Are charitable RPs obligated to invest for the best financial return?
Charitable RPs 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". Although most RPs are exempt, rather than registered, charities the guidance is still applicable to them.
First, a charitable RP may make a "financial investment" which is an investment made to achieve a financial return. Second, a charitable RP may make a "social investment" which is an investment made to achieve a social return. Then third, a charitable RP 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 charitable RP is obligated to invest solely to make the largest financial return, or whether it can apply ethical principles when deciding what to invest in.
Charity law, and the Charity Commission's guidance, has supported the view that charitable RPs 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 charitable RP have though felt that 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 all charities, including charitable RPs, can apply ethical principles when making financial investments. The judge made the following points:
- A board member of a charitable RP's primary duty is to further the objects of the charitable RP, 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.
- Board members of charitable RPs 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 charitable RP's objects against the potential financial impact on the charitable RP 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.
- Board members 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 charitable RP, then the board members 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 charitable RPs should feel empowered to take reasonable ethical decisions in relation to financial investments.