Charities and investments – the revised investment guidance (CC14)

The Charity Commission published its revised investment guidance for charity trustees (CC14) on 1 August 2023. Now the dust has settled, this article explores how we got here, the key takeaways, and our experience of what charities have been doing in practice.

How we got here

The Commission was planning changes to its investment guidance as early as 2020, partly prompted by feedback from the sector that the 2011 version did not adequately address “responsible” or “ethical” investment. The Butler-Sloss case in 2022 (in which Bates Wells acted for the claimant charities) addressed these issues directly, and set out the law on how trustees should consider non-financial factors when making investment decisions. The Commission’s consultation process was paused in the run-up to the case. After the judgment the Commission also undertook user-testing of the new draft guidance.

Key takeaways

• The most significant changes are to the sections on financial investment, which now reflect the Butler-Sloss judgment. The underlying law has now been clarified and so the guidance now emphasises what is in the interests of the charity’s purposes, rather than focusing on maximising financial return.
• Trustees can choose which investment approach is in the best interests of their charity in the circumstances. The guidance gives a number of example approaches of investing for a financial return, such as avoiding investments that conflict with a charity’s purposes, or which could reduce support for a charity or harm its reputation, particularly amongst its supporters or beneficiaries. Whilst focusing solely on financial return is an option, it is not the only option, and may not be the best option.
• Trustees need to balance factors relevant to their charity’s circumstances, taking advice where necessary, and exercising good judgment in formulating an investment policy that is in the best interests of their charity and its purposes. They must review their charity’s financial investments on a regular basis; assess whether these are appropriate and whether any changes need to be made.
• The terms “responsible” and “ethical” investment have been shelved, as they meant different things to different people, and have been overtaken by Butler-Sloss.
• The interim guidance on social investment published in 2016 has now been incorporated into CC14 with some non-substantive updates.
• CC14 is shorter than its predecessor, but still covers a lot of ground. It will likely provide answers to the issues most smaller charities encounter, but larger charities may wish there was more detail on some points.

How are trustees using the revised guidance?

Broadly we’ve found charities taking one of three approaches:

Early adopters – Some charities have long wanted to place more emphasis on non-financial considerations when making financial investments, but the previous CC14 and uncertainty in the law caused doubt about the degree to which considering non-financial factors was permissible. Butler-Sloss and the revised CC14 provide the legal clarity needed to avoid investments which directly conflict with the charity’s purposes. Many of these charities have already been engaging extensively with investment managers to tailor portfolios and publicly discussing their revised approaches.

Confidence building – Others have been planning to review their policies for some time. Butler-Sloss and CC14 have provided the prompt to move this up the agenda. Beneficiaries and stakeholders may now be, and are likely to increasingly become, more aware that trustees can adopt a range of investment approaches, and that their views are a relevant factor for trustees to consider when setting their policies. For higher profile charities this may mean a renewed emphasis on factoring stakeholder views into the balancing exercise.

Maintaining position – There are those charities who may decide they do not need to change approach. This may be because their current investment policy, which might focus solely on maximising financial return, is the best way to further their charity’s purposes. What these boards should not do is fail to adopt an investment policy or engage with the revised CC14 at all. At the least, there should be a clear record of the trustees reviewing their policies, with reference to CC14, including their reasons as to why the policy remains in the best interests of their charity.

Finally, for those charities looking to take a more radical approach to the mix of impact focused investments in their portfolios, there is growing awareness that the flexibility allowed by the social investment power, as opposed to the financial investment power, can provide greater legal freedom on issues such as financial return and diversification.

What’s next?

Charities continue to engage with, and are often expected by supporters and beneficiaries to have a position on, major social and environmental issues. Their investment approaches are a significant means for responding to those issues.

Each charity will have its own financial objectives, and CC14 rightly does not take a prescriptive approach. In fact, some feel sector-led guidance is needed to put the principles of CC14 into practice.

A coalition of sector groups have launched the Charity Investment Governance Principles project, hosted by Charity Finance Group, which will explore best practice in decision-making around charity investments. The principles are expected to be published in the coming months and will complement CC14, with the hope they will define and raise standards of best practice in charity investment, just as the Charity Governance Code has done for charity governance generally.

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.