The UK Charity Commission has published guidelines in response to a new investment power given to charities under the Charities (Protection and Social Investment) Act 2016.
Pursuant to this new legislation, as of the 31st July 2016, trustees of charities are now given the statutory power to make social investments. These guidelines have been issued as the first phase of implementing the 2016 Act, which aims to support trustees in making confident decisions about their charity’s investments to ensure these decisions are made in compliance with their duties.
The Commission has said that this is the first time that the term ‘social investment’ has been identified in legislation. It is defined as “a ‘relevant act’ (such as use of charity funds or making a guarantee) that is carried out ‘with a view to both directly furthering the charity’s purposes and achieving a financial return for the charity’.” The Director of Policy and Communications at the Commission has added that the purpose of the guidelines is to “explore this definition to provide further advice on what is and is not a social investment.”
The Commission also emphasised that the 2016 Act does not purport to take precedence over the general duties of trustees. In fact, it places specific duties on trustees that they must exercise in addition to their current common law duties when they are considering making social investments. Referring to these specific duties under the 2016 Act, the Commission guidelines provide that charity trustees must:a) consider whether advice ought to be obtained; b) obtain and consider any such advice and; c) satisfy themselves that it is in the interests of the charity to make the ‘social investment’. The guidelines provide that this advice can consist of obtaining legal and/or financial advice where appropriate, to help the trustees make a fully informed decision whether to make a ‘social investment’ or not.
While the new legislation was being introduced in the House of Lords, Lord Bridges stated that the intention of giving charities this new power is to “help charities to make social investments so that they can fulfil their mission in new and innovative ways and give charities the confidence and certainty to invest in this growing sector.” This new power allows charities to make investments that both furthers their charitable mission and allows the charity to generate a financial return. Although the guidelines provide that charities do not need to give a precise monetary value when assessing this return, they state that trustees should not authorise a ‘social investment’ if it is not in the best interests of the charity.
Lord Hadley also addressed the fact that “charities have over £60billion (A$105billion) of assets under management but only £100millon (A$175million) are social investments.” With the new law clarifying what it is to make a ‘social investment’ and guidelines outlining to trustees exactly what their duties are, it is expected that an increase of social investments will be made in the future.
Social investments can take the form of “secured loans, overdraft facilities or social impact bonds where investors put forward the capital and are repaid by the government based on the social impact made by the charity’s programme.” For example, the Victorian Government in Australia announced it was making its first social impact bond focussing on drug and alcohol rehabilitation and children coming out of care. The New South Wales government has clearly found success with the model as they are now going ahead with their third social impact bond – this one will be focussing on tackling the issue of prisoners who reoffend.
Since 2010, several countries have commenced over 60 projects based on the social investment model with over 30% of them saying that they have reported “positive social outcomes”. The new guidelines aim to help trustees make fully informed decisions and become more confident in making social investments that can result in charities having the potential to make a great financial return as well as making a positive impact on those who benefit from their charitable mission.
Click here to read about social investments.
Click here to read the guide for trustees.