The Charity Commission has produced interim guidance on the new social investment power which was passed in the recent Charities (Protection and Social Investment) Act 2016. This came into force on the 31st July 2016.
I’d encourage anyone interested in social investment to read the full guidance here, but in order to help busy trustees and charity finance teams, here are ten things you should know about the new power to make social investments
1. You don’t have to make social investments
The new power to make social investments is not a command to make social investments; it is merely codifying the legal right and duties for charities to make such investments. A right which some argued that charities already had!
So don’t feel you now have to shake up your whole investment portfolio or appoint a ‘Social Investment Officer’ to make social investments. If you are not interested in social investment, no one can force you to do so.
However, the new power does classify some activities that you may not think of social investment, as social investment (read point 5 below) – so it is still worthwhile reading the guidance to understand how it may impact your organisation.
2. Social investment doesn’t just mean investing in anything you like
The Act is clear that a social investment is not just investing in anything you like and think is ‘good’. It has to be “with a view to both directly furthering the charity’s purposes and achieving a financial return for the charity.”
Note the words “directly furthering the charity’s purposes”.
Be careful, therefore, when other organisations (or even trustees) promote the idea of making a ‘social investment’ into some good cause. The first question you should ask is: does this further our charity’s purposes? If not, then the answer should be “no, thanks”.
3. Check your governing document or endowment restrictions
Related to the above, you cannot just invest in anything you like or with your funds in any way you like.
You need to make sure that you are following your charity’s purposes by reading your governing document and that you are respecting any restrictions that have been made on your funds. This is particularly important if you have a permanent endowment, as there may be additional restrictions.
4. Guarantees count as an investment
Some charities may make promises to agree to pay the costs of another person or organisation, in order to reduce the risks for someone providing a service to that person. An example may be agreeing to be responsible to pay a tenant’s rent to a landlord if the tenant does not pay it or agreeing to repay a loan to a bank if the borrower does not keep up their repayments.
These are now counted as social investment – and they need to be reviewed in light of the new guidance. The rules of social investment will therefore apply to these activities – i.e. they must directly advance your charity’s purposes and you have considered the need to get appropriate advice.
So if you are a charity that gives these kinds of guarantees, then make sure you read the new guidance
5. Social investment may be broader than you think
Related to the above, the guidance is clear that if you apply funds in a way that both furthers your charity’s purposes and seeks to achieve a financial return, then your proposed action will be a social investment. If it is a social investment, then you need to follow the process outlined in the guidance.
This could be a very broad set of activities and could be things that you don’t think of as investments. So it may be worth sitting down and reviewing all your activities and considering whether they could be a social investment.
6. Programme Related Investments can continue as normal
For those charities and foundations that make Programme Related Investments (PRIs) this can continue as normal.
This is because the new power to make social investment is about those investments made for both achieving a charity’s purpose and achieving a financial return.
PRIs, by contrast, are made primarily to further a charity’s stated aims and achieving some financial return is not the main reason for doing so.
This is an important distinction and charities should read CC14 Section 10 on PRIs Investments to see what their responsibilities are – they are not the same as those relating to a social investment.
7. You should consider whether you need to take advice
The new social investment power does not have the same stringent legal duties that making a financial investment does. However, it does ask you to consider whether you need to obtain advice about a proposed social investment. If you consider that you do need advice, then you need to obtain that advice and consider it before you make a social investment.
The point to remember is that just because an investment is a ‘social’ investment, it doesn’t mean that charities can just go with their gut feelings. It is important that charities safeguard their charities’ assets and only make decisions that are in their interests of their organisation.
8. Trustees are ultimately responsible for complying with the new social investment power
This may seem unnecessary to restate given that trustees are ultimately responsible for all the actions of their charity. But the guidance is clear that while trustees can delegate some of the tasks related to complying with the new power (i.e. sourcing and seeking advice) – they cannot delegate the duty to comply with this new power to some other person.
This means that trustees need to get assurance for themselves from the officers of the charity (or other trustees) that the law has been followed.
9. You must review your social investments from time to time
Your social investments should be reviewed from time to time, just like you would your financial investments. Although the guidance does not specify exactly how regularly you should review your social investments.
Depending on the size of your charity and how often you make social investments, you may need to review them every month, once a quarter or even once a year. However, you should make sure that you build in a regular review of your social investments into your trustee meetings (if you haven’t already!).
10. Beware of private benefit
With anything that a charity does, trustees should be conscious of the risks of unnecessary private benefit being generated by their decisions. Social investment is no different. Just because the aims of an organisation or project are social, doesn’t mean that private benefit isn’t an issue.
Make sure that you are considering whether any private benefit is created through your social investments and whether this is necessary, reasonable and in the interests of your charity.
Read the rules on public benefit for more information on this issue.