The new CC14 guidance: Key questions for your charity

CC14

Many charities with investment portfolios will have noted the case of Butler-Sloss v The Charity Commission for England and Wales in the summer of 2022. To summarise, the judgement concluded that charities have the freedom to choose an investment policy that aligns with their charitable objectives and interests, rather than being strictly bound to maximise the best investment return.

Previous judgements such as the 1992 Bishop of Oxford case resulted in a narrow interpretation of the trustee’s ability to manage their investment portfolios, with many considering that prioritising investment returns and minimising financial detriment to the charity to be the overriding position.

As a result of the Butler-Sloss case,  new guidance was issued in August 2023 by the Charity Commission under CC14. The guidance has been welcomed by the majority of charities but raises a number of new questions to consider when setting your investment policy.

How do my investments align with my charity activities and purpose?

With more freedom to choose or exclude certain investments, does your charity purpose highlight any current investments that may conflict? For example, many ecological charities may exclude oil companies- and conflict resolution charities may exclude companies with links to military activity. Conversely trustees may also now feel that their policy should be proactive in choosing investments that suit their charitable purpose – for example, new technology and environmental sectors.

This is always a good starting point when discussing policy. By considering your charity’s purpose it should lead to more informed discussion between trustees on what to include and exclude in future policies.

What other external influences might affect my charity’s policy?

It’s also important to consider the supporters, funders, and beneficiaries of the charity. Key supporters and funders may be put off by a ‘whole of market’ approach or a managed investment fund that is easy to manage but may contain investments that don’t suit your purpose.

Trustees must consider canvassing key influencers on the charity and consider how the investment policy may impact their support or public view. It has long been possible to have investment funds that removed obvious items such as weapons manufacturers but where your charity has specific investments in banks and other previously ‘safe’ funds it can also change quickly. Take the recent example of Barclays bank being targeted by fossil fuel protesters, this is a case where the funds could have been invested in the bank itself. Could your charity be considered tainted by association?

Internally, recruitment and retention of staff may be impacted by the chosen investment policy. We are seeing that more and more potential recruits may query management about ESG (environmental, social, and governance) investing or EDI (equality, diversity, and inclusion) policies. These can all have an impact on how the charity recruits or retains the best people for its mission.

Updating an investment policy requires careful consideration by the Board to consider potential scenarios and is crucially dependent upon good communication and understanding of your investment manager to instigate the desired policy. Trustees need to be specific in explaining their needs and risk appetite to those managing the funds.

Can the charity handle decreased investment income?

Another key question is whether the policy is balanced between the need for income returns and the charity’s purpose and mission. This question of balance is considered in more detail in the Butler-Sloss case. Balancing the risk of reputational damage or loss of support against higher investment returns is critical for trustee consideration when setting policy.

It can be difficult to model these scenarios but where a charity is heavily reliant on investment income over recent years – whether that be income or capital growth – the decision must consider various factors such as forward budgets and alternative investments.

A carefully balanced policy that understands the risk element, as well as potential income growth, is the desired outcome.

How should charities communicate their policy?

If the trustees have decided to update their investment policy based on the new guidance, then the best place to communicate this is through the trustee’s report. Explaining in detail to stakeholders means laying out the policy in enough detail to explain how the trustees have considered the charity’s purpose, the risks, and the type of investments they want to focus on in the years ahead. A good policy will also consider future returns and tie in with plans and reserves policy if investment income is a critical part of the charity income.

In summary

In conclusion, there is no ‘right’ or ‘wrong’ investment policy. However recent public focus on areas such as fossil fuels, climate change, and ESG investing has meant that charities have to consider and possibly update their approach to stay ahead of the curve and be seen to be proactively managing their investments. The CC14 guidance is a great starting place to inform charities on their wider choice, appropriate exclusions, and restrictions to be imposed on their policy, how to tackle this difficult area, and finally of course how they keep those key stakeholders on side.