial and social benefit.
An amendment should also be considered to draw attention to the difference between the responsibilities of charitable trusts and those of private trusts, in that charities need to further their charitable purposes rather than simply preserve capital.
The review says the government should consider a legal power for charities with permanent endowments to consider placing them in mixed purpose investments, with a requirement to restore capital levels within a reasonable period.
It also says the government should develop a standard social investment vehicle to allow funding from different sources to be invested, and maintained separately, in the same product.
The Statement of Recommended Practice from the Charity Commission should be revised to facilitate reporting of social investments and professional accounting bodies should identify a standard system for valuing social investments, the review says.
Charities should be able to apply to HM Revenue and Customs for prior clearance on tax treatment before making a social investment, and HMRC should, as the market matures, provide clear guidance on the different types of social investment.
There should also be statutory and regulatory underpinning of social investment, and the Financial Services Authority should establish a specialist unit to deal with the challenges of social investment.