Charity Law: Social Investment by Charities

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

Our recommendations for reform are included in the Charities (Protection and Social Investment) Act 2016, which received Royal Assent on 16 March 2016.

The terms of reference for our Charity Law project, first agreed with the Government in June 2013, were updated in October 2013 to record the extension of the project to include a review of certain aspects of the law relating to social investment by charities.

Charities occupy a special place in society and in law. They exist for the benefit of the public and they must have exclusively charitable purposes. To achieve those charitable purposes, charities have traditionally both spent their funds in support of their charitable objectives (for example, providing funds to build a hospital), and invested so as to generate further funds for future initiatives (for example, purchasing shares in listed companies to provide an income). A charity making a social investment combines these objectives in one transaction, seeking to achieve both its charitable purposes and a financial benefit.

Our terms of reference were to consider charity trustees’ powers to make, and duties when making, social investments and to consider whether anything can be done by way of law reform to make those powers and duties clearer.

Consultation

We conducted a consultation in summer 2014 that considered the current law and the difficulties that charities face when making social investments.

Many charity trustees can, and do, make social investments without having any concerns about the scope of their powers and duties. Some charity trustees, however, are not confident about making social investments because they are unsure whether their powers under the charity’s governing document or under the general law authorise such investments. In addition, some charity trustees considering whether to make social investments may feel that they risk breaching their duties.

In our consultation paper we provisionally proposed the introduction of a new statutory power to make social investments. We did not suggest that the new power should replace charity trustees’ existing powers, but rather that it should supplement them, forming part of the toolbox available to achieve charities’ purposes. We provisionally proposed that the new statutory power should be accompanied by a non-exhaustive checklist of factors that charity trustees may take into account in deciding whether to make a social investment.

The consultation paper also considered whether charities with permanent endowment could use the endowment to make social investments. We concluded that permanent endowment can be used to make social investments which are anticipated to preserve the capital value of the endowment. We did not propose that there should be a further power to use permanent endowment to make social investments that are not expected to preserve capital.

Report

Following an 8-week consultation, we published our recommendations on 24 September 2014. We then drafted a Bill to give effect to our recommendation for the creation of a new statutory power, which the Government included within the Charities (Protection and Social Investment) Bill.

Implementation

The Bill was introduced into the House of Lords in May 2015 and completed its Parliamentary stages in February 2016. The Charities (Protection and Social Investment) Act 2016 received Royal Assent on 16 March 2016.