Law Commission clarifies legal framework for social investment by charities

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

The commission has recognised that social investment is an important and developing area for charities that helps them meet their charitable objectives by combining investment and spending.

While charities are generally permitted to make social investments under the existing law, the commission's 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.

Statutory power

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

The report, Social Investment by Charities: The Law Commission's Recommendations, concludes that the law allows trustees to use permanent endowment to make social investments that are expected at least to maintain their capital value. For clarity, the commission recommends that the new power be extended to trustees of permanently endowed charities.

The commission's consultation revealed dissatisfaction with the existing powers of charity trustees 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 the 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."

She continued: "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."

Legal footing

Darren Hooker, a solicitor in the charity and social enterprise team at Stone King, commented: "The Law Commission's response has been much anticipated and I am sure will be welcome news for many charities. Social investment is a growing and an increasingly important form of investment.

"Although it was generally accepted that charities did have the power to make social investments, the surrounding law was unclear. In addition, the Charity Commission's guidance on social investment, although helpful, had no legal footing and this may have deterred some charities from making social investments. The introduction of a statutory power provides certainty that charities can indeed make social investments and will hopefully encourage more charities to do so."