Charities and Social Investment

A study of UK charities in receipt of social investments has found many to be excessively risk-averse while the charities themselves felt their wariness ensured a responsible and risk-based approach.

The UK Charity Commission, the independent regulator of charities in England and Wales, published an independent research report into charities and social investment, alongside an analysis of the findings.

The research was carried out by the Institute for Voluntary Action Research (IVAR) on behalf of the Commission, between July 2012 and March 2013.

The Charity Commission says the aim was to explore the regulatory risks, challenges and opportunities facing charities in this field and investigate the development of the social investment market over the next five years.

‘Social Investment' is described as investment that provides a social as well as a financial return.

The UK Charity Commission identifies two types of social investment; 'program related' (an investment made by a charity wholly to further its aims with the potential of receiving a financial return) and 'mixed motive' (one which trustees make on the basis that it has elements of both financial investment and programme related investment).

The research found that:

• The major drivers for successful social investment by charities were a shared sense of mission, good governance, skilled management and strong relationships between investors and investees. The main barriers were concerns about financial risk and reputational damage.
• When it comes to making and receiving investment, some research participants were unaware of the charity law framework that applies to charities. Charity investees had several support needs such as independent advice, help with business planning, peer learning and access to simple and clear investment products.
• Some social investment intermediaries felt that charity investees were excessively risk-averse. However, the investees themselves felt this wariness ensured a responsible and risk-based approach.

The Charity Commission highlighted some key regulatory issues in its analysis:

• Social investment needs to be clearly understood by trustees. It is vital that trustees are able to make informed decisions when embarking on a particular investment. Charities trustees must exercise financial prudence and explain their decisions.
• Charity trustees need to highlight the unique nature of charitable status. Trustees should make sure that the intermediaries and partners they work with are aware of their organisational status as a charity that exists for public benefit.
• Charities should collaborate and seek support. Informal peer learning, networking and independent advice will enable trustees to understand social investment and make informed decisions.

'This research highlights the importance of strong governance and a clear mission when it comes to social investment,” Chief Executive of the Charity Commission, Sam Younger said.

“The Commission's core role is to protect the public's interest in the integrity of charity, so we applaud the fact that trustees are assessing financial risks – however, we don't want trustees to miss opportunities to further help their beneficiaries by being overly cautious.

“Proper risk assessment, due diligence and good business planning make charities better placed to succeed in social investment'.

David Emerson Chief Executive of the Association of Charitable Foundations, one of the organisations that took part in the research, said social investment has the potential to transform the way social purpose organisations and funders work together.

“Many charitable foundations are already engaged and many more are keenly watching the space. This very helpful report flags up important issues for policy makers, market builders and investors alike.

“If the emerging market is to take advantage of all that foundations have to offer, it is vital that it takes account of their aspirations, concerns and creativity, as well as the legitimate constraints'.

Research Manager at IVAR, Leila Baker said that having the opportunity to focus on charities and their experiences and opinions of social investment provided great insight.

“We learned that these organisations need three things: simple social investment products; neutral advice from organisations that are not market competitors; bespoke and financial support with business planning and preparing for investment.

“The charity sector and others could also benefit from enhanced communication and trust between charitable and non-charitable organisations engaged in social investment,”

The Charity Commission urged all UK charities considering social investment to read its guidance on Charities and Investment Matters (CC14), together with the research report .

There are over 180,000 charities registered with the Commission.