How to have your cake and eat it – the new social investment power for charities

The snappily titled Charities (Protection and Social Investment) Act 2016 has several components to it, some of which are already in force and some of which are on the way. One recent part to come into effect is the power to make social investments introduced by the 2016 Act which introduces three new sections (292A, 292B, and 292C if you’re interested) into the Charities Act 2011 and makes a slight adjustment to the Trustee Act 2000 to tie the two together in this respect. The changes went live on 31st July this year and in August the Charity Commission issued interim guidance on social investment to form part of the wider CC14 guidance on charities making investments.

So what is ‘social investment’ and what should charities be aware of under the new legislation?

Well, it first helps to take a step back and say what social investment isn’t – if a charity invests purely with a view to making a financial return for the charity then that might be ‘an investment’ but it isn’t social investment. Also, if a charity gives (say) a grant to a benefciary then that might be ‘social’ but it isn’t an investment, at least not in the meaning of the legislation.

Here, a ‘social investment’ “is made when a relevant act of a charity is carried out with a view to both: (a) directly furthering the charity’s purposes and (b) achieving a financial return for the charity”. “What is a ‘relevant act’?” you might well be asking. Well, that is: “an application or use of funds or property” but also includes “taking on a commitment in relation to a liability of another person (such as a guarantee) that puts the charity’s funds or other property at risk of being applied or used.”

So, in order to be a social investment the aim must be directly further your objects and also achieve a financial return. This can be achieved by spending the charity’s money or using its other property (as you might expect) but can also include giving a formal guarantee or equivalent. This latter widens out the definition of social investment and, whilst the first is still likely to be by far the most common variety, it is worth being aware of the second too.

To try and put all this into context, let’s say you are a charity with an object to help reduce unemployment. You decide to invest some funds in supporting unemployed people to develop their own new businesses and, in exchange, your charity is entitled to take 20% of the shares in each new business created. You would simultaneously be fulfilling your objects but also be looking to make a profit out of the businesses which succeeded.

It’s important to note a few things about social investment. Firstly, in one sense, this is not new at all as charities have done this kind of thing well before the 2016 Act came into being. However, what the new legislation does do is confirm that charities do have this power. Before you rush off entering into social investments, though, the new law also comes with some restrictions and some obligations.

In brief, the restrictions are:

  • the Act doesn’t apply to charities established by legislation (e.g. NHS charities) or to Royal Charter Charities – you may well still be able to carry out social investment but you are not covered by this statutory power so it is worth double-checking before you do;
    • your own governing document may have restrictions which narrow the general power;
    • this does not change any of the existing legal duties for trustees (e.g. acting in the charity’s best interests and acting with reasonable skill and care); and
    • this does not change any restrictions on existing funds (such as permanent endowment);

The obligations for trustees are:

  • (before exercising a power to make a social investment):
    • assess whether advice ought to be obtained (NB – this doesn’t have to be professional advice such as legal but of course should be from someone who the trustees consider to be competent to give it);
    • if the answer to the first point is that advice is needed, then the trustees must get that advice (and also consider it when received); and
    • satisfy themselves that the investment is in the charity’s best interests (considering the benefits to the charity, both in achieving the objects and financially).
  • (after exercising a power to make a social investment):
    • review those investments from time to time;
    • consider if advice is needed in respect of the review; and
    • (if it is) obtain that advice and consider it when it is received.

The Charity Commission guidance makes it clear that these are obligations on the trustees and these obligations cannot be delegated, even to the senior management team. However this does not mean that the trustees need to do everything in relation to the implementation and monitoring of the social investment, just that they need to have the oversight of it (in the same way that trustees should have the oversight of the rest of the charity’s activities).

So, what does all this mean in practice? How can you have your proverbial cake and eat it or, to put it another way, meet your charity’s objects and bring in income for the charity at the same time?

The first thing is to be aware of when you might be making (or considering making) a social investment within the meaning of the legislation. This is particularly important given that providing a guarantee may not fall within what you might normally think of as an ‘investment’. If you are engaged in social investment you need to bear in mind the obligations on the trustees which then apply, and then follow them. The guidance lists a series of things trustees should bear in mind before making this kind of decision, such as the duration of the arrangements and an ‘exit strategy’, how the performance will be monitored and judged, and exactly what the benefits are expected to be (both financial and in terms of fulfilling the objects).

In one sense, this shouldn’t change anything because the underlying duties on trustees haven’t changed and trustees should therefore always be considering if they know enough about an issue to make a decision in the best interests of the charity or if they need some form of third party advice (whether or not from a professional) to help inform the decision. Trustees should also keep an eye on contracts that the charity has entered into – in whatever shape or form – to satisfy themselves that they remain in the charity’s best interests and take action if they don’t.

However, in another sense the legislation and accompanying guidance helps focus the mind and remind charities of what they should be bearing in mind if they want to both fulfil their objects and make money for the charity at the same time.

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