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The UK’s Association of Charitable Foundations, which represents 300 institutional investors collectively holding £48bn in investments, has backed moves to bring greater clarity to the law on whether charities can make social investments. The Law Commission, an independent statutory body which reviews UK law and recommends reform where needed, has been asked by the UK government to prioritise a consultation on social investment by charities following a government-sponsored review of charity law by Lord Hodgson of Astley Abbotts. In the review, Lord Hodgson concluded that charities are not confident about making decisions on social investment and recommended a series of changes, including a statutory power of social investment for charities. The UK government broadly accepted
Lord Hodgson’s recommendations and asked the Law Commission to review whether such a power would be possible. The Law Commission agreed that charity trustees are confused about whether making social investments conflicts with the perception that they must seek maximum risk-adjusted returns or with the application of the Trustee Act 2000. It has taken forward Lord Hodgson’s proposal for “a new statutory power to make social investments”, which it says would to bring greater legal clarity. It provisionally proposes that when exercising the new statutory power to make social investments charity trustees should not be required to comply with investment duties under the Trustee Act 2000, such as reviewing investment periodically and obtaining advice.
The Association of Charity Foundations has backed the proposal, calling it “appropriate and helpful”. “We believe that only such a power would give trustees of the wide range of charities that exist the discretion they need to blend financial and social return along the spectrum inways that will best further their specific charitable purposes,” it said in response to the Law Commission’s consultation.
The Wellcome Trust, one of the UK’s largest charity investors, which has a £14.5bn investment portfolio which achieved returns of 18% last year, has also welcomed the proposal. It said: “The introduction of a statutory social investment power is on the whole supported by the Wellcome Trust as it would make it clear to charities that this activity is permitted. We would agree that the power should apply unless it is expressly excluded in the governing documents of a charity. The statutory power should apply to all charities, regardless of their legal form.” Proposals for a general power were first submitted in a report: ‘Ten Reforms to Grow the Social Investment Market’ authored by Stephen Lloyd and Luke Fletcher of Bates Wells Braithwaite (BWB), a specialist charity law firm. BWB welcomed the new proposed power but called for greater statutory force for a proposed voluntary checklist that charities should be able to tick off before they make social investments.
However, the ACF has raised concerns about such a list, saying some of its members are concerned that this might lead to a ‘tick box’ approach or become outmoded in future years. It says: “We would therefore ask the Law Commission to consider whether the statutory power should have a rider, making it clear that in exercising the power trustees should take into account all factors reasonably understood as necessary to ensure that the social investment will best further the charity’s objectives.
A Law Commission spokeswoman said the consultation closed in June and that it will now be analysing responses before taking further steps.
Link to Law Commission review