Mixed purpose investments – but is it all still a bit of a muddle? Your chance to comment on the new CC14
January 2011
The Charity Commission is inviting comments on its long-awaited revised investment guidance.
Charities and investment matters, along with its accompanying legal underpinning guidance, is available for download[1]and interested parties have until 28 February 2011 to get their comments to the regulator (investment@charitycommission.gov.uk ).
Registered charities held a total of £78bn in investment assets in 2010 and despite low interest rates and volatility in recent years; it is still a key source of income as far as the Commission is concerned, for achieving charitable aims. The guidance replaces:
- Investment of charitable funds: basic principles (CC14, February 2004;
- Investment of charitable funds: Detailed guidance (February 2003);
- Charities and social investment (2003); and
is a complete rewrite in a new format. Ruth Murphy of Newton Investment management welcomed the new draft: “It is an update much needed and sought by both charities themselves and their investment managers. It provides a slightly more relaxed regime on some key areas, such as a charity's own ability to consider taking a total return approach to their endowments. The clarity and affirmation on the extent to which social and objective-led priorities and concerns may be taken into account when formulating an investment policy is very welcome as, in spite of the Commission's broader guidance on this point in the previous edition of CC14, many myths have remained.”
Rosie Chapman, head of policy at the Charity Commission explains the approach taken: “The Commission's role in producing this guidance is to explain the range of options available to charities by law when using charitable resources in a way that may generate a financial return. In doing so, we have aimed to reflect policy and practice and give freedom to charities that want to be more innovative. We are carrying out a full consultation to make sure people have the time to properly consider and comment on the draft guidance. We welcome all contributions and comments on the draft guidance.”
When is an investment not an investment?
Back in September 2010, the Caritas round table supplement, The case for socially responsible investment (SRI), highlighted the general confusion about the balance between investment responsibly and the duty of trustees to generate the best possible return on investment.[2] Rosie Chapman has told Caritas: “The timing of the Caritas SRI round table supplement was helpful and informed the Commission in developing the draft guidance.”
It was Simon Steeden at Bates Wells and Braithwaite who summarised the generally accepted legal position at the time: “Trustees have a duty to act in the best interests of that charity, including when they make investment decisions. At one end of the spectrum is investing purely for financial return and at the other is what is called ‘social investment’ – in effect making grants by way of loan or some other financial assistance.”
However, the new draft guidance separates out two forms of ‘investment:
- Financial investment. This includes investment where the aim is to make the best financial return, ethical investment where the aim is to achieve the best financial return consistent with ethical principles reflecting the charity’s aims and mission-connected investment where the aim is to achieve the best financial aim which furthers a charity’s aims.
- Programme-related investment (PRI). This is where the primary aim is to further the charity’s aims and may also get a financial return.
The problem with PRI is that many regard this as merely charitable expenditure in line with its objects and not proper investment. Charles Mesquita of Newton Investment Management told the Caritas round table delegates that he saw this as ‘recycling money’ and that calling it ‘investment’ is “a bit like buying your own house and telling everyone its an investment but in fact you bought it because you really want to live in it.”
The legal underpinning document accompanying the draft guidance does confirm the distinction in paragraph (vii) of the introduction: “There is an important distinction to be made between ‘financial investments’ (which include ethical investment and mission connected investment) and ‘programme related investment’ which would not be an investment in the legal sense…..and co could not be considered as an exercise of a power of investment such as that referred to in the Trustee Act 200.”
Lack of clarity
Moira Protani, who was also at the round table event, was not convinced the draft guidance provided clarification of how trustees must fulfill their legal duties. “I can see some trustees getting in a complete mess 'investing' in project or programme-related ‘Investments’ (which is really a charitable application!) or mission-related ‘investments’ and mixed purpose ‘investments’, let alone financial investments and ethical investments. To describe spending money on charitable projects as ‘investments’ is a misuse of the English language and ignores numerous cases in which judges have considered what is and is not an investment – the Charity Commission's existing guidance achieves the right balance and the Commission should not be easily persuaded otherwise.”
Guy Davis of Evercore agrees the Commission has a bit more work to do: “The document has some good features, giving more detail on investment policy satements, hedge funds, derivatives, etc but otherwise it is very poorly drafted with many duplications and a number of errors. I think it is very dangerous to lump together project related investments (I think it is called 'grantmaking' in old charity parlance) or mission connected investment or even mixed purpose investment with good old financial Investment and ethical Investment! I was confused by the end of it so who knows what your average charity trustee will make of the document.”
Fees
Although the draft guidance has a short section stating that trustees should request an outline of all the fefes that may apply to a portfolio up front and ensure there are no unexpected fees, the Commission has agreed to investigate Jupiter Asset Management’s request (Melanie Wotherspoon) suggestion of a section containing standard questions could ask investment managers so that more transparent comparisons could be made by trustees between the different advisers.
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from
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