Charities told to put money into businesses that chime with their aims and principles, even if returns suffer

Charities are being told they should invest the billions of pounds they hold in reserve into businesses that chime with their principles, even if they have to take a financial hit.

The Charity Commission is moving to promote ethical investment by charities to ensure funds are not used to support businesses that conflict with their own aims or those of their supporters.

The shift reflects a growing sensitivity around the climate crisis which extends far beyond environmental charities, and what the commission sees as a changing public mood towards the transparency of the voluntary sector. Risk of poorer returns from ethical investment may no longer be a valid excuse, it suggests.

The biggest 5,000 UK charities have a combined investmment of an estimated £116bn. This includes very large organisations such as the Wellcome Trust or the Church Commissioners, each with billions invested, so many charities may have just a few thousand pounds on the markets. Nevertheless, they face growing scrutiny from supporters.

Charities exist to benefit the public, not to advance their own financial interests Luke Fletcher, Bates Wells

Helen Stephenson, the commission’s chief executive, said financial investments are about more than sums on a balance sheet. “Trustees’ decisions are increasingly seen as reflective of what a charity really stands for. And social attitudes on a range of issues, including around the environment, are shifting,” she stated.

However, the move will not head off an imminent legal challenge by a coalition of voluntary sector groups seeking a definitive ruling from the courts on trustees’ duties in respect of ethical investment. The coalition haswelcomed the commission’s initiative, but wants the law updated.

Luke Fletcher, a partner at law firm Bates Wells, which is working with the coalition, said charity trustees need clearer guidance about investments, particularly in light of the climate and ecological emergency. “Charities exist to benefit the public, not to advance their own financial interests,” he said. “So we think a court needs to clarify what is expected of charity trustees in this new situation.”

Many donors do not realise that the charities they support hold substantial reserves for contingencies, including costs should the charity cease operations. The bigger investments are held by charitable foundations, which have a duty to make returns on endowments that enable them to make grants and sustain their own work without spending their capital.

An inquiry initiated by charity leaders’ group Acevo in 2014 called for greater transparency around investments and action to tackle barriers faced by charities wishing to align them more closely with their stated purpose. This followed a BBC Panorama investigation showing that Comic Relief had invested in arms, tobacco and alcohol companies. The charity has since tightened its rules on investment, including a ban on fossil fuel interests.

Comic Relief cash in arms and tobacco shines light on charities' investments Read more

The commission has previously declined to strengthen its guidance, but now says that while it cannot tell charity boards what conclusions to reach, it wants to put this issue at the forefront of trustees’ minds and encourage and support them “to ask the right questions”.

In a blog, the commission says trustees have a duty to maximise financial returns for their charities. But the law is clear that they may take ethical or other non-financial considerations into account. “We want trustees to feel empowered to respond to these expectations where they can and consider investments that chime with their charity’s purpose, as the law allows,” said Stephenson.

The commission previously said that seeking a ruling by the charity tribunal in the high court could be costly, time-consuming and risk uncertain outcome. But Fletcher said the coalition is resolved to press the case: trustees need reassurance that they would, for instance, be protected from sanction if they chose to align investments with the goals of the Paris climate agreement “even if the market as a whole takes a different approach”. A ruling is expected within months.

Caron Bradshaw, chief executive of the Charity Finance Group, which represents charity finance directors and managers, said charities are under mounting pressure from donors on the type of investment they may make. “There is definitely huge interest in how far you can go with this, so greater clarity will be widely welcomed.”