Are charities obligated to invest for the best financial return?
Charities will be aware that there are different forms of investments that they can make.
The rules around investment are covered in helpful guidance published by the Charity Commission called CC14 – Charities and investment matters: a guide for trustees.
First, a charity may make a "financial investment" which is an investment made to achieve a financial return. Second, a charity may make a "social investment" which is an investment made to achieve a social return. Then third, a charity may carry out a "mixed-motive investment" which is an investment which cannot be justified solely as either a financial investment or a social investment but is, as the name suggests, a mix of the two.
When making a purely "financial investment" the question often arises as to whether a charity is obligated to invest solely to make the largest financial return, or whether a charity can apply ethical principles when deciding what to invest in.
Charity law, and the Charity Commission's guidance, has supported the view that charities can take ethical considerations into account when making financial investments, even if that potentially means a lower rate of return but that it must be justified.
Some charities have though felt that Charity Commission guidance around ethical investment was unclear about what was possible.
Helpfully then there has been a further clarification to the law around financial investment in the case of Butler-Sloss & Ors heard earlier this year in the High Court.
In short, the case reconfirmed that charities can apply ethical principles when making financial investments. The judge made the following points:
- A trustee's primary duty is to further the objects of the charity, and the starting point to achieve this is that financial investments should be made to maximise the financial return, whilst balancing an appropriate level of risk.
- Trustees do though have discretion to take ethical investment decisions where they reasonably balance relevant factors. Particularly they should balance the likelihood and seriousness of a financial investment conflicting with the charity's objects against the potential financial impact on the charity from excluding certain investments. Financial impact here can include not just the potential lower return on the investment, but also the risk of losing donors or supporters and reputational damage.
- Trustees do though need to be mindful of making decisions on a purely moral ground, where those morals may not necessarily be shared amongst supporters and beneficiaries and there may be legitimate differing views.
- If the balancing exercise is properly done and results in a reasonable and proportionate investment policy for the charity, then the trustees have complied with their legal duties.
The Charity Commission is now proposing to publish revisions to its guidance in Summer 2023, to reflect the judgment in this case. For now though, this is a helpful clarification around the law on financial investments and charities should feel empowered to take reasonable ethical decisions in relation to financial investments.