Seb Elsworth: Revised guidance for responsible investing leaves questions unanswered

A lack of new case law leaves the regulator making the best of a difficult situation

Earlier this month, the Charity Commission began a consultation on a draft set of guidance on how charities should invest.

The particular focus of the commission is on updating the guidance on “responsible” or “ethical” investment to give trustees more confidence in making decisions about managing their investments in line with their organisation’s purpose and values.

This is an important area for charity trustees. Not only is there significant potential reputational risk in holding investments that run contrary to your mission (as Comic Relief and the Church of England have found out); the opportunity to be able to contribute positively to your mission through how you allocate your charity’s capital can be substantial, as outlined in ACF’s Stronger Foundations paper.

This could be through an environmental charity investing in green energy projects, or using networks such as Share Action to encourage some of the biggest companies in the world to change their practice.

However, the extent to which trustees are able to make responsible investment decisions, and not simply pursue the maximum risk-adjusted financial return, has been unclear for some time.

Last year, the commission undertook a listening exercise on the issue and identified both technical and practical barriers to trustees being able to make responsible investments.

In terms of technical barriers, feedback to the commission highlighted that the legal framework itself was an issue.

There are different interpretations and the case law is outdated and does not reflect modern investment practice or the public’s expectations of how charities should behave in the 21st century.

The current guidance (CC14) was also criticised for not giving trustees sufficient confidence that responsible investment is something they can undertake.

My organisation, Access, is one of a significant number of charities that have been saying for some time the lack of clarity in the underlying law is a problem, and that the law itself needs to be clarified.

At the moment, the current case law (and the basis for the guidance in CC14) is from a key case dating back all the way to 1991 (commonly known as the Bishop of Oxford case) – a time before climate change was a major investment or public policy debate, for example.

The Charity Commission’s job is to give guidance to charities and their trustees and it does not have the power to change the law or the legal authorities.

So, can redrafting the guidance be sufficient to provide the clarity trustees need when making decisions about responsible investing, if the law itself is opaque?

Strangely, the commission is only consulting on the first sections of the guidance and not the whole document, which it says it will rewrite completely at some point in the future, so it is hard to form a view of the draft guidance in terms of giving trustees confidence to invest responsibly.

The draft language does seem to be more enabling. It talks of trustees being able to “decide that rather than just focusing on the financial return on an investment, your approach will also take into account your charity’s purposes and values”.

The guidance goes on to say: “All charities can take this approach, and some already do – trustees have a wide discretion.”

It also cites some specific examples of the sorts of responsible investments that charities might choose to make, helping the guidance to feel more tangible.

One of these is of a heritage charity avoiding investments in fossil fuels because the trustees have evidence that this would damage its reputation, reduce donations and not be in the charity’s best interests.

This is a helpfully broad definition of how responsible investment could fit with a charity’s mission. However, it is not clear what bar the required “evidence” would have to meet for the trustees to feel they were legally protected in making this kind of decision – the guidance lacks specificity and feels quite vague.

In defining responsible investment, the new draft guidance also seems to implicitly suggest that it is fine for charities to engage in irresponsible investment, essentially where trustees don’t take account of their purpose and values in making investment decisions.

Given the commission aims to promote trust and confidence in charities generally, it seems odd that charity trustees would have carte blanche to ignore the charity’s purpose and values when investing.

Furthermore, the new guidance rests on a legal interpretation (published by the commission) of the Bishop of Oxford case being relevant only to permanently endowed charities, or where there is a “duty to invest”.

This seems to be a completely new interpretation and so trustees will need to understand whether there are additional requirements that might apply to their charity if they meet these criteria.

So all in all, while its tone is more enabling, the new draft guidance will still leave serious questions unanswered for trustees.

I can’t help feel that the commission is trying to make the best of a difficult situation, given the case law is so old. Ideally, a new case would clarify the underlying law.

The commission’s consultation is open until 20 May.

Seb Elsworth is chief executive of Access, a foundation that helps widen access to social investment for charities and social enterprises

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