There is plenty of material to help trustees understand their roles and responsibilities, but CC14 is the document to which most will turn.
The revised guidance, published in August, includes a number of changes but is more ‘evolution than revolution’. Overall, there is improved clarity in a number of areas. For example, the opening lines on ‘Your trustee duties’ leave no room for debate: "As trustees, your principal duty is to further your charity’s purposes. This means that you must make your investment decisions to further those purposes."
Trustees have discretion to choose what is best in their circumstances and a range of investment options open to them
Which changes should we focus on?
Every charity’s situation is unique
Helen Stephenson, CEO of the Charity Commission commented: “We are clear that each charity’s situation is unique, and there is no ‘one-size fits all’ approach to charity investments. We are also clear that trustees have discretion to choose what is best in their circumstances and a range of investment options open to them.”
Your charity’s investment policy should not be prepared by your investment manager, but they can certainly help. There is clear direction that ‘the Commission expects all charities that invest to have a written policy’, reinforcing a message we have consistently seen trustees embrace over the years.
Clear choice of type of investment
‘Mixed motive’ and ‘programme related’ are out, and ‘financial investment’ and ‘social investment’ are in. Where the former seek financial returns and can consider non-financial factors such as sustainability, the latter relate specifically to achieving the charity’s purpose directly through the investment (while also making a financial return). ‘If your charity is making a social investment, the specific trustee duties that apply are different from those that apply to financial investment.’ It is worth reading the detail of what constitutes a social investment and trustees’ duties in this respect.
Recent High Court ruling following the Butler-Schloss case
The new guidance removes references to ‘ethical’ investment. Instead, it clarifies recent legal changes, and addresses the balancing act needed when considering an investment that might conflict with your charity’s purposes or harm its reputation. As long as the potential investment risks and benefits are balanced, charities have discretion to choose investments that align with their values, providing they further their charitable purposes.
Charities should take professional advice
In this new section the Commission expects charities to take professional advice when making investment decisions. Advice can be given by a professional adviser outside your charity, such as an investment adviser or discretionary investment manager. Alternatively, it can be a member of staff or (as we see on many charity boards) a trustee with relevant investment experience. If charities choose to have a trustee give professional advice, the trustee will be held responsible for the quality of the advice.
Trustees should feel empowered
The new guidance should give trustees confidence to be decisive: ‘the Commission is unlikely to have concerns about your investment decisions or policy if you can show that you have: complied with your trustee duties and your governing document; considered and balanced relevant factors, taken advice and reached a reasonable decision.’ Throughout the document, we are reminded that trustees can take almost any decision, as long as it is thought through carefully.
Working with investment managers
Notably how a charity’s investments might be delegated to an investment manager. This includes a checklist of considerations when hiring a new manager, a reminder to ‘regularly review the service they provide’ and a note to be aware of the manager’s voting policy, ‘to understand how your investment manager has voted on your behalf’.
What else should trustees be thinking about?
How up to date is your investment policy?
The investment policy is your charity’s investment road map, covering your time horizon, liquidity requirements, diversification of assets, restrictions, attitude to risk, income needs and whether you take a total return approach. All these elements and any others that are pertinent to your charity should be included. We recommend reviewing your policy annually. If there are any changes to the charity, such as a large capital spend or the need to set up a designated reserve, they should be reflected in the policy.
Have trustees had any training recently?
Trustees’ investment knowledge can vary enormously, and ‘knowing what you don’t know’ is important. Even if one has spent one’s working life specialising in one aspect of the financial sector such as private equity or bonds, overseeing the management of a balanced charity portfolio requires a different skillset. Don’t be afraid to attend regular training events run by investment managers to keep up to speed with changes to the sector and new regulations.
What do the governing documents say?
Your charity’s governing documents are a valuable guide to what the original donors intended when they set up the charity, and should clarify investment restrictions.
What are your charity’s investment objectives?
Many decisions will stem from answering this question. Most charities seek a balance between providing income for today’s beneficiaries, whilst generating long-term capital growth for the beneficiaries of tomorrow. Whether your charity spends income only, or takes a total return approach, identifying your sustainable annual expenditure is key. In most organisations the needle should point squarely between the two, but in some cases it should lean more towards one end of the spectrum. This might be because the beneficiaries are declining – as with some religious orders – or there is a forthcoming capital project, such as building a new care home. Both approaches are defensible as long as the balance is redressed over time and the logic stated in your policy.
CC14 remains the go-to tool for trustees seeking a broad understanding of their roles, and the revised guidance is a clear and digestible reminder of trustees’ responsibilities.
There are a number of areas mentioned above that it may be helpful to review. Armed with this checklist, trustees should feel better equipped to ensure their charity’s investments remain fit for purpose.
If you are a private investor, you should not act or rely on this document but should contact your professional adviser.
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