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Clarifying the legal framework for social investment by charities

Law Commission | Law Commission

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In a paper published today the Law Commission explains the existing legal framework for social investment by charities and recommends measures to simplify and clarify the law.

Social investment provides financial returns while at the same time generating social benefits. It is an important and developing area for charities that helps them meet their charitable objectives by combining investment and spending. It can, for example, enable a poverty relief charity to lend money to a fair-trade farming project, or an environmental charity to invest in a fund that buys shares in green technology companies.

According to the Law Commission, charities are generally permitted to make social investments under the existing law, and many are already doing so. But its recent consultation shows there is some uncertainty about charity trustees’ powers and duties when making social investments, leaving some trustees cautious about taking up the opportunities it offers.

To clarify the law and bring certainty, the Commission is recommending that charity trustees be given a specific statutory power to make social investments. It is also recommending reforms to clarify the duties that apply to charity trustees when they make social investments.

The paper concludes that the law allows trustees to use permanent endowment to make social investments that are expected at least to maintain their capital value. To make that clear, the Commission recommends that the new power be extended to trustees of permanently endowed charities. The Commission’s consultation revealed some dissatisfaction with charity trustees’ existing powers to lift the restrictions on permanent endowment. The Commission therefore intends to extend its ongoing review of charity law to examine this issue in more depth and will shortly be discussing extended terms of reference with Government.

Professor Elizabeth Cooke, the Law Commissioner leading the project, said:

“Charities have a special place in society. The contribution they make is made possible, in part, by how they spend their money.

“Social investment represents a significant opportunity for charities, but the existing law is unclear. Our recommended reforms will clarify the law for trustees as to their powers and duties. They will make social investment more straightforward in law and give trustees the confidence to make the best of the opportunities it offers.”

The report, Social Investment by Charities: The Law Commission’s Recommendations, is available on www.lawcom.gov.uk.

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