By this stage, most charities have likely considered whether they could, and should, engage in social investments: activities which may both directly further the charity’s purposes and achieve a financial return. And, if not (or if it has been a while) the amendment of the regime in the Charities Act 2022 may have put it back on your radar.

Back in 2015, the Law Commission identified two “problems” which were, in its view, making it difficult for charities:

  1. First, charity trustees were worried about whether they had sufficient constitutional powers. Charity constitutions do not usually talk about social investment at all. Instead, there are separate powers (e.g. to invest, to make grants and similar and, in many cases, a “catch-all” power to do anything else within the law). Was the catch-all power sufficient, or was something more specific needed? Could the investment powers be combined with (say) the grant-making powers to make a social investment which was not fully either of those things?
  2. Second, there were concerns about the trustees’ duties – including to pursue an investment strategy which produced the best risk-adjusted financial return (this position has now of course been elaborated on and clarified in the Butler-Sloss decision) and the application of duties of diversification of investments. A social investment was thought unlikely to play a part in a diversified investment portfolio – it may involve risks that are disproportionate to the return to be achieved.

The response was for Parliament, in 2016, to create a statutory social investment power, which gave almost all charities – whether incorporated or unincorporated – a power to make social investments. When it was introduced, Lord Bridges of Headley noted that “it is important to make the power as widely available as possible in order to encourage its use and the benefits that will flow from it”.

But, despite this admirable intention, two types of charity were excluded from this power: charities governed by Royal Charter and charities governed by, or whose purposes and functions are set out in, legislation (statutory charities). This was explained in Parliament simply as being due to “differences in governance structure” and as a result, [a]ccording to the explanatory notes to the Bill, “[s]uch charities must rely on their existing powers in order to make social investments or alternatively seek an amendment to the relevant legislation or Royal Charter to introduce such a power”.

This leaves Royal Charter and statutory charities in the (perhaps familiar) position of having different (and often more complex) considerations than everyone else, and having what seems like a mountain to climb to navigate those complexities.

In many cases it is still possible to get comfortable that social investments can be made. For those who cannot, or who wish to clarify the position, there are a range of powers that can be used to introduce express powers. These typically involve Parliamentary / Privy Council oversight, but these provisions are easier to navigate than they once were.

And despite what the Explanatory Note says, there could be a simpler route for statutory and Royal Charter charities to obtain an express social investment power. There is case law to the effect that a scheme can expand the powers of even a statutory charity. There is no reason why such a scheme could not be used to grant social investment powers in many cases, or why (subject to discussions with the Charity Commission) it would not be quite straightforward to achieve, or provided to a number of charities at once.

If you would like to discuss the possibility of obtaining clear social investment powers, or to discuss the possibility / any collaboration with other like-minded charities, please contact Mark Abbott.

The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.