Law Commission to review mixed-purpose social investing by UK charities


Investment & Pensions Europe, By Gail Moss

November 04, 2013



The Law Commission, the statutory independent body that monitors the law in England and Wales to ensure it is fair, modern and cost-effective, is to review the powers of English and Welsh charities in relation to mixed-purpose social investment.


Mixed-purpose social investment is a relatively recent phenomenon. The investment is made in part to achieve a financial return and in part to achieve a social benefit that furthers its objectives.


The Law Commission said social investment in general presented many challenges for charity trustees, with decision-making complicated by the relative novelty of the concept, and the immaturity of the social investment market. But while Charity Commission guidance explains that charity trustees can make mixed-purpose investments, there is concern the current legal framework does not easily accommodate this. This can deter trustees from taking advantage of social investment opportunities and result in high transaction costs.


The Law Commission has therefore agreed with the Cabinet Office that it will consider whether the law can be reformed to make clearer the powers and duties of charity trustees in undertaking mixed-purpose investment. In particular, the review will examine whether a new specific power to make mixed-purpose investments is feasible and would be beneficial for charities. It will also consider the introduction of a new legal power for non-functional permanent endowments to be invested in mixed-purpose investments, with the requirement that capital levels must be maintained or otherwise restored within a reasonable period.


According to the Charity Commission, there are 50,000 charitable trusts in England and Wales. Assets of charitable trusts with annual income of more than £500,000 (€590,000) total £48.5bn, according to the Association of Charitable Foundations (ACF). Carol Mack, deputy chief executive at the ACF, said: “This has been a longstanding subject of discussion, and it’s helpful to have it looked at.” Raj Singh, programme director at the UK Sustainable Investment and Finance Association (UKSIF), said: “Charities shouldn’t be constrained by red tape when it comes to mixed-purpose social investment. Such investments provide additional leverage to charities by providing additive benefit, on top of core operations, to the people they serve.” He added: “One way of doing that is through impact investing vehicles, though charities will need to be careful to pick a portfolio that ultimately suits beneficiaries. The growing impact-investing market means this type of investment can be utilised by more and more charities as mixed-purpose social investments.”


Singh said it appeared that regulators were beginning to understand that these investments could achieve competitive returns, as outlined in a recent report by Sonen Capital and the KL Felicitas Foundation in the US. He said:

“The news that a foundation has invested 85% of its assets into a range of bespoke impact-investment portfolios over seven years, achieving index-competitive levels of return, seems to blow the fears of underperformance out of the water, while still retaining the benefits of diversification. Clarifying charity law to allow for taking on higher risks would be welcomed, but it should be stressed that mixed-purpose social investing can be return-based. The range of products in the mixed-purpose social investment market is maturing rapidly, and this type of investment can mirror ‘mainstream’ risk-adjusted investing.”

The review represents an extension of the Law Commission’s charity law project, started in March, which will examine selected issues in charity law, including Charity Commission powers, charity transactions and disposals (for instance, of land) and charity mergers. It follows last year’s review of the Charities Act 2006 by Lord Hodgson of Astley Abbotts. The Law Commission expects to launch a public consultation in summer 2014, with the publication of a final report and draft Bill in March 2016, if the review progresses far enough.


See the full article on Investments and Pensions Europe.

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