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In October 2011, the Charity Commission published its revised guidance on Charities and Investment Matters, more commonly known by its abbreviated title: ‘CC14’.
CC14 sets out the Commission’s view of the investment powers and duties of charities and charity trustees. The revised version has been warmly welcomed by the sector and is widely recognised as an improvement on the previous version of the guidance. BWB as a firm was heavily involved in the consultations on the guidance, and we see the final version as a positive step forward.
What type of investments can charities engage in?
CC14 categorises the investments made by charities as Financial Investments, Programme Related Investments and Mixed Motive Investments.
Financial Investment requires a charity to achieve the best financial return, after undertaking a risk analysis.
Programme Related Investments are made in furtherance of a charity’s objects, but may incidentally produce a financial return.
As under the previous version of CC14, it is clear that charities can carry out both Financial Investment and Programme Related Investment: there is more detail in the guidance.
What about Mixed Motive Investments?
A Mixed Motive Investment is one which cannot be justified by reference to either (a) the expected financial return or (b) the extent to which the investment supports the charity’s purposes. It is an investment that can only be justified by the sum of these elements - by a dual financial and social return.
Up until now, there has been uncertainty about whether this type of investment by charities is permitted: the new CC14 confirms that it is. This means that it is now clear that charities will often be able to accept a discounted financial return on their investments in exchange for greater social impact. This will greatly help charities wishing to find ways to invest in social enterprises.
What do the trustees need to consider when seeking to carry out Mixed Motive Investment?
Section K of the guidance sets out the practical questions and issues for trustees. In summary:
Trustees must be satisfied, before investing, that such investment is justifiable both on the grounds that it will achieve a financial return and that it will further the charity’s objects. The investment must also be in the best interests of the charity. The trustees should keep a minute of these matters and the reasons that they decided to make the investment.
Any private benefit to individuals as a result of the investment must not be inappropriate.
The risks must be proportionate to the investment to be made.
The trustees have to continually monitor and review the anticipated financial return and whether the investment continues to be in the best interests of the charity.
Since Mixed Motive Investment involves financial investment, there is a risk that value will fall or lead to a complete loss. The trustees need to ensure that they have properly considered all of the issues, including taking professional investment and legal advice, and taken and recorded their actions properly.
Social Investment Innovation
In issuing the revised CC14, the Commission has essentially recognised the innovation taking place in the emerging social investment market and the catalytic role charities are already playing in this developing area of investment practice.
The guidance can be accessed at http://www.charity-commission.gov.uk/Publications/cc14.aspx#a.
By Viral Kataria
Solicior, Bates Wells & Braithwaite London LLP, www.bateswells.co.uk