Can charities invest 100% in social or mission-aligned investments?

Today, many charities are asking whether they can put all of their assets into investments that deliver a social (or ‘mission-aligned’) impact. For some, the answer is a qualified yes. 

The recent Butler-Sloss case^[1] is a sensible place to start. Although it didn’t change the previous, underlying law, it is a helpful summary of principles for trustees considering social investment. 

There is generally available social investment power, but charity trustees also have a duty to manage assets prudently and to invest available resources (funds not being used immediately for charitable purposes) so that they obtain maximum financial return.

Powers of social investment have very low requirements in terms of financial return. Therefore, unless a charity is spending out, or is otherwise using up all of its assets over a defined period of time, that generally means that charities with available funds need to consider some financial investment – even if the aim is to invest in projects that also deliver a social or mission-aligned outcome. 

So, trustees need to be familiar with their financial investment powers. Charities generally have very broad powers in this regard: they may have relevant powers (and sometimes restrictions) in the charity’s governing documents, and the Trustee Act 2000 gives trustees a general power.

This is where the principles reaffirmed in the Butler-Sloss case apply. In that case, the trustees sought to align all investments with the Paris Agreement on climate change. The charities concerned had environmental purposes, but all investments could not be said to directly advance the charities’ purposes. The court was asked on what basis the trustees could proceed. 

The judge confirmed that the overarching duty was to further the objects of the charity. An investment power must be used to further those purposes. “That is normally achieved by maximising financial return on investment.”

However, in cases in which trustees reasonably believe that investments (or classes of investments) conflict with the charity’s purposes, they have a discretion to exclude those investments. In exercising that discretion, trustees should balance all relevant factors, including the likelihood and seriousness of any conflict and the potential financial effect of excluding such investments.

Trustees can also take into account the risk of losing financial support from donors or supporters and damage to the reputation of the charity in general and among its beneficiaries. That may also lead them to exclude certain investments (or classes of investments).

However, in the Butler-Sloss case, the judge said that trustees need to take care in deselecting investments on moral grounds. They should recognise that not all among the charity’s supporters and beneficiaries will have the same moral outlook, or there may be differing, legitimate moral views on a subject: “Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.”

… If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.”

However, the case did not conclude that it would be appropriate to exclude a strong financial investment (or class of investments) where it is not possible to justify this with reference to the best interests of the charity and its objects (including with reference to its reputation). Wider duties of trustees to exercise care in the management of assets, to diversify investments, maximise financial return and manage risk may still require an investment strategy to consider financial investments that offer strong returns. 

In other words, trustees will need to aim for maximum returns on some investments, or they may breach these wider duties of care to the charity. Great care needs to be taken where there is not a strong charitable justification for rejecting financial investment which would provide a strong financial return. If non-mission-aligned financial investment does not clash with the charity’s objects, and would not harm the charity in any other way, for example, reputationally or by alienating stakeholders, there may be no power available to the trustees to de-select it.

That said, the case confirms that the charity’s purposes are paramount. Where the charity’s objects (and mission) are broad in scope, this will help with both selection and de-selection of investments. For example, a charity with purposes connected to social change, such as improving conditions for the poor, may enable it to conclude that the charity’s stakeholders would expect it to take a tailored approach to investment. 

Therefore, an investment policy that roots the selection and deselection of investments firmly in the charity’s objects and a (reasonable) assessment of the charity’s reputational need, expectations of stakeholders and equivalent objective factors, might permit it to enable it to select investments according to compatible criteria.

With some charities, this might enable 100% of their investments to be mission-aligned. 

Great care will be required when investments are not delivering maximum, market-rate returns. If the “balancing exercise” explained in this article is not carried out properly, if trustees’ investment policy cannot be justified as set out above, trustees could potentially be liable for losses suffered by the charity. Trustees cannot overlook investments that provide a better rate of return where there is not this robust rationale in the interests of the charity.   

Nevertheless, the approach outlined above might be of benefit to many charities seeking to maximise charitable impact. 

What might a 100% mission-aligned investment policy look like in practice? 

A policy that seeks to align all investments with mission-related aims might require that all investments satisfy at least one of the following criteria:

• directly and effectively advancing the charity’s objects;
• in whole or in part directly advancing the charity’s objects and delivering some maximised, but potentially sub-optimal financial return, which is augmented by the advancement of the objects; or
• delivering a market-rate financial return by any means which indirectly assists the charity in advancing its objects, and is consistent with its mission and other objects-derived requirements of the policy.

That way, all investments could be said to either be an effective use of assets for charitable purposes or provide maximum financial return in a way that is consistent (or not inconsistent) with the charity’s objects, or both. 

For charities able to achieve this balancing act, trustees could be said to have their cake and eat it too.

[Important note: this article is not legal advice and you should not rely on it as such. Financial investment decisions carry an elevated duty of care. Trustees should obtain appropriate professional advice before adopting a policy like that illustrated in this article.]