New guidance on investing charity funds published

Matthew Harrington
Financial Planning, Charities
Matt Harrington Financial Adviser for Lovewell Blake Financial Planning

The Charity Commission’s document aimed at charity trustees which gives guidance on investing charity money has been significantly updated.

Matt Harrington Financial Adviser for Lovewell Blake Financial Planning

With rising interest rates affecting the investment environment, it is an opportune time for trustees to review how they invest funds to support day-to-day activities, fund future projects, and ensure their charity’s reserves are both safe and working hard.

The good news is that the updated guidance is shorter than before, and has removed terminology which was confusing in favour of a plain English approach.  It has also been road-tested by a sample of around 1,000 charities across the UK.

Often charity trustees take a cautious approach to investment, and whilst this is understandable – it is not their money they are dealing with, and often a charity’s very existence depends on its reserves being prudently handled – it is also important to ensure that an overly-cautious approach doesn’t restrict the charity’s income.

Trustees’ principal duty is to further their charity’s purposes, so any investment decisions must be made with this as the primary objective.  Understanding this is key: are you investing for long-term growth to support future plans, or to provide an ongoing income for current activities?

As with any other trustee judgement, investment choices must follow the principles of good decision-making, ensuring that trustees are acting within their powers, in good faith and only in the interest of the charity.  Such decisions must be made on a sufficiently informed basis, taking into account any relevant factors, and avoiding conflicts of interest.

In addition to these general trustee duties the Charity Commission expects trustees to follow some specific duties when making financial investments, whatever the structure of the charity (including for charitable companies and other corporate charities). 

This includes considering whether the investments are suitable for the charity and whether they will meet its investment objectives; considering the need to diversify investments; taking advice from an experienced investment expert; and reviewing the charity’s investments at appropriate intervals. 

These duties are outlined in full in the Charity Commission document, CC14 ‘Investing charity money: guidance for trustees’. There is a link to this document at the end of this article.

A charity’s governing document will usually outline the powers trustees have in making such decisions, and may also stipulate if there are any kinds of investments which may not be made, either on risk or ethical grounds.

Trustees must also act with reasonable care and skill, using their own experience, and seeking outside expert advice where the right skillsets don’t exist within the charity board.  It is actually quite rare for charities to have investment experts among trustees (bear in mind that those with accountancy skills don’t necessarily also have investment expertise).

Any investment decision will carry an element of risk – even cash deposits with returns below the rate of inflation will erode the true value of your holdings.  Understanding this risk is crucial, as is knowing what level of protection there is if things go wrong (for example, through investments covered by the Financial Services Compensation Scheme (FSCS).

Investment decisions will also have to take into account the time horizon, and whether the charity may need to access its funds to meet unexpected costs (as many needed to do during the Covid pandemic).

Those investing charity funds tend to take a more ethical approach to investment, either because this is set out in the charity’s governing document, or because doing so is in line with the ethos of the organisation.  Trustees need to be aware of such considerations, and the potential implications of such restrictions on the investment characteristics.

All of this sounds daunting, but it is in fact simply common sense.  Charity trustees are investing money on which the charity depends to deliver its charitable objectives, and it’s right and proper that those decisions are taken carefully and responsibly. 

As long as trustees have clear investment objectives in place and understand what their powers and responsibilities, there is no need to be afraid of taking such decisions. 

As Helen Stephenson, the chief executive of the Charity Commission says, “Our refreshed guidance will help trustees make well-informed, carefully considered decisions about how to invest on behalf of their charity in a modern context.

“We are clear that each charity’s situation is unique, and there is no ‘one size fits all’ approach to charity investments.  We are also clear that that trustees have discretion to choose what is best in their circumstances and a range of investment.”

Investing a charity’s funds wisely is one of the most important things a board of trustees can do to ensure the future viability of their organisation and its ability to continue delivering its services to those who need them.

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