New guidance allows for broader strategies

An update to guidance for charities on investment has introduced advice to protect them from the risks of the current economic crisis - but also relaxes the rules on social investment. Mathew Little reports

Investment: New advice is more permissive
Investment: New advice is more permissive

The investment world has changed significantly over the past few years as the global economic crisis has taken hold. The Charity Commission's CC14 guidance on investment, published last October to replace the earlier version from 2003, reflects this changed climate.

It says that the purpose of financial investment is to seek the best returns "within the level of risk considered to be acceptable" - a new condition.

There are sections on how to manage the risk that banks or investment managers might default on their contractual obligations. Trustees are advised, with the aftermath of the Icelandic banking collapse in mind, to consider investing only in markets that are substantially regulated and have compensation schemes in place.

Otherwise, the new CC14 is a lot more permissive. Investing in commodities is given the green light, whereas previously it was not considered an allowable asset class. Investing in hedge funds and private equity is explicitly permitted. A total return approach to investing - receiving the benefit from dividends and increased capital - is discussed with approval.

Kate Rogers, client director at the investment management firm Schroders, says: "The tone is more flexible, emphasising that trustees, if they have considered all the issues and taken advice, shouldn't be criticised for the decisions they have made.

"The guidance talks in much more balanced terms about the types of instruments that charities can use. Previously, the wording was quite negative on some of the alternatives."

But the ground-breaking change in the new CC14 is in its definitions of investment. The core description of financial investment - investing, with conditions, to achieve the best financial return in order to indirectly further a charity's aims - is supplemented by programme-related investment and mixed-motive investment, both ways to directly advance a charity's objects.

Programme-related investment - using a charity's assets to further its aims in a way that may or may not produce some financial return, by, for example, making grants or investing in a social enterprise - is included in CC14 for the first time. Before now it was not considered to be investment at all and was analysed in a separate commission publication.

Mixed-motive investment - investment that encompasses both the desire to make a financial return and further a charity's aims - is also accepted by the commission for the first time, ending doubt as to whether it was legally permissible. Together, PRI and mixed-motive investment have become known as "social investment".

"This automatically makes it more mainstream," says Rogers. "Whether it is actually a mainstream investment approach yet remains to be seen."

Tom Murdoch (pictured), an associate at the solicitors Stone King, commends the new CC14 as "enormously better" for havingTom Murdoch greatly broadened the scope of possible investment. "The previous CC14 was restrictive in the type of investments that could be made," he says. "It was greatly out of date and needed substantial revision to allow for the broad range of investments that are now envisaged in the new guidance."

The previously restrictive CC14 was limited to validating financial investments that gave the best return and a form of financial investment - ethical investment - that permitted charities not to invest in companies that conflicted with their aims.

For example, the British Lung Foundation would have been permitted not to invest in British American Tobacco.

Les Jones, treasurer of the Wildfowl and Wetlands Trust and ex-finance director of WWF UK, says the commission has been quite conservative in the past about investment but has now changed definitively. "If you go back far enough, beyond the last two versions of CC14, the commission didn't seem much interested in ethical investment," he says.

The commission gradually became far more positive about ethical investment, he says. Now most large charities have ethical investment policies. With the emerging social investment market, the Charity Commission has made its pitch earlier. "They have come out very positively at a fairly early stage of these things," says Jones.

Some in the sector believe that CC14 will provide social investment with a much-needed boost. Murdoch gives the hypothetical example of a grant-making trust that will be able, under the guidance, to use its capital more creatively than just investing it in the traditional manner. "Capital can be used as an investment in a way that provides both a financial and charitable or ethical return," he says. "Charities can therefore invest in social enterprises and even in other charities."

Whether, in the coming years, social investment burgeons as a way for charities to use their money remains to be seen. But if it doesn't, it will not be because of official disapproval.

Rogers say that the new CC14 isn't revolutionary, but she hopes trustees will feel empowered by the choices it offers. "I hope they feel they can consider social investment as well as financial investment," she says. "Or different ways of fulfilling their charitable aims, not just the typical and traditional."

- Read our interview with the head of Panahpur, James Perry

- See our article on how ethical investment has grown

- Check out our case study about the Esmee Fairbairn Foundation's investment strategy

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