Law Commission Calls For New Guidance on Social Investments For Charities

The Law Commission has released a new paper calling on the government to create new rules giving the trustees of charities the explicit, statutory power to make social investments – using finance in order to achieve a combination of economic and social goals. The changes outlined in Social Investment by Charities: The Law Commission’s Recommendations aim to alleviate some of the difficulties faced by trustees under the current law.

The conclusions of the independent body’s report are based on a consultation exercise earlier this year, which drew 44 responses from across the third sector. The Commission says that, while charities do already have the power to make social investments, there exists a general lack of clarity as to exactly how far they are allowed to go with them, thanks to a misconception that trustees have a duty to maximise financial returns when making an investment.

Clarifying charity trustee duties and responsibilities

This lack of clarity is partly due to the Trustee Act 2000, which describes certain trustee duties that were not written with social investment in mind. The report advises the government to update the Act by introducing statutory duties specific to social investment; it goes on to suggest the revised law makes it clear that permanent endowments may be used, with the proviso they are not used in ventures where a negative financial return is expected.

Under the new duties, trustees would be commended to ensure that investment in a cause is in their charity’s best interests, and to periodically review the arrangements, while also seeking outside advice on an ongoing basis. It also recommends that HM Treasury introduces a new procedure allowing charities to obtain clearance on the tax treatment of any proposed social investment – an area of concern among the trustees who provided feedback on the subject.

Social investment opportunities, financial planning and charities

Professor Elizabeth Cooke, the member of the Law Commission who led the report, commented “Charities have a special place in society. The contribution they make is made possible, in part, by how they spend their money.

“Social investment represents a significant opportunity for charities, but the existing law is unclear. Our recommended reforms will clarify the law for trustees as to their powers and duties. They will make social investment more straightforward in law and give trustees the confidence to make the best of the opportunities it offers”.

NCVO warns of pressure on charities

The National Council for Voluntary Organisations welcomed the report, although it warned that charities shouldn’t feel pressured into making social investments. Senior Policy Officer Andrew O’Brien said “Social investment is only likely to be a viable option for a small number of charities.

“The choice to make social investments should be freely made by trustees, based on an objective assessment of how they can best achieve their charitable objectives, and compared with other options for investment or for furthering their mission”.

The Cabinet Office will now consider the report, before making a decision about which of the recommendations to adopt.

IBB’s team of specialist charity lawyers are experienced in delivering practical commercial advice across all areas of the law to charities, not-for-profit organisations and those who work within the charity sector.

Our specialist charity team can advise you on key matters affecting your charity, not-for-profit organisation or social enterprise such as social investments and financial planning. You can find out more about our work in the charity sector here. Alternatively, for additional information or to discuss your requirements with one of our charity law solicitors, call us today on 01895 207809 or email charities@ibblaw.co.uk.

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