For several years charities have wanted the guidance amended to make it clearer that they are allowed to make social investments that further the charity’s objects but bring a risk of a below-market return.
They also wanted greater clarity about "mixed motive" investments, where the investment can be justified partly on financial grounds and partly on the grounds that it furthers the charity’s aims.
Draft guidance released in February was criticised for adding to the uncertainty about what was permitted and creating more rules, rather than simplifying matters.
Luke Fletcher, a solicitor at Bates Wells and Braithwaite, said the guidance published yesterday provided much greater clarity.
"We feel this will give charities the confidence to get involved in social investment," he said. "It formally recognises social investment for the first time. It will allow charities to accept a discount on financial return if it supports the charity’s purposes to a sufficient degree."
James Perry, chief executive of Panahpur, the first charity to put all of its money into social investment, said the new guidance was a great step forward.
"This is brilliant news," he said. "It’s much more sensible guidance and we’re going to get much more clarity."
The new guidance states explicitly on its first page that social investment is an acceptable approach.
"Charities are increasingly interested in how they can invest to directly further their aims as well as achieve a financial return," it says. "In this guidance, we refer to this as ‘programme related investment’.
"Charities can make ‘mixed motive investments’ if their trustees decide that this is in the charity's best interests.
"These are all valid investment approaches for charities, although different considerations and legal duties apply."
It also says that charities can choose to limit their investments in stock markets on ethical grounds, although they must be clear that the reasons for doing so benefit their charity.