1. Purpose of investments
Description
The board has a shared understanding of why the charity makes investments, how those investments further the charity's purposes, legal and practical considerations relating to investments and the charity's time horizon.
Rationale
A charity's investments might range from a small amount of money in a bank account to a large investment portfolio. For most charities, investments will be made to ensure the ongoing sustainability of the charity, for example holding reserves or funds designated towards a particular project, or to generate financial returns. There are also opportunities, particularly for charities with an endowment or substantial investments, for the investments to support and further the charity's purposes beyond financial returns, for example through responsible, impact or social investment. Trustees should have an understanding of the legal and practical considerations relating to investments and the charity's time horizon.
Key outcomes
- All trustees have a shared understanding of the charity's purposes, that investments are a tool to deliver those purposes, and how investments further the charity's purposes.
- All trustees understand their legal responsibilities, investment powers and how investments are held by the charity.
- Any restrictions or requirements relating to the charity's investment approach, for example due to the charity's governing document or structure, are recorded in writing.
- The charity's structure and the type of funds held are understood by trustees/staff/committee members.
- Trustees/staff/committee members understand when money might be needed, and choose an investment approach appropriate to the charity's overall time horizon.
- Where a charity is accumulating significant investments, trustees/staff/committee members explore how this furthers the charity's purposes.
Practice
Purpose of investments
Why the charity makes investments and how those investments further the charity's purposes
Trustees' principal duty is to further the charity's purposes. Investment decisions must be made to further those purposes and in the interests of the charity.
Trustees, with support from staff and committee members, understand why the charity makes investments and how those investments further the charity's purposes. In most instances, this will include:
- providing financial returns (income or capital growth) to fund the charity's activities
- investment of the charity's reserves as governed by the reserves policy
This may also include: investments which further the charity's purposes beyond financial returns, for example via responsible, impact or social investment approaches.
Legal and practical considerations
Trustees must comply with the legal duties and requirements set out in the Charity Commission's ‘Investing charity money: guidance for trustees (CC14)’, make decisions in the best interests of the charity and keep the investment approach under regular review.
Trustees (working with help from staff, committee members and others) can decide how to invest and have a wide range of options available. The Principles will help trustees and those working with them, to work through the governance considerations to achieve this.
All trustees are signposted to where to find information about their legal and regulatory responsibilities in relation to investments and can access training appropriate to their charity's context and their role.
Trustees are collectively responsible for their charity's investments. Those trustees with professional investment expertise are responsible for the quality of advice they give to the charity. More information on trustee responsibilities can be found in the Charity Commission's CC14 guidance.
Many law firms and investment managers will also offer training which includes legal and regulatory responsibilities
Trustees (with help from staff and committee members where needed) follow the requirements of the Charity Commission's CC14 guidance including:
- check and follow any specific restrictions or requirements, for example in the charity's governing document or stated by a donor, that affect the charity's ability to make investments
Donors can place restrictions on their gifts, for example a donor might say that when a gift is invested any income generated must be spent on a specific area of the charity’s purposes or the charity’s purposes generally; or on whether the gift should be treated as permanent or expendable endowment; or on how the gift can be invested. Trustees must understand any restrictions placed by the donor and ensure these are adhered to when taking any investment decisions.
Restrictions on making investments might include:
- avoiding particular asset classes
- where a donor has indicated that they only want their funds invested in a particular way, for example to minimise environmental damage
Any restrictions should be recorded in writing.
Trustees, with the support of staff and committee members, can periodically review whether the restrictions make ongoing sense, for example every 5-10 years considering whether the restrictions are still suitable in the charity's context. Legal and/or investment advice may be needed before any changes are made. Where trustees wish to change governing document restrictions, they must follow the legal requirements that apply.
See the Charity Commission's How to make changes to your charity's governing document (CC36) for more details.
- understand the charity's structure (for example whether it is incorporated or unincorporated), and the implications of this for holding investments
CC14 - "If your charity is a company or Charitable Incorporated Organisation (CIO), or other corporate body, it can hold investments in its own name.
For other charity types, such as trusts and other unincorporated charities, the trustees have to hold investments in their names on their charity’s behalf. For these charities it can save costs and be more convenient to appoint a nominee or custodian to hold investments, but any type of charity can make these appointments."
The charity's structure should be listed in the governing document.
For a charity which is a CIO or charitable company, regardless of its size, investments (for example a bank account or investment portfolio) should be held in the name of the charity because it has its own legal personality. Some or all of the trustees may be named on the bank mandate. Staff may be named on the bank mandate if there are no restrictions in the governing document and they have delegated authority from the trustees.
An unincorporated charity, regardless of its size, has to hold investments (for example a bank account or investment portfolio) in the name of the trustees because the charity does not have its own legal personality. Some or all of the trustees will be named on the bank mandate so they are able to manage the bank account. Staff may be named on the bank mandate if there are no restrictions in the governing document and they have delegated authority from the trustees.
For more on charity structures, see:
- understand the type of funds held by the charity, for example unrestricted funds, endowment funds
See the glossary for an explanation of unrestricted, designated, restricted funds, and reserves, expendable and permanent endowment.
For those charities which prepare accounts, the Charities SORP (Statement of Recommended Practice) provides guidance. The accounts start with the SOFA (Statement of Financial Activities).
This includes details on the charity’s:
- level of any unrestricted, restricted, designated and endowment funds-
- income: this might include income from donations, legacies, grants, memberships, trading activities (eg running a café or charity shop) and investment income (eg dividends paid on shares, rent from an investment property). The income does not typically include capital growth on the charity’s investments.
- expenditure: this might include paying staff, costs for renting a premises, paying grants, fundraising costs and investment management costs
- investment gains/losses: this includes any increases or decreases in the value of the charity’s investments. This is not listed as income and typically appears further down a charity’s balance sheet
Many accountancy firms and membership bodies provide training courses for trustees on reading charity accounts.
- understand whether the charity holds permanent endowment or expendable endowment funds
- look at any documents that tell you how investments must be kept and used
- look at your charity's governing documents, for example does your charity’s governing document mention permanent endowment or does your charity’s governing document mention other restrictions? (eg donor wishes, restrictions on investment approaches)
- look at any documents that were used to give investments to your charity, for example are a donor’s wishes recorded (in a letter or other document) that they intended for their gift to be held as permanent endowment?
If in doubt, seek assistance from the Charity Commission.
- if the charity intends to make social investments, check and follow any governing document rules about whether or how the charity can make social investments
The Charities Act 2011 (as amended) says that a social investment is where charity trustees use money or property with a view to both:
- achieving their charity’s purposes directly through the investment
- making a financial return
Social investments can be made to directly deliver the charity's work (for example where a charity purchases a building from which to run services) or into other organisations which deliver the charity's purposes (for example making a loan to a social enterprise).
Any charity intending to make social investments should take advice from an individual with appropriate expertise. Trustees (with help from staff and committee members where needed) will need to consider whether social investments are appropriate in their charity's context, for example with regard to the charity's:
- available funds
- time horizon
- risk appetite
For more see: Responsible, Impact, Social investment
Time horizon and accumulating funds
All trustees have a shared understanding of the charity's time horizon, and ensure this is relayed to any individuals involved in the charity's investments (for example staff, committee members or external investment advisers or investment managers).
To reach a shared understanding, trustees can explore:
- whether the charity's purposes are achievable within a certain time frame
- balancing current and future needs
- whether the charity might achieve its purposes in different ways and how that might affect the charity's time horizon
Seeking to exist in perpetuity is not a strategic goal in itself. Where a charity has an ultra-long time horizon, trustees need to be clear why this is the best method for achieving the purposes.
Trustees/staff/committee members review the charity's investments in relation to its time horizon, including:
- whether the investments are suitable for meeting the charity's purposes over the short, medium and longer term
- the charity's risk appetite, and whether there is an appropriate balance between sound management of resources and being over-cautious
- requirements regarding income or capital growth
- where a charity is accumulating funds beyond its reserves policy, how this furthers the charity's purposes more than spending funds on the purposes
Reserves can strengthen a charity's resilience, for example if there is a drop in income or funds are needed for a project. A charity should have a reserves policy to explain its approach and the level of reserves the charity intends to hold.
Where income or growth in assets is above the level of spending, trustees should consider whether to continue to increase the size of the charity's unrestricted funds or to spend more on the charity's purposes. The decision-making process and outcome should be clearly recorded.
Macmillan Cancer Support (charity number: 261017) is keen that as much funding as possible goes to achieving the charity’s purposes, while ensuring the charity’s ongoing viability. As such, they focus on a ‘liquidity rather than a reserves policy’: 'As an organisation that relies almost entirely on annual fundraised income, our policy is to hold adequate funds to enable us to react to any unexpected adverse impact on our finances and therefore, we operate a liquidity rather than a reserves policy. This reflects our operating model which sees the immediate recognition of multi-year grant commitments, as per our accounting policy. It also means that by focusing on an appropriate level of liquidity, rather than a targeted level of reserves, we can increase our impact on the lives of people living with cancer...During 2022, trustees reviewed the current liquidity policy and reduced the target liquidity from £100 million to £70 million, following extensive liquidity modelling work with support from an external organisation. £70 million represents the amount needed to maintain the organisation at a healthy position with enough liquidity to cover working capital needs, along with a ‘rainy day’ fund which could be drawn upon in the event of a crisis. Under our liquidity policy, our target is to retain these funds in investments and cash which can be liquidated at short notice. In addition, we will hold cash and other liquid funds to meet normal day-to-day cash flow requirements.'
- where an expendable endowment is held, whether the intention is to spend, preserve or grow the endowment over time, why the chosen approach best serves the charity's purposes and the implications of accumulating funds
Charities make investments in order to support or further the charity's purposes. Growing or preserving the value of an expendable endowment is not a strategic goal in itself and there are opportunities and costs to maintaining an expendable endowment over the long-term. Unlike the trustees of a pension fund who are required to act on behalf of beneficiaries and ensure funds are maintained for beneficiaries, charity trustees act for the charity’s purposes and unless permanent endowment is held do not have an obligation to maintain the funds. Spending, preserving or growing an endowment over time must be an intentional decision made to support or further the charity's purposes.
Growing an endowment: In common with other Community Foundations, The Community Foundation serving Tyne & Wear and Northumberland (charity number 700510) is intentionally building an endowment to be 'a community asset to serve the region now and for generations to come....[so that] more charitable organisations can be offered funding and longer-term support as over time, the Community Foundation will be less reliant on money given annually.'
Reviewing perpetuity: Joseph Rowntree Charitable Trust (charity number 210037) carries out a periodic review of the charity’s time horizon, roughly every ten years
Blagrave Trust (charity number 1164021) states that it is 'agnostic about existing in perpetuity – that it would consider spending down if the justification was clear, but in the absence of such a justification would continue to balance its investment strategy and returns, alongside its grant-making commitments.'
Spending down: Albert Hunt Trust (charity number 1180640): 'established on 12 January 1979 and has distributed grants totalling more than £40m to date. When the Trust was originally set up the founders were clear in their intention to support a broad range of causes...With the unprecedented recent effects on society, through the pandemic and current cost of living crisis, there is a stark increase in the dependence being placed upon civil society as a source of intervention. This has consequently caused the Trustees to question ‘why does the Trust exist?’ and ‘why does the Trust need to exist forever?’. With the acknowledgement that there is much immediate need for financial support the Trustees have decided to act now by concentrating on the spending of the Trust’s remaining resources within a specific timeframe seeing The Albert Hunt Trust mark its 50th anniversary in January 2029 by closing.'
Reconsidering philanthropic endowments: Many endowed foundations are grappling with ways to share power between wealth holders (eg foundations) and those delivering change on the frontline (eg charities, social enterprises and activists).
See Principle 6: investment strategies that consider equity and impact for more on this. Some foundations, particularly in the US and UK, are exploring radically different approaches:
- Lankelly Chase Foundation (charity number 1107583) is working to "relinquish control of our assets, including the endowment and all resources, so that money can flow freely to those doing life-affirming social justice work."
- Thirty Percy Foundation (charity number 1177514) is "exploring how best to support wealth holders as part of the paradigm shift towards new economics and spiral investing approaches."
- Joseph Rowntree Foundation (charity number 1184957) is considering "how different forms of wealth, including philanthropic wealth, can be mobilised through alternative funding and investment practices to better serve people and the planet."
Purpose of investments
Why the charity makes investments and how those investments further the charity's purposes
Trustees' principal duty is to further the charity's purposes. Investment decisions must be made to further those purposes and in the interests of the charity.
Trustees, with support from staff and committee members, understand why the charity makes investments and how those investments further the charity's purposes. In most instances, this will include:
- providing financial returns (income or capital growth) to fund the charity's activities
- investment of the charity's reserves as governed by the reserves policy
This may also include: investments which further the charity's purposes beyond financial returns, for example via responsible, impact or social investment approaches.
Legal and practical considerations
Trustees must comply with the legal duties and requirements set out in the Charity Commission's ‘Investing charity money: guidance for trustees (CC14)’, make decisions in the best interests of the charity and keep the investment approach under regular review.
Trustees (working with help from staff, committee members and others) can decide how to invest and have a wide range of options available. The Principles will help trustees and those working with them, to work through the governance considerations to achieve this.
All trustees are signposted to where to find information about their legal and regulatory responsibilities in relation to investments and can access training appropriate to their charity's context and their role.
Trustees are collectively responsible for their charity's investments. Those trustees with professional investment expertise are responsible for the quality of advice they give to the charity. More information on trustee responsibilities can be found in the Charity Commission's CC14 guidance.
Many law firms and investment managers will also offer training which includes legal and regulatory responsibilities
Trustees (with help from staff and committee members where needed) follow the requirements of the Charity Commission's CC14 guidance including:
- check and follow any specific restrictions or requirements, for example in the charity's governing document or stated by a donor, that affect the charity's ability to make investments
Donors can place restrictions on their gifts, for example a donor might say that when a gift is invested any income generated must be spent on a specific area of the charity’s purposes or the charity’s purposes generally; or on whether the gift should be treated as permanent or expendable endowment; or on how the gift can be invested. Trustees must understand any restrictions placed by the donor and ensure these are adhered to when taking any investment decisions.
Restrictions on making investments might include:
- avoiding particular asset classes
- where a donor has indicated that they only want their funds invested in a particular way, for example to minimise environmental damage
Any restrictions should be recorded in writing.
Trustees, with the support of staff and committee members, can periodically review whether the restrictions make ongoing sense, for example every 5-10 years considering whether the restrictions are still suitable in the charity's context. Legal and/or investment advice may be needed before any changes are made. Where trustees wish to change governing document restrictions, they must follow the legal requirements that apply.
See the Charity Commission's How to make changes to your charity's governing document (CC36) for more details.
- understand the charity's structure (for example whether it is incorporated or unincorporated), and the implications of this for holding investments
CC14 - "If your charity is a company or Charitable Incorporated Organisation (CIO), or other corporate body, it can hold investments in its own name.
For other charity types, such as trusts and other unincorporated charities, the trustees have to hold investments in their names on their charity’s behalf. For these charities it can save costs and be more convenient to appoint a nominee or custodian to hold investments, but any type of charity can make these appointments."
The charity's structure should be listed in the governing document.
For a charity which is a CIO or charitable company, regardless of its size, investments (for example a bank account or investment portfolio) should be held in the name of the charity because it has its own legal personality. Some or all of the trustees may be named on the bank mandate. Staff may be named on the bank mandate if there are no restrictions in the governing document and they have delegated authority from the trustees.
An unincorporated charity, regardless of its size, has to hold investments (for example a bank account or investment portfolio) in the name of the trustees because the charity does not have its own legal personality. Some or all of the trustees will be named on the bank mandate so they are able to manage the bank account. Staff may be named on the bank mandate if there are no restrictions in the governing document and they have delegated authority from the trustees.
For more on charity structures, see:
- understand the type of funds held by the charity, for example unrestricted funds, endowment funds
See the glossary for an explanation of unrestricted, designated, restricted funds, and reserves, expendable and permanent endowment.
For those charities which prepare accounts, the Charities SORP (Statement of Recommended Practice) provides guidance. The accounts start with the SOFA (Statement of Financial Activities).
This includes details on the charity’s:
- level of any unrestricted, restricted, designated and endowment funds-
- income: this might include income from donations, legacies, grants, memberships, trading activities (eg running a café or charity shop) and investment income (eg dividends paid on shares, rent from an investment property). The income does not typically include capital growth on the charity’s investments.
- expenditure: this might include paying staff, costs for renting a premises, paying grants, fundraising costs and investment management costs
- investment gains/losses: this includes any increases or decreases in the value of the charity’s investments. This is not listed as income and typically appears further down a charity’s balance sheet
Many accountancy firms and membership bodies provide training courses for trustees on reading charity accounts.
- understand whether the charity holds permanent endowment or expendable endowment funds
- look at any documents that tell you how investments must be kept and used
- look at your charity's governing documents, for example does your charity’s governing document mention permanent endowment or does your charity’s governing document mention other restrictions? (eg donor wishes, restrictions on investment approaches)
- look at any documents that were used to give investments to your charity, for example are a donor’s wishes recorded (in a letter or other document) that they intended for their gift to be held as permanent endowment?
If in doubt, seek assistance from the Charity Commission.
- if the charity intends to make social investments, check and follow any governing document rules about whether or how the charity can make social investments
The Charities Act 2011 (as amended) says that a social investment is where charity trustees use money or property with a view to both:
- achieving their charity’s purposes directly through the investment
- making a financial return
Social investments can be made to directly deliver the charity's work (for example where a charity purchases a building from which to run services) or into other organisations which deliver the charity's purposes (for example making a loan to a social enterprise).
Any charity intending to make social investments should take advice from an individual with appropriate expertise. Trustees (with help from staff and committee members where needed) will need to consider whether social investments are appropriate in their charity's context, for example with regard to the charity's:
- available funds
- time horizon
- risk appetite
For more see: Responsible, Impact, Social investment
Time horizon and accumulating funds
All trustees have a shared understanding of the charity's time horizon, and ensure this is relayed to any individuals involved in the charity's investments (for example staff, committee members or external investment advisers or investment managers).
To reach a shared understanding, trustees can explore:
- whether the charity's purposes are achievable within a certain time frame
- balancing current and future needs
- whether the charity might achieve its purposes in different ways and how that might affect the charity's time horizon
Seeking to exist in perpetuity is not a strategic goal in itself. Where a charity has an ultra-long time horizon, trustees need to be clear why this is the best method for achieving the purposes.
Trustees/staff/committee members review the charity's investments in relation to its time horizon, including:
- whether the investments are suitable for meeting the charity's purposes over the short, medium and longer term
- the charity's risk appetite, and whether there is an appropriate balance between sound management of resources and being over-cautious
- requirements regarding income or capital growth
- where a charity is accumulating funds beyond its reserves policy, how this furthers the charity's purposes more than spending funds on the purposes
Reserves can strengthen a charity's resilience, for example if there is a drop in income or funds are needed for a project. A charity should have a reserves policy to explain its approach and the level of reserves the charity intends to hold.
Where income or growth in assets is above the level of spending, trustees should consider whether to continue to increase the size of the charity's unrestricted funds or to spend more on the charity's purposes. The decision-making process and outcome should be clearly recorded.
Macmillan Cancer Support (charity number: 261017) is keen that as much funding as possible goes to achieving the charity’s purposes, while ensuring the charity’s ongoing viability. As such, they focus on a ‘liquidity rather than a reserves policy’: 'As an organisation that relies almost entirely on annual fundraised income, our policy is to hold adequate funds to enable us to react to any unexpected adverse impact on our finances and therefore, we operate a liquidity rather than a reserves policy. This reflects our operating model which sees the immediate recognition of multi-year grant commitments, as per our accounting policy. It also means that by focusing on an appropriate level of liquidity, rather than a targeted level of reserves, we can increase our impact on the lives of people living with cancer...During 2022, trustees reviewed the current liquidity policy and reduced the target liquidity from £100 million to £70 million, following extensive liquidity modelling work with support from an external organisation. £70 million represents the amount needed to maintain the organisation at a healthy position with enough liquidity to cover working capital needs, along with a ‘rainy day’ fund which could be drawn upon in the event of a crisis. Under our liquidity policy, our target is to retain these funds in investments and cash which can be liquidated at short notice. In addition, we will hold cash and other liquid funds to meet normal day-to-day cash flow requirements.'
- where an expendable endowment is held, whether the intention is to spend, preserve or grow the endowment over time, why the chosen approach best serves the charity's purposes and the implications of accumulating funds
Charities make investments in order to support or further the charity's purposes. Growing or preserving the value of an expendable endowment is not a strategic goal in itself and there are opportunities and costs to maintaining an expendable endowment over the long-term. Unlike the trustees of a pension fund who are required to act on behalf of beneficiaries and ensure funds are maintained for beneficiaries, charity trustees act for the charity’s purposes and unless permanent endowment is held do not have an obligation to maintain the funds. Spending, preserving or growing an endowment over time must be an intentional decision made to support or further the charity's purposes.
Growing an endowment: In common with other Community Foundations, The Community Foundation serving Tyne & Wear and Northumberland (charity number 700510) is intentionally building an endowment to be 'a community asset to serve the region now and for generations to come....[so that] more charitable organisations can be offered funding and longer-term support as over time, the Community Foundation will be less reliant on money given annually.'
Reviewing perpetuity: Joseph Rowntree Charitable Trust (charity number 210037) carries out a periodic review of the charity’s time horizon, roughly every ten years
Blagrave Trust (charity number 1164021) states that it is 'agnostic about existing in perpetuity – that it would consider spending down if the justification was clear, but in the absence of such a justification would continue to balance its investment strategy and returns, alongside its grant-making commitments.'
Spending down: Albert Hunt Trust (charity number 1180640): 'established on 12 January 1979 and has distributed grants totalling more than £40m to date. When the Trust was originally set up the founders were clear in their intention to support a broad range of causes...With the unprecedented recent effects on society, through the pandemic and current cost of living crisis, there is a stark increase in the dependence being placed upon civil society as a source of intervention. This has consequently caused the Trustees to question ‘why does the Trust exist?’ and ‘why does the Trust need to exist forever?’. With the acknowledgement that there is much immediate need for financial support the Trustees have decided to act now by concentrating on the spending of the Trust’s remaining resources within a specific timeframe seeing The Albert Hunt Trust mark its 50th anniversary in January 2029 by closing.'
Reconsidering philanthropic endowments: Many endowed foundations are grappling with ways to share power between wealth holders (eg foundations) and those delivering change on the frontline (eg charities, social enterprises and activists).
See Principle 6: investment strategies that consider equity and impact for more on this. Some foundations, particularly in the US and UK, are exploring radically different approaches:
- Lankelly Chase Foundation (charity number 1107583) is working to "relinquish control of our assets, including the endowment and all resources, so that money can flow freely to those doing life-affirming social justice work."
- Thirty Percy Foundation (charity number 1177514) is "exploring how best to support wealth holders as part of the paradigm shift towards new economics and spiral investing approaches."
- Joseph Rowntree Foundation (charity number 1184957) is considering "how different forms of wealth, including philanthropic wealth, can be mobilised through alternative funding and investment practices to better serve people and the planet."
