Charities (Protection and Social Investment) Bill [HL]

Lord Cromwell Excerpts

Monday 20th July 2015 Lords Chamber

[Lord Bridges of Headley]

My Lords, it is to government amendments to Clause 13, relating to the definition of social investment, that I now turn. It is the dancing on the head of a pin that I promised to undertake, which was mentioned by the noble Baroness, Lady Barker, and follows our fruitful debate in Committee and my meeting with my noble friend Lord Hodgson and the noble Baroness.

Noble Lords will recall that I described the power of social investment as being deliberately drafted to be as wide as possible while retaining the distinctiveness of the “social” element, so that the power covers a spectrum from transactions that are mostly intended to further charitable purposes but involve some return of capital, to those that are primarily financial but have a small mission benefit.

There are two poles at the extremes of the spectrum. At one end there are social investments that look much like grants, with very little expected return of capital. At the other end, there are social investments that look very similar to traditional financial investments but have a small role in furthering charitable purpose—and one which is deliberately sought. Social investments must combine some aspect of each pole, but the nature of the combination is entirely flexible.

I also took the opportunity to make it clear that the Bill does intend to include mixed motive investment within the definition of social investment. That said, I have remained open to your Lordships’ suggestions that the Bill could be clearer on this point. This is of particular importance given the intent of this legislation to be expressly permissive and to encourage the uptake of social investment by charities. Thus I reiterate that in relation to the power of social investment: first; there is no minimum degree of mission benefit before the social investment power is engaged; secondly, it is the combination of the mission benefit and the financial return which may cause trustees to consider a social investment to be in the interests of a charity; and, thirdly, a charity’s purposes need not be advanced on an exclusive basis—there may be other unrelated outcomes that are features of the transaction as a whole but are not part of the charitable mission of the specific charity investor and are not part of their reason for investing.

For the record and for completeness, the Law Commission recommendation paper which forms the basis of Clause 13 states that,

“we consider that the definition should make clear that insofar as a social investment is justified by its expected mission benefit: (1) only the charity’s objects are relevant; other benefits which do not fall within the charity’s purposes are irrelevant (even if they may be charitable purposes for another charity); (2) for a charity with multiple purposes, a social investment need not further each one of those purposes; and (3) the charity’s social investment must be expected to cause the mission benefit that is relied on to justify the social investment. However, insofar as a social investment is justified by its expected financial return, it need not be used exclusively and directly to further the charity’s purposes”.

It may be worth me unpacking this further by way of an example. A charity might have the care of horses as its charitable purpose. It may wish to invest in a horse and donkey social enterprise, which provides joint facilities for both. The social enterprise may also expect to make a financial return, perhaps from charging visitors. It is entirely right that, having weighed the benefits to horses along with the expected risk-adjusted financial return, the horse charity is able to invest in the horse and donkey social enterprise. So long as the trustees have satisfied themselves that the combination of expected financial return and mission benefit in relation to horses is appropriate, this is covered under the social investment power. For the avoidance of doubt, this would also be the case for a horse and zebra charity investing in the horse and donkey social enterprise.

To put this in a more generic formulation, the social investment power will enable charities with wide charitable objects to invest in a wide range of social enterprises on an unrestricted basis, and by way of equity or debt or a combination of the two, or indeed through any other suitable financial instrument. With this in mind, and following discussions with the Law Commission and others, we have decided to amend the definition used by the Bill in a way that will make this even clearer, and to put it beyond any doubt in relation to matters of interpretation that could be raised some years hence. This explains Amendments 25 and 29.

I hope that this meets with the approval of the noble Lords who raised concerns in this area. I recognise that it may not go as far as some may like, but it is as far as we feel able to go without raising the spectre of private benefit. The Bill does not change the law on private benefit, which was deliberately excluded from the scope of the Law Commission review. However, for the record, the Law Commission recommendation paper states that,

“there was broad agreement that the law relating to private benefit does not generally prevent charities from making social investments … It does not seem to us that it is an obstacle, if properly understood, to social investment done with the aim of furthering a charity’s purposes”.

I trust that my laying out of the definition and the thinking behind it in some detail has served to make the case clear.

I thank the noble Lord, Lord Cromwell, for Amendments 30 and 31. It is, of course, important for charity trustees to be prudent and to think about the long-term management of their charity’s assets, whether they are making a social investment or engaged in any other activity. This month, the Charity Commission published its revised guidance, The Essential Trustee, (CC3), which says, for example, that trustees must,

“make balanced and adequately informed decisions, thinking about the long term as well as the short term”,

and that they,

“must act responsibly, reasonably and honestly. This is sometimes called the duty of prudence. Prudence is about exercising sound judgement”.

Trustees are therefore already subject to duties that cover the points made by the noble Lord’s amendment.

The purpose of Section 292C is to set out certain duties that apply specifically to social investment, not to codify the entirety of trustees’ duties when making social investments. In addition to these duties, trustees will of course also be subject to the duties imposed by the general law, including the law of prudence. The specific duties in 292C also modify the duties imposed by the Trustee Act so that they are tailored to social investment. Just as the Trustee Act does not include an express duty to consider prudence and the long-term management of a charity’s assets, nor should the social investment duties.

The Law Commission’s recommendation was that the trustees should be satisfied that a social investment is in the charity’s interests, having regard to the two limbs of the definition in Section 292A: namely, furthering purposes and the financial aim. The wording of the government amendment deliberately refers back to those two limbs of the definition; it does not need to do more than that.

Finally, the long-term management of a charity’s assets will not always be a relevant consideration when making a social investment. It would be relevant if a charity is using its investment assets to make a social investment, but this will not always be the case. A charity might use its disposable income to make a social investment. For example, if a charity’s endowment produces an income of £10,000 to be spent this year, the charity might decide to use £2,000 of that to make a social investment that is expected to further the charity’s purposes and might result in a payment of, say, £500. That might not be a prudent long-term management of that £2,000 as an asset, but it is an excellent use of the charity’s funds and the possibility of getting £500 back is better than simply giving £2,000 away. I fear that the wording of the noble Lord’s amendment might suggest, even if it is not intended to, that such a social investment is not permitted, and I hope that he will be content not to press it. I beg to move.

[Lord Cromwell (CB)]

My Lords, I shall speak to Amendments 30 and 31, which are amendments to government Amendment 29. In doing so, I remind the House of my involvement in the charity sector and in financial investing. I am grateful to the Minister for government Amendment 29, which I support. I sense that I may be swimming against the tide here, but I hope that he will feel able to reconsider his approach to the text by adding what we have suggested in the amendments tabled in my name and that of my noble and learned friend Lord Hope of Craighead.

The Minister’s amendment highlights the need for trustees to consider a social investment in respect of two factors: the charity’s purposes and the financial return. I am sure he is right in that. No financial return is not, in my definition at least, an investment. The missing element in our view is to consider how a social investment fits into the pattern of overall investments and the long-term plan for the charity’s assets as a whole, not just considering the investment in isolation, which I think Amendment 29 seems to imply.

Some might say that prudence and long-term planning are motherhood and apple pie because they are self-evident. However, the Bill is breaking new ground. It invites trustees to engage with a new type and class of investment. These are welcome additions to the investment universe, but they are different from and less regulated than mainstream financial investments. Furthermore, these investments are likely to be presented in different ways, separately, and by different people. I hope that the Minister will agree that, first, the wording we suggest does not place any barriers in the way of social investing, or certainly none that a worthwhile social investment could reasonably object to. Secondly, they provide a context to such investments, and given that this is a new area of investing, a reasonable sense check that trustees should observe when making or considering them.

[Lord Hope of Craighead (CB)]

My Lords, I am in the unusual position of having heard the Minister’s reply before we move our amendments, so I know what he is saying. Perhaps I may say in support of the amendment tabled by the noble Lord, Lord Cromwell, to which I have also put my name, that what we are trying to do is refine the exercise which the Minister is himself engaged upon. For myself, I very much welcome government Amendment 29.

The starting point for this is to look back to new Section 292C(2)(c), where the charity trustees are asked to,

“satisfy themselves that it is in the interests of the charity to make the social investment”.

It was because that in itself seemed rather bald that we suggested in Committee that the phraseology should be expanded upon to give further guidance to the charity trustees. The noble Lord has very properly expanded on that, but our point is that it does not go quite far enough. It tells the trustees that they should have regard to the benefit that they expect the social investment to achieve for the charity, stating,

“(by directly furthering the charity’s purposes and achieving a financial return)”.

That is a specific and immediate task; namely, looking at the information and the task before the charity trustees at the moment. The problem may be that if a step is taken today, it may undermine or at least put at risk the assets of the charity in the longer term. It is to try to balance these two things out—the way things seem today as against how they might seem in two or three years’ time—that we are making this additional suggestion.

The Minister has said that he is not persuaded, but I wonder whether he would be kind enough to at least think again about whether he might give some little step in our direction to balance out these two things. Long-term management of the assets is obviously essential to the charity if it is to remain alive, and it is to balance out the immediate task with the long-term future that we suggest the wording should be expanded further.