New guidelines to help charities navigate investment governance have been launched to help address potential conflict between charities’ investments – an important source of income – and their charitable objectives. 

The Charity Investment Governance Principles set out best practice in the decision-making processes that sit around how charities invest. A panel session at ICAEW’s Charity Conference next week will explore how these principles can be used to improve investment governance.

Some charities invest far more money compared with their programmatic spending activity and yet, historically, very little attention has been paid to how those investments are made and what impact they have, says Luke Fletcher, a partner at law firm Bates Wells, who acted as a legal adviser to the investment principles steering group. 

Investments contributing to problems

“There’s a growing sense that this disconnect is neither good nor sustainable,” Fletcher says. “Operational charities that care deeply about certain issues are sensitive to the fact that there might be investments that are contributing to some of the problems that they’re trying to solve on the operational side.”

Kristina Kopic, ICAEW’s Head of Charity and Voluntary Sector, joined Fletcher on the steering group as an adviser. She agrees that the potential reputational damage of that disconnect is not to be underestimated. Indeed, several high-profile charities have been criticised in recent years for investment decisions they have made that are at odds with their charitable goals. These include the Church of England’s indirect investment in payday lender company Wonga and the National Trust’s investment in fossil fuel companies. 

“Most charities want to invest ethically, but some may not know where to start and trustees may worry about the financial return once non-financial factors are considered. It can be daunting to be responsible for a charity’s assets, but it’s all part of the trustee role, and the Charity Investment Governance Principles provide practical support,” Kopic says.

Sector-wide collaboration

The guidance is the result of a sector-wide collaboration between the Charity Finance Group (CFG), the National Council for Voluntary Organisations, the Welsh Council for Voluntary Action, the Association of Charitable Foundations and the Charities Responsible Investing Network. Representatives from the Charity Commission for England and Wales joined the project as independent observers. 

“Historically, investment has been seen as a specialist, professionalised area focused on managing risk and return,” Fletcher adds. “In recent years, the impact dimension has come in. So, how do you reconcile that challenge? One of the main benefits of these principles is to make it clear how these things come together, when to ask these questions and who should be asking them.” 

Ultimately, charity trustees are responsible for investment decision-making. And yet, where investment decisions are delegated to investment managers, the trustee board can feel disempowered, Fletcher warns. 

Curating operations/investment conversations 

“Boards may know very little about investment, but may know a great deal about the charity’s mission, and those who know about the investments may not understand the operational work. So how do you curate conversations where these two worlds come together and come to aligned positions around what can be quite difficult and technical questions?” Fletcher says.

This is about arming them with the right questions to ask about investment decisions, he says. “At what point should they get independent financial advice and start appointing investment managers? Who do you appoint as your investment managers? If you are positively seeking impact, how does that weigh against financial factors? 

“It’s about framing the right questions and helping trustees to figure out who should be asking those questions and when they should be asking them. It’s not prescriptive; different trustee boards will come up with very different decisions.”

Prompting question, not giving answers

Richard Sagar, Head of Policy at CFG, agrees this is not about giving trustees the answers. “We’re not too descriptive in what the investment decisions should be, but it’s a process to follow around the governance to make sure trustees are making investment decisions with full knowledge regarding the law, the Charity Commission guidance and best practice in the wider sector.”

The principles follow the 2022 High Court judgement in a case brought by the Ashden Trust and the Mark Leonard Trust, represented by Bates Wells, to confirm that their “Paris-aligned” investment policy was permissible under charity law, even though it might lead to reduced financial return and increased financial risk. That led to the Charity Commission’s new CC14 guidance on investments. 

“So, the court has given clarity, new investment guidance has been produced and there’s some regulatory clarity in the area. It’s a good platform on which to build to say: ‘What does good look like?’ in this context,” Fletcher explains.

Empowering trustees

Fletcher says his hope is that trustees will feel empowered by the Charity Investment Governance Principles and have greater confidence in decision-making around investments. “I would like to see some of these bigger conversations taking place in a constructive, positive way that generates consensus within charities.”

Sagar, meanwhile, says awareness and use of the principles will be key. “We hope that it will offer practical help. Pretty much any charity that invests in any capacity – and that includes holding cash – will find these principles relevant.”

Sagar also stresses that investment governance for charities should be an iterative process and conversations and decisions around investments will evolve over time as circumstances change. 

“We’re keen on feedback from charities about how they’ve implemented the principles and what they might like to see change – not necessarily in terms of the technical detail, but more in terms of how we might structure this to be more useful for the sector. We really want ongoing dialogue and communication with the sector on this,” Sagar says.

Luke Fletcher will be one of the panellists at a dedicated session on the Charity Investment Governance Principles at ICAEW’s virtual Charity Conference, taking place on 23 and 24 January 2025. Find out more and book your place.