Time to review your Charity’s Investment Policy Statement?

Responsible investment v financial return

There are many criteria trustees may wish to implement in their investment policies, but one of the most common is responsible investment standards. The Butler-Sloss case questioned the extent to which moral and ethical considerations can influence investment policy while trustees still act in the best interests of their charity, organisation, or beneficiaries. The case is a reminder that in furthering charitable purposes, trustees have legal obligations in exercising their investment powers. The balance between implementing policies that align with the charity’s objectives and an approach that aims to provide the best financial return at a suitable risk level is crucial.

The two are not mutually exclusive. Responsible investing techniques and other stipulations in policy statements may be employed to enhance long-term returns. It's the relevance and appropriateness of policies to your charity that is of importance.

What does good practice look like?

Trustees investing assets on behalf of a charity should have an IPS. Those appointing a discretionary investment manager are legally required to have one in writing. This should be provided to the investment manager to form the basis on which they will provide services to the charity.

The Charity Commission’s current guidance provides a helpful starting point for the writing of IPSs, emphasising that they should be tailored to the organisation's individual circumstances, taking into account factors such as the mission, risk tolerance, and financial goals. The IPS should also cover key areas such as investment objectives, liquidity needs, performance measurement and reporting. 

Trustees must consider these areas and their relevance to their organisation’s objectives. This should be done from the organisation’s point of view with charitable purpose, beneficiaries, and stakeholders in mind rather than the trustees’ personal views or that of the investment manager’s. There’s also a vast array of additional factors that may be worth considering policies for:

Navigating all these topics and compiling appropriate written policies that give trustees confidence they are meeting their obligations can be challenging. It is, therefore, often best to take professional advice on creating an IPS. Trustees appointing an investment manager may look to them for guidance. While guidance can be reasonable, it is essential to know that preparing the policy statement cannot be delegated to the investment manager. However, trustees can take independent expert advice on its content. This will ensure that investments are managed in line with the IPS rather than the IPS aligning to a certain investment strategy.

As good practice, it is also important to note that developing an IPS is not a one-off task. IPSs should be reviewed regularly and updated to remain relevant and practical. This includes assessing changes in the organisation’s circumstances or objectives, changes in trustees, considerations from regular reviews of investments, and adjusting investment policies or guidelines as needed.

What are some common issues to avoid?

Aligning the intentions of an investment policy with its results is challenging.

For example, an organisation focused on environmental conservation might have a restriction on investment in companies with fossil fuel involvement. Ostensibly a sensible-sounding policy, however, the implementation could be interpreted in many different ways. There’s exploration, production, processing, distribution, and manufacture of equipment used in the fossil fuel industry. There’s also the question of whether it applies to direct investments or investments held through collective funds. Investment managers may not be able to screen out certain practices or apply screens to certain types of investment. Certain companies may be leaders in positive change but are transitioning away from practices identified as needing to be screened out.

It’s easy to see how certain investment decisions based on the IPS can quickly stray from the policy intentions if this is not adequately considered and worded.

Some issues we often see include:

• Over-prescriptive, unnecessarily restricting investments and potential returns
• A lack of detail, risking non-alignment to objectives and charitable purpose
• Suitable benchmarks not identified, weakening the review process
• Restrictions imposed that are not practical to implement
• Investment objectives and charitable purposes not adequately reflected
• No policies on cash
• Lack of clarity around risk management

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