Charities (Protection and Social Investment) Bill [HL]

Baroness Pitkeathley Excerpts

Monday 6th July 2015 Grand Committee

[Baroness Barker (LD)]

My Lords, it may be useful if I speak to Amendments 21 and 22. Like the noble Lord, Lord Watson of Invergowrie, we are seeking to make the concept of social investment clear in legislation. Part of the aim of doing so is to make sure that social investment policies sit alongside the overall investment policies of a charity and are treated in much the same way.

Our first amendment, Amendment 21, seeks to delete “social” in subsection (3) of new Section 292C. This is one of those cases where a deletion is meant to lead to more inclusivity, so in fact we are suggesting that all a charity’s investments should be the subject of a periodic review. Amendment 22 seeks to ensure that trustees are under an explicit duty to make their investment policy available publicly to their donors and beneficiaries.

One of the big challenges of social investment is that, by its very nature, most of the time it is unlikely to bring about significant financial return. For example, if a charity invests in a business to be carried out by its beneficiaries—for example, former prisoners and so on—any such business is unlikely to turn a profit in the first few years of its existence. Therefore, it is doubly important that charities are able to do double accounting—that is, they have to be able to explain to the public what has happened to the financial return and also how they have calculated the social return or the return in terms of the benefits to them in furthering their charitable objects.

I happen to be of the school that says that there ought to be a greater degree of transparency overall regarding charity investments. Sometimes in our sector, charities can be somewhat fearful of being attacked for the sorts of investments they have to make in order to obtain a financial return. With the development of social investment, there is a need for charities to up their game across the board, and therefore such transparency would be helpful.

I also agree with some of the points made by the noble Lord, Lord Watson of Invergowrie. The term “from time to time” is probably a well-understood legal phrase: it is something that should happen but it is difficult to put an exact timeframe on it. Some investments will take place over a long time, and therefore an accounting period of three years would not make sense for charities. Equally, the point made by the noble Lord, Lord Watson, that they must be reviewed stands. Therefore I, too, shall be interested to hear the Minister’s reply, and I hope that between us we can flesh this out to make it just a bit clearer.

[Baroness Pitkeathley (Lab)]

My Lords, I support all these amendments because they encourage trustees to focus more attention on the progress of social investments and to review them regularly. I, too, think that “from time to time” is a bit vague, although I understand that it has a legal meaning.

There are two reasons why I support the amendments. The first is that I think they will make the position of trustees and their responsibilities clearer. Social investment is a fairly new concept and trustees on the whole are not very familiar with it. We are trying to encourage them to be more so, and I believe that these amendments would help in that. The second reason—and here I declare an interest as chair of the Big Society Trust—is that I agree with the noble Baroness, Lady Barker, that the financial return on these social investments is often not realised for some time, although the social return may be obvious at an earlier stage. To some extent, charities and trustees are learning as they go in this area, so any further guidance or direction we can give them would be of benefit.

[The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley) (Con)]

My Lords, I thank noble Lords for tabling these amendments, which raise interesting points, and I hope that I will be forgiven for going into a little detail on our thinking around them.

Once again, I think we agree on the need for transparency and accountability. It is important to ensure that charities take the opportunity to review all their actions from time to time with the intention of ascertaining how effective those actions have been. This should apply to their grant-making activities no less than their financial investments. It is also desirable for charities to be suitably transparent in reporting. Public-facing organisations should aim to explain how they operate, and I share your Lordships’ wish to encourage as much openness and information sharing as is practicable.

However, while I support these intentions, we must be careful not to overburden charities by mandating the collection and publication of information to an extent that could distract from their core activities. This must be the case in particular for the large number of charities that are small and may not have the requisite capacity or capability—the “little platoons” I referred to on Second Reading. Charity trustees have overall responsibility for the investment of their charity’s funds. They must make the strategic decisions about how to use a charity’s assets to achieve its aims.

In relation to financial investments, charity trustees are already under a legal duty to keep their investment portfolio under regular review. Those reviews must cover how their investments are performing, and if an investment manager is used, the service provided by that investment manager. Trustees should also monitor and review their internal arrangements for managing the charity’s investments. In terms of the regularity of the review, the trustees may decide to hold reviews at specific intervals or they may decide to hold a review in response to a specific event, for example if there was evidence of inadequate performance of an investment or if there was a sudden change in the economic outlook. This seems appropriate and allows charities to respond flexibly to circumstances rather than impose a rigid timetable.

The phrase “from time to time” is indeed understood among the legal profession and is explained in case law. The commission’s guidance on investments covers what it means. Given the existing requirements to review financial investments regularly, it would be beyond the scope of this Bill to impose duties to review social investments on the far wider range and greater number of investments in the general sense. Furthermore, in addition to requirements to review investments, there are also a number of disclosure requirements in relation to financial reporting by charities. Any charity with a gross income greater than £25,000 must submit its audited or independently examined accounts to the Charity Commission on an annual basis.

In addition, there is the charities SORP—a nice word—contained in Accounting and Reporting by Charities: Statement of Recommended Practice, which, as I am sure noble Lords know well, sets out the recommended practice for the purpose of preparing the trustees’ annual report and for preparing the accounts. The recommendations of SORP supplement accounting standards, thereby providing an even stronger basis for reporting. The statement of recommended practice deals expressly with the reporting of social investments. As social investments are different from financial investments, the reporting criteria should not and cannot be equated; they should instead be tailored.

While I am extremely keen to see charities taking greater steps towards impact assessment, thereby enabling them to think about their total impact in the round, imposing specific new rules via statute would seem too blunt an approach and potentially a highly burdensome one. It would seem to place a greater requirement for assessing the impact of social investments than currently exists for grants, spending or financial investments. This might have the unintended consequence of making charities less likely to make use of social investment—the opposite of what we are trying to achieve, particularly at this early stage of market development.

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[Baroness Pitkeathley]

My Lords, I must take issue with the statement from the noble Lord, Lord Wallace of Saltaire, that the teaching in public schools is always better than that in state schools. I might well take issue with that but I certainly do not take issue with the fact that they have much better facilities, and that is what this is really all about.

We do not need to rehearse yet again the long-standing and tortuous arguments about what constitutes public benefit. In my intervention last week about funding the Charity Commission I talked about the quid pro quo that charities would expect in return for contributing to the funding of their regulator. Here we focus on another quid pro quo: in addition to the huge advantage that charitable status confers, independent schools are encouraged to further engage with local communities and make their facilities available for sports and arts purposes. Noble Lords have acknowledged that there is a lot of this about. There is some very good practice and it relates not only to the last Charities Bill. I remember that when I chaired the New Opportunities Fund, which did a great deal of work putting lottery money into schools, there were some excellent examples of co-operation between public and state schools. As we have heard, though, it is very patchy. Too many of the sharing facilities and projects that go on are dependent on the history of relationships between that school and its local community. Even more concerning is that they are sometimes dependent on relationships between individuals, usually teachers. This is not satisfactory.

Facilities and coaching are important, as we have heard, so far as sport, arts and music are concerned, and they are disproportionately available in the public school sector. Only this morning, we heard that the Olympic legacy has not been realised so far as participation is concerned, and too many independent schools think it sufficient to say that facilities are available to local communities whenever their own students do not need them or they are not in use. When one headmaster was asked when the facilities were available, he said, “Any evening after 9 pm or any bank holiday, but funnily enough no one seems to want them then”. Quite.

I very much support these amendments. The only anxiety I have is one that we have raised many times before in this Bill—the issue of giving the Charity Commission more responsibility without increasing its resources. This is quite a heavy policing function that would be placed on it, and that will need to be taken into consideration, but I support the amendment.

[Lord Lexden (Con)]

My Lords, I declare my interest as a former general secretary of the Independent Schools Council and as the current president of the Independent Schools Association and of the Council for Independent Education. As I recite these names, it perhaps gives an illustration of the diversity that exists in the independent sector, which, viewed from the outside, is often depicted as a rather monolithic affair determined to keep on its own side of a Berlin Wall. Nothing could be further from the truth, as this debate so far has indicated.

I am very glad indeed to hear the acknowledgements of the widespread support that is given by the Independent Schools Council to the growth of partnership activity. The results are summarised in a publication called the ISC Annual Census 2015. A great deal of detailed material is going to be made available in September on a website Schools Together, which will give a great wealth of case studies and examples of what schools are doing in sharing facilities with their local communities and state schools. It will be an extensive website because there is so much to record.

I think the issue comes to this: is there a role for the law in this matter? We are at one in acknowledging that much has been done. I stress the ISC’s continuing encouragement for the further expansion of such schemes and have very serious concerns about the implications of an attempt to specify how independent schools that are charities should demonstrate public benefit. All charities are of course required to provide public benefit. Would it be right to single out independent schools for specific guidance on what they should do? I also question whether this would be expedient because schemes for sharing facilities that are likely to succeed will do so when they reflect a deep and genuine desire on the part of state schools, local communities and independent schools to be involved in them.

Local wishes should determine what happens. It is important to remember that independent schools vary greatly in size and character. More than 50% have 350 pupils or fewer. Only a tiny minority have large endowments; the vast majority are wholly dependent on fee income. What they can do will vary from place to place depending on size and on how local communities and state schools wish to work with independent schools. I emphasise that the 1,200 schools belonging to the Independent Schools Council are keen to work with local schools and communities, contributing to the activities of local communities and work in state schools. These things are innate to them these days, forming part of the charitable ethos and purpose of the schools.

If partnership schemes are to deliver benefits to all involved—local communities, state schools and independent schools, which are enriched by partnership—I suggest that the best course is to give every encouragement to voluntary local arrangements and not seek to impose a set of requirements across the board, which I suppose would be known these days as a one-size-fits-all approach.