Social Investment following Charity Commission guidance

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16 December 2011

The Charity Commission has published guidance which provides welcome confirmation that charities may make 'social' and 'mixed motive' investments.

A charity is able to make financial investments with a view to making a profit but it may also want to make another type of investment, which furthers its objects but risks a below-market return.  This latter type of investment is becoming increasingly popular with charities and is known as 'social investment' or 'programme related investment'.  Until recently, it was not clear that charities could comfortably make this type of investment which does not necessarily achieve the best financial return.   However, the recent Charity Commission publication 'CC14: Charities and Investment Matters - a guide for trustees' has been welcomed in the charitable sector as recognising that charities may make both financial investments, social investments or a mixture of the two, provided the trustees are clear about their motives and that the use of resources is in the best interests of the charity.

Programme Related Investment ("PRI")

PRI involves using the charity's funds to further its aims and at the same time potentially receiving a financial return.  There are many forms the investment can take; common types include making loans to, and taking shares in another charitable organisation.  Before making the investment, the trustees of a charity must ensure that the investment is:

  1. in furtherance of its stated aims;
  2. for the public benefit; and
  3. expected to produce some financial return

Although the PRI must be expected to make a return, this does not have to be the main reason for making the investment.  An example given in the guidance is a charity which works to relieve poverty giving a loan to another charity that helps unemployed people back into work.  This will relieve poverty (wholly in furtherance of the charity's aims), will be for the public benefit, and be expected to achieve a financial return from the interest payments on the loan.

An additional benefit for trustees is that, in making a PRI, they are not bound by the complex legal framework for financial investments.

Mixed Motive Investment

Generally, an investment that a charity makes must be one of either:

  1. a normal financial investment – seeking the best financial return given the level of risk considered appropriate; or
  2. PRI – as described above.

Both of these are accepted methods of investment provided they are undertaken in the charity's best interests.  This Commission's guidance recognises for the first time that an investment may be made which cannot be wholly justified as either one or the other, but rather has a 'mixed motive'.   Trustees may be able to justify an investment with mixed motives so long as:

  1. their motives are partly financial and partly to further a charity's aims directly in a way that might produce a financial return;
  2. there is no other reason for making the investment, including creating unauthorised or unacceptable private benefit to either the trustees or other individuals; and
  3. the investment is in the charity's best interests.

It is hoped that the Charity Commission's more flexible approach to mixed motive investment will enable charities to invest more widely in the emerging social investment market.  But as the guidance is still hot from the press with few practical examples to date, trustees must think carefully through the justifications for an investment with mixed motives and would be wise to seek professional advice before it is made.  

For further advice please contact Nicola Manclark by email or Charles Wyld by email

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