ACF responds to Charity Commission call for views on investments
ACF has today submitted evidence to the Charity Commission’s call for views on charity investments.
The call for views, which closes on 31 March 2020, asked about experiences and current considerations around responsible investments, what are the barriers to more widespread responsible investment, and what more could be done to support trustees to invest in a way that reflects the charity’s purpose and values.
The key message from ACF is that charitable foundations should seek to do good as well as achieve an income from their investments, that the rules already allow for this, and that many are already doing it. But there is confusion within the charity sector about what is allowed, and the Commission should clarify this to enable a permissive environment for trustees.
Max Rutherford, Head of Policy at the Association of Charitable Foundations, said:
“Charitable foundations wanting to pursue stronger practice are likely to go beyond being ‘intentional’ when it comes to their investments. They will also be able to demonstrate how they invest in line with their values – and indeed go further by leading or supporting investment strategies taking aim at some of our most pressing systemic challenges. Current rules already allow for this, and many foundations are moving at speed in this direction. There is no evidence that responsible and mission-aligned investing has a negative impact on returns, and good evidence to the contrary. At a bare minimum, it is highly viable to avoid investments in harm-causing industries and still maintain a healthy capital and revenue.”
“When it comes to charity investments, many discussions and debates are framed around a false premise that trustees have a duty to maximise financial return. In fact trustees are already expected to take account of environmental and social impacts of particular investments, and consider their charitable purposes and mission in their investment strategy. We call on the Charity Commission to clarify existing guidance and provide a statement to remove uncertainty. Ultimately, in order for the Commission to achieve guidance for charities on investing that is clear, permissive and future-facing, CC14 may need to be rewritten.”
Summary of ACF's submission (full response here):
What is the direction of travel?
Driven by the climate crisis and the desire to take account of diverse views in decision-making, there is a clear direction of travel for the foundation sector away from purely financial return towards more intentional, impact-positive, mission-aligned investment approaches.
Despite this direction of travel, most foundations in the UK and elsewhere remain invested in a way that primarily or solely focuses on financial return. Investments are generally considered the means to a charitable end, thereby differentiating some of the money (investments) from the ‘mission’ (usually in the form of grant-making).
However, a growing proportion of foundations are reframing their investments as a core part of their mission –not separating one part of the charity’s resources from another but seeing all their resources as part of the charity’s toolbox to pursue positive impact.
What are the barriers?
There are many reasons given as to why some charitable foundations have not yet moved towards a ‘responsible’ approach to investment. All of them should be possible to overcome with clarity about the permissive nature of existing guidance and the right support.
Concern about financial impact: There is no evidence that responsible and mission-aligned investing has a negative impact on returns, and good evidence to the contrary. At a bare minimum, it is highly viable to avoid investments in harm-causing industries and still maintain a healthy capital and revenue
Confusion about trustee duties: There exists in the charity sector something of a false premise when it comes to charity investments, where discussions and debates are framed around an unfounded view that trustees have a duty to maximise financial return. Our reading of charity guidance is this is not the case, but rather it is the case that trustees are expected to take account of environmental and social impacts of particular investments, and consider their charitable purposes and mission in their investment strategy. Early on in the Charity Commission’s blog, it states that: “Trustees have a duty to maximise the financial returns generated from the way in which they invest their charity’s assets”. This assertion (which is sometimes expressed in parts of the foundation sector and beyond) does not reflect the content of CC14. Statements like these risk replicating and potentially exacerbating the uncertainty that exists in the sector. The rest of the blog is far more nuanced and reflective of the guidance
Lack of investment options: There are now more products in the market to support trustees approach to intentional investment, but many foundations (due to constraints of size, time or expertise) will still need to consider joining pooled funds - which limits the scope for very detailed individual specification of restrictions or preferences. There has been a sea change in the approach of investment advisors and managers with this regard over the last ten years, but it is not yet universal. Greater transparency and independence as to assessments of companies’ activities from an ethical point of view is needed. Improvements in this area around the depth, number and quality of these offerings may increase as foundation interest increases.
What more could be done?
Clarify existing guidance and provide a statement to remove uncertainty: CC14 is permissive, but it remains a prevalent view in the charity sector that the rules say charities are required to maximise financial returns. Ultimately, in order for the Commission to achieve guidance for charities on investing that is clear, permissive and future-facing, CC14 may need to be rewritten.
Clarify Mixed Motive Investment (MMI), Programme Related Investment (PRI), Impact Investing and Social Purpose Businesses: Foundations report that reference to “mixed motive” and “programme related investment” in the Charities Act creates confusion and has not kept pace with common usage among foundations, charities and others in the impact investment space. There is also confusion among auditors regarding which investments should be signed off as PRI and which as MMI. More clarity from the Commission with examples of each type of investment would be helpful.
Adopt a similarly clear and explicit position to that of the 2018 OSCR guidance on Scottish charity investment: In November 2018, the Scottish charity regulator produced new guidance on charity investments stating: “investments are charity assets used to help the charity deliver its charitable purposes”, not merely a way of funding the charity’s activity. That “usually investments are intended to provide a financial return”, but there are other forms of return that are also valid “such as social or environmental”. This non-prescriptive, enabling approach is a useful framing for trustees. It encourages them to do more to put all their resources to work in pursuit of their charitable purposes, but allows flexibility and interpretation in the context of that charity.
Consider if there is a role for the new SORP: While there already exists some degree of reporting on social, environmental and ethical factors, this could potentially go further in future, for example how a charity’s investment policy is developed and overseen, and how it connects to its charitable purposes.
Support an enabling environment: There are several ways that the Charity Commission could enhance the environment to make it more permissive and conducive to responsible investing. These include working with umbrella bodies to communicate what is permitted already, providing case studies of different approaches taken by charities within the current regulation, tailoring messages to charities with large assets and those with few, providing support for trustees, and working with other parts of government to consider what more could be done to incentivise responsible investment.
For more information please email Policy@acf.org.uk