The Charity Commission has published a refreshed version of its guidance on investing charity money. What has changed – and do you need to act? Heather Lamont reports

If your school has charitable status and has one or more investment portfolios, you will want to be aware of the latest version of the Charity Commission’s guidance on investing charitable funds (CC14). You should refer to it when next reviewing your investment policy (something you ought to be doing regularly anyway) or if you are setting out a policy for the first time.

The law on charity investment and how to access professional expertise hasn’t changed, so most schools will find that it doesn’t necessitate a revamp of their approach or policy. There are some changes of emphasis and terminology, though. The updated guidance is also shorter and, most people will find, clearer than its predecessor.

The guidance begins by reminding us that charity trustees’ principal duty is to further their charity’s purposes and reassures us that when it comes to investments, this will mean different things to different organisations. In other words, good governance comes first – sound decision-making by the governors to identify and describe what approach is best for your school, rather than a box-ticking exercise.

Purpose-related considerations

A hot topic prior to the release of the refreshed guidance was the question of whether trustees were permitted to place significant restrictions on what type of businesses their portfolios might be allowed to invest in, even if there was a good chance that this would damage the financial returns from their investment. In 2022, the well-publicised English High Court case known as Butler-Sloss focused on the scope for trustees to exclude carbon-intensive businesses. The outcome confirmed that such a policy would be consistent with trustee law, provided as ever that the trustees were able to demonstrate sound decision-making and why they believed such a policy to be in furtherance of the charity’s purposes.

Although this doesn’t represent any change in the law, the refreshed CC14 guidance recognises that trustees may exercise their own judgment on whether and how to restrict investment in any particular type of business if they feel that it either contradicts their mission or would put their organisation’s reputation at risk.

In practice most schools tend to take a light-touch approach when considering this aspect of their investment policy and do not seek to screen out large swathes of business activity. It is common to avoid tobacco stocks for reputational reasons, for example. Other specific areas of concern, especially for schools with a religious affiliation, may be alcohol, gambling, armaments or adult entertainment. But sensibly applied, such exclusions need not carry any assumption of noticeable damage to long-term financial returns.

If you are going to apply portfolio restrictions for reputational reasons, it’s important that the policy is applied consistently. This can be a challenge if you have pooled funds in your portfolio, which will be the case for most school investors. It’s easy enough to specify the criteria to exclude direct investment in individual company shares – say, ‘any business deriving more than 10% of its revenue from alcohol’, or ‘tobacco producers’ – but if you’re investing in So-and-So’s Emerging Markets Fund are the same criteria going to apply there? Probably not, so your reputation is still at risk. This is one reason why many schools opt for one of the charity-specific pooled funds, as these each publish their own policies which can be applied throughout the portfolio, not just to ‘direct’ holdings.

The refreshed CC14 also makes clear that consideration of what types of business may or may not be excluded from the portfolio is far from the only approach that trustees may wish to apply. For instance, trustees may choose to integrate environmental, social and governance (ESG) issues into their investment strategy either to boost returns or protect their reputation. Indeed, this is something that good investment managers will be doing anyway because understanding these ESG factors has implications for financial risk and returns – so it’s worth asking your portfolio manager about.

Investors are increasingly aware that a policy on what’s allowed or not allowed in the portfolio might be good for your reputation, but it won’t change how the world works. The Charity Commission’s guidance therefore recognises that trustees may also be interested in how the investment assets are being used to advance the school’s purposes and reflect its values, and refer to this in their investment policy. This might be, for example, through action by their fund managers to drive real-world change on issues that matter to stakeholders such as climate change, inequality or mental health.

Accessing professional expertise

When it comes to selecting investment assets or managing a portfolio most schools will not have enough in-house expertise to do this themselves and the guidance expects that the great majority of charities will need to select a professional manager to take on this role.

Some schools will ask their chosen firm to manage a ‘bespoke’ portfolio of individual investment assets and/or pooled funds. It’s worth investigating how bespoke this really is, because it’s not the most cost-effective route to the investment market – you’re paying your manager directly to select funds for you, and you’re paying the managers of those third party funds indirectly. The loss of income and capital value over time that arises from this double layer of costs can be quite striking.

That’s easy enough to justify if you do indeed have needs that are unique, and if your portfolio reflects those needs. But many charity investors have found out that they have been invested for years in a model portfolio (so not really bespoke at all) which isn’t even a particularly good match for the distinctive priorities that charitable investors tend to have.

Indeed, the refreshed CC14 guidance notes that another way to access professional management is to invest in a collective scheme such as a specialist fund available only to charities. You still need to be satisfied that the fund meets your school’s needs, so it’s important to understand the fund’s investment policy and objectives and how these align with your own policy. Fund information is readily available and it should be straightforward to compare different funds in the market and how they have performed, but don’t be afraid to ask questions of the manager before you invest and thereafter.

The benefits of these funds are well recognised and most boards will feel confident to select from this range without having to take professional advice on their choice. However, if you do want to seek advice about selecting a portfolio manager or a pooled fund, or on any other aspect of your investment policy, then you should expect to pay separately for it: the Financial Conduct Authority isn’t keen on investment advice being ‘bundled up’ with fund management.

And CC14 notes that you still need to consider the advice objectively and do what is best for your charity, thinking about any potential conflicts of interest that affect an advisor. This could be an issue, for example, if the advisor is recommending that you use its own funds or services, without being able to demonstrate why those will serve your purposes better than others – common sense, and good governance, will tell you that such ‘advice’ is unlikely to be impartial.

Heather Lamont is a client investments director at CCLA.

Heather Lamont