What charity trustees need to know about investing


Lianne Lodge explains how charities can learn from the mistakes of others and make sure their investment portfolio reflects their charitable purpose

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20th March 2017 by TFN Guest 0 Comments

Scotland's charity sector has recently faced some criticism, particularly in relation to the issue of raising funds through investment. Without revisiting some of the more lurid media allegations directed at the sector in recent months, it's probably fair to say that the picture painted is not one most in the sector will recognise.

The sector as a whole is transparent about finances, which are vital to the running of programmes and actions for a whole range of causes. Every charity registered in Scotland has to set out a charitable purpose in its governing document or constitution.

These must fall in line with the purposes listed in the Charities and Trustee Investment (Scotland) Act 2005 and include aims such as "the prevention or relief of poverty" or "the advancement of health." 

Lianne Lodge

Lianne Lodge

All actions by the trustees must be carried out with regard to the stated purpose or purposes. The trustees have a responsibility to protect existing assets (so far as they are not spending them) against inflation.

For some organisations, investment might be something the trustees want to pursue to complement fundraising and other means of generating income.

Other charities have no option but to invest to generate income. If the charity's sole asset is an endowment fund, trustees are obligated to generate returns in order to provide support for current and future beneficiaries in line with the charitable purpose.

Trustees have legal powers to invest charity funds, subject to some restrictions and exclusions. However trustees must be careful to protect the charity first and foremost. This means understanding and assessing potential risks to finances and reputation to make sure decisions are as robust as possible.

As with any exercise of a trustee's duty, trustees investing their charity's assets have to show a higher standard of care. When investing, this may mean that the law requires trustees to be able to show that they took more care than they would have done in managing their own investments. For example, a trustee may be prepared to take a high level risk with their own investments, but if investing the charity's assets, they must show that they took additional care which may mean a more moderate level of risk can be tolerated.

OSCR has powers to intervene and can even remove trustees if they are in serious or persistent breach of their duties. For these reasons it is advisable to get professional advice on behalf of the charity before pursuing any investment. The cost of such advice can be taken from the charity's assets because it is so important to get it right.

An investment manager can help trustees establish where their priorities should be. Any investment strategy should be underpinned by an investment policy document. Although this is not a legal requirement in Scotland, it really is a must for guiding robust decision making. This document should act as a framework for an investment manager to pursue suitable investment options following the clear instructions laid down in the policy document.

However trustees seeking to exercise caution need to be equally mindful of the purpose of investing in the first place – generating returns while protecting the capital as much as possible.

Lynne Lamont of Brewin Dolphin says that it is quite common for trustees to want to pursue "ethical investments" however, they can be surprised to find how limited their options can become.

Lynne says: "Most investment advisers will work with trustees to screen out potential investments, restricting any exposure by field, such as investments relating to the tobacco or alcohol industry if those are deemed inappropriate within the context of the charity's charter. Yet as more fields are applied, the potential pool of investment options narrows and returns can be more difficult to acquire."

The most important thing to ensure is that any investments are in line with the objectives of the charity, and this should be where trustees consider applying the most stringent restrictions. The bottom line is that trustees have to understand the implications of any investment decision, including a decision not to make any investment, and how this can affect their revenue, reputation and any other assets. Ultimately they should put the charity's interests above any personal ethical concerns they may have concerning investments. The necessary level of care that trustees must take should reassure the public that investment is something that is pursued carefully and can make a real difference to the various good causes supported by charities in Scotland.

Lianne Lodge is associate specialising in charities and private clients at Gillespie Macandrew LLP