Charity Commission consultation on charity responsible investment guidance

Below is our response to the recent Charity Commission consultation questions regarding updated responsible investment guidance.

1. As a result of reading this draft guidance, how clear are you about the duties and good practice that apply to decisions about a charity’s financial investments, whether or not the charity adopts a responsible investment approach?

In relation to Section 3 of the draft guidance (“follow the law on financial investment”), we are concerned that this section of the guidance could potentially be misleading for charity trustees given that the only established case law which sets the precedent for how charities approach responsible investment is the 1992 Bishop of Oxford Case. As it currently stands, this case remains the only case law on the topic and is itself subject to a campaign for a judicial review.

3. Is the phrase ‘responsible investment’ an appropriate term for the approach to investing in line with a charity’s purpose and values?

In addition to the concerns surrounding terminology as described in Question 2, the draft guidance would benefit from further detail on the need for an investment strategy that is focused on ‘avoiding’ various sectors to be holistic across that charity’s activities.

For instance, the draft guidance provides an example in Section 2.1 of a heritage charity avoiding investment in fossil fuels because the trustees have evidence this would not be in the charity’s best interests. But the investment strategy must be complimented with a holistic strategy elsewhere, for example with a plan on reducing fossil fuel energy usage in office locations.

Furthermore, the Commission’s guidance would benefit from referencing impact investing, as defined in the Investment Association’s Responsible Investment Framework. Impact investing is a growth area, and we are seeing more and more interest from charities given it is often a natural fit for their strategy as a charity. The guidance could provide a definition of impact investments and state that an impact investment strategy does not necessarily mean sacrificing financial returns.

The guidance could provide more clarity on social, programme-related and mixed motive investment, and for what size of charity this type of investment is appropriate for and where you might get advice.

4. How confident would you be, as a result of reading this draft guidance, that adopting a responsible investment approach is a valid option?

As an investment manager we feel that this question is more pertinent to charity investors.

5. In the section ‘Check if extra rules apply’, we say that there are some situations where a responsible investment approach can be taken only if at least one of five tests is met. As a result of reading this draft guidance, how clear are you about when these tests are relevant to the decision to take a responsible investment approach?

Answering this from an investment manager perspective, we feel that the statement “you have clear and compelling reasons, supported by evidence, about why your charity should follow a responsible investment approach” is vague and it would be helpful to provide charities with examples of how this might be applied.

6. Do you have any other comments to make on the draft guidance?

Under Section 3.4 (“Check if extra rules apply”), the guidance makes reference to the specific rules being in place for a permanent endowment (and some other charities if specified) as they are subject to a duty to invest. It states that “you must aim for the best financial return within the level of risk you have decided is appropriate for your charity”.

However, it is not clear from the guidance what the difference is between a charity that is subject to a duty to invest and one that isn’t in terms of aiming for the best financial return. It is also implying that taking a responsible investment approach is somehow linked to not achieving the best financial return.

Furthermore, contained under Section 8.9 (“Can a charity engage in stakeholder activism?”) is the statement that “shareholder activism needs to be related to [the charity’s] aims”. We believe the guidance would benefit from an expanded definition of what is meant by shareholder activism, as well as clarification of what “related to its aims” means in practice.

In addition, the updated guidance does not refer to the changing regulatory landscape. Reference to the development of regulation would provide charities with an understanding of the direction of travel in relation to the regulation of responsible investments.