Transcript What is an investment?

Investing responsibly: Charity
Commission Guidelines
Stephen Roberts
Policy Legal Adviser
Investment of Charitable Funds:
Detailed Guidance
• Underpins CC14 Investment of Charitable
Funds: Basic Principles
• Current version dated February 2003
• Currently being reviewed
Issues in investment guidance
• What is an investment?
• What is the proper use of an investment
power?
• Role of derivatives
• Ethical Investment
• Mission Connected Investment
• Blended investment
What is an investment?
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Investor/investee
Company shares
Land let to produce a rental income
Tradeable debt
Non-tradeable debt
Units in collective investment schemes
What does the Detailed Guidance
not consider as an investment?
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Commodities e.g. gold, vintage wine
Works of art
Premium bonds
Land purchased with a view to sale
Derivatives
What is the proper use of an
investment power?
• The general power of investment
(section 3 Trustee Act 2000)
• Standard investment criteria:
– Suitability of class of investments and particular investment
– Need for diversification so far as is appropriate to the
circumstances of the trust
(section 4 Trustee Act 2000)
What is not a proper use of the
investment power?
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Trading
Gambling
Speculation
Use of derivatives other than as ancillary to
investment
Ethical Investment
• Ethical investment (also known as socially
responsible investment) is investing for
financial return, but having regard to other
criteria such as environmental protection,
health, human rights.
Screening and disclosure
• SRI/Ethical investment often involves
– positive screens (focussing on companies that do good); or
– negative screens (avoiding investments in a particular)
• Examples include:
• alcohol, tobacco, gambling; the environment, global warming;
employment policies and practices; products/services; arms
manufacturing/supply; animal testing; human rights/equality.
• Disclosure of policy
– any investment policy for charities over the statutory audit level
must be disclosed
– these charities are also required to state the extent to which
environmental or ethical considerations are taken into account
– this should apply to all charities as a matter of good practice
Making an ethical
investment
• A charity’s governing document sometimes imposes
specific ethical restrictions on the scope of trustees’
general power of investment – trustees must comply with
these
• Power of investment has to be used to further the
purposes of the trust. Purposes will normally be best
served by seeking the maximum return consistent with
commercial prudence
• Consider whether*:
– a type of investment is in direct conflict with the aims of your charity
– a type of investment might hamper the work of your charity (e.g. alienate
beneficiaries or donors)
– The financial return will be just as good even if other moral/ethical
considerations are taken into account
* Harries (Bishop of Oxford) v Church Commissioners [1992] 1 WLR 1241
Positive considerations
• Financial return more secure where company
committed to sustainable development
• Long term profitability secured by a particular
moral approach to development of business
Programme Related
Investment/Social Investment
• Not investment at all.
• Their purpose is to directly further the
purposes of the charity and not to secure a
financial return to the charity.
• Issue is extent to which furthers the purpose
and whether the amount applied justifies that.
Private benefit
• Any private benefit arising from a social
investment has to be incidental to the
furtherance of the charity’s purposes
• An educational charity investing in a profit
making private school would not be an
appropriate way of furthering the charity’s
purposes by way of a social investment. It
may be justified as a financial investment if
the financial return justifies it.
Mission Connected Investment
• “We define an investment as an MCI if it:
Targets a market rate of return and also helps
a foundation to achieve its mission.”
(Mission Possible: Emerging opportunities for
mission connected investment – New
Economics Foundation)
Mission Connected Investment
• Other definitions:
“The term Mission Investing covers two
distinct categories of investments: market
rate investments that support program
goals; and Program Related Investments
(PRIs) structured to create specific
program benefits while earning a belowmarket return.”
(More for Mission website)
Blending social investment and
socially responsible investment
• Mixing two different things: one is about a
financial return to the charity and the other is
about directly furthering the purposes of the
charity.
• Trustees need to be clear what they are doing
in applying funds so they can be sure they
are complying with the appropriate duties.
Common Investment Funds
• Corporate Manager has power to invest
equivalent to general power of investment
• CC14 detailed guidance applies
• Difference between a charitable collective
investment fund and a non-charitable
collective investment fund
CC14 Detailed Guidance
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New style
Must/should
Legal underpinning
Discussion with sector