More big charities are to become social investors. Or are they?

As the Law Commission's consultation on charities and social investment closes, one proposal could clear the way for charities to make social investments. But with questions of power, protection and appetite still unanswered the fog between charities and social investment remains.

The Law Commission in the UK has taken its first step towards making well endowed charities feel more comfortable about social investment. Although charity trustees can make social investments under current laws, it’s a foggy area with fiduciary duties that oblige them to maximise profit. 

The consultation was opened in April alongside a report which outlined how the existing law could be discouraging charities from taking up social investment. As it closes, one proposal for “a new statutory power to make social investments” stands to give trustees the power to seek both a financial and social return through their investments, and help build a more ethical investment market.

There is broad agreement from within the UK charity sector around the need for a new statutory power to build the confidence of charity trustees considering social investment. But few are advocating for charities to leap into it.

Three leading bodies in the UK civil society arena, The Charity Finance Group (CFG), the NCVO and the Directory of Social Change (DSC), said that social investment should be approached with caution, and that charities need to be adequately protected from potential pitfalls of social investment as they welcome the proposal.

“It is important to stress that charities should not feel pressured to make social investments as result of this proposed power and investments should only be made after careful consideration of the risks and evaluation of the mission benefit that will be accrued,” said Caron Bradshaw, chief executive of the CFG. 

The CFG warns against pushing charities into social investment. But without a push there are some doubts that charity trustees will automatically act upon the power to make social investments.

The DSC tweeted that “legal barriers aren't the issue with social investment”, and hinted in a response to the consultation that there would be no gold rush, with bigger problems facing the market including a dearth of relevant investment products and a lack of appetite for social investment among charity trustees. 

The proposal aims to clear the current haze around investment options for charities, and would come with a voluntary checklist that charities should be able to tick off before they make social investments. It also suggests that there should be restrictions on how the power could be used by permanently endowed charities.

The suggestion of a new statutory power to make social investments was first submitted in a report, Ten Reforms to Grow the Social Investment Market, authored by Stephen Lloyd and Luke Fletcher of City law firm Bates Wells Braithwaite.