The seven principles are voluntary for charities, and must be read alongside the applicable Charity Commission guidance, in particular 'Investing charity money: guidance for trustees (CC14)', which was updated in August 2023.
As charity trustees will know, they are required to comply with CC14. In line with their voluntary nature, the Principles are intended to be a 'tool for improvement and encouragement', reflecting that charities are all at different stages in their investment strategy and implementation.
The push for the development of the Principles arose following the 2022 Butler-Sloss case, about which VWV has previously written.
The Principles have been developed by the sector to be applicable across the sector, and include subsections for large and small charities. For charity trustees who are familiar with the Charity Governance Code, the framework for the Principles are similar having been developed to have synergy with that Code. The Principles' Steering Group comprised the Charity Finance Group, the Association of Charitable Foundations, National Council for Voluntary Organisations, Wales Council for Voluntary Action and the Secretariat of the Charities Responsible Investment Network. Hundreds of charities were consulted, in addition to lawyers, accountants and investment managers who work with and for charities. The Charity Commission was involved in the development of the Principles only as independent observers.
A small charity is considered a charity with under £1 million in investments. There is also a separate section for smaller charities which hold investments mostly in cash, ie in a bank account. A large charity is considered a charity with over £20 million in investments. Charities between large and small are advised to use the Principles based on their investment context, taking into account the charity's capacity and current investment practice. The Principles do not distinguish between restricted and unrestricted funds.
The Principles are divided into separate items in relation to whether a charity:
We include a description for each Principle below, and summarise our key takeaways. However, we recommend that charity trustees, senior staff and those involved in or advising on charity investment decisions read the Principles in full. We have focused primarily on the recommendations for larger charities. They are available to download here.
1- Purpose of investments
The charity trustees must understand why the charity makes investments, how the investments further the charity's purposes, legal and practical considerations relating to investments and the time frames for such investments and strategy.
This Principle supports and encourages trustees to consider the manner in which the charity invests and how this will further the objects and interests of the charity. This includes ensuring trustees have an understanding of whether a financial investment or an impact/responsible investment is being made, and the associated impacts on the charity's income, capital and reserves. The Principles' glossary contains useful descriptions of the differences in how impact, social or responsible investments can be classified.
2- Leadership
The charity trustees provide leadership on investments, supported by a strong governance structure and delegation framework.
This Principle aims to reinforce the requirements of trustee decision-making, and clearly ensure that appropriate control and oversight is in place for investments. This is particularly important where there is a committee structure and delegated responsibility for investments and finances. Such delegations may also include delegation to external parties including an investment manager. For charities with large and/or complex investments, it is important to ensure that there are specific committees or staff members with expertise and access to specialist advice.
Delegation should be supported by an appropriate framework which outlines the relevant controls and authority limits for decision-makers. This should be a document which is customised for each charity, based on the sophistication of the charity's investments, actual decisions made and the practical way the charity operates. Please contact VWV if you require assistance with reviewing or creating an appropriate framework.
3- Integrity
The charity's purposes are placed at the forefront of investment decision-making.
Following the decision in the Butler-Sloss case, this is an integral part of the Principles. Personal motives or opinions of trustees or staff should not be allowed to impact investment decision-making. In particular, charities which have narrower purposes, such as environmental or human rights, should consider whether there are investments which will conflict with those purposes (for example, investments in arms or oil/gas drilling) and any reputational risks (for example, tobacco investments). These considerations must be balanced against the financial consequences of allowing these risks to impact the investment. However, trustees retain discretion to make investments in the best interests of the charity.
4- Decision-making, risk and control
Effective systems are established, appropriate to the charity's size and the complexity of investments held.
This Principle closely relies on the Charity Commission's 'Investing charity money: guidance for trustees (CC14)'. It provides further guidance on when trustees, as well as staff and committee members should seek professional advice, whether internal or external to the charity, and includes relevant items on which the charity and trustees may require advice. These include: investment strategy and approach, an investment policy, amounts to invest, financial position, risk appetites, allocations to financial vs social investments and the need to ensure responsible investment practices. The Principle places particular importance on recording the relevant decisions made by the trustees or delegated decision makers.
5- Effectiveness
The charity trustees are confident that trustees/staff/committee members providing delegated oversight of investments have the necessary skills, experience and knowledge. The charity trustees, supported by staff/committee members, ensure there are processes in place for effective oversight of investments.
This Principle builds on the requirements of Principle 2 and 4. Each of the items in this Principle falls under the 'recommended' categorisation. This is likely most useful for charities with experience investing already. It supports the underlying governance structures to ensure that there is sufficient information provided to trustees at induction and throughout their tenure, as well as learning and development opportunities; board succession planning to replace any knowledge lost through the natural governance cycle; and effective board meeting processes so that all trustees are on top of the relevant information to make decisions.
6- Equity, diversity and inclusion
The charity trustees ensure that trustees/staff/committee members involved in the charity's investments commit to exploring, understanding and taking action with regard to equity, diversity and inclusion.
Similarly to Principle 5, this Principle does not contain any 'must' items. Rather, charities are encouraged to consider ensuring that their meetings and engagement at a trustee and staff/adviser level is respectful and frank, and where required, independent. This Principle particularly supports trustees to consider whether the charity should be making responsible, impact or social investments to promote diversity and inclusion, and to discuss the benefits and challenges of this for the specific charity.
7- Openness and accountability
The value of openness and accountability in relation to the charity's investments is understood and acted upon.
This Principle interacts with the requirements of annual reporting and the Charities Statement of Recommended Practice (SORP). It also encourages information sharing amongst the charity, its stakeholders, the public and other charities.
As is evident from the above summary, the trustee duties set out in CC14 are reflected in the practices recommended in the Principles. This includes supporting the duty to make proper decisions, act with reasonable care and skill, take professional advice where required, comply with the governing document and Charities Act 2011, and maintain delegations and investment policies with appropriate oversight.
We recommend that all those involved in charity investment decision making review the Principles in detail. It has applicable provisions for charities of differing sizes, and can assist all charities from those which only hold simple cash investments, to those contemplating more complex investments and those considering expanding into social or impact investments.
As a new resource, the Charity Finance Group has also invited any feedback on the Principles.