Charities Bill [HL]

Viscount Chandos Excerpts

Wednesday 7th July 2021 Grand Committee

[Viscount Chandos (Lab)]

My Lords, I thank the Minister for her very clear introduction to the Second Reading of the Charities Bill. She has exceptional commitment to and experience of the charitable sector, which informed her remarks and reinforced the authority with which she spoke.

I welcome this Law Commission Bill, even though its status limits the extent to which there can be any amendments even to the technical and tidying-up objectives the Minister summarised. Other noble Lords have already covered many of the Bill’s key issues so I propose to focus on one specific and perhaps rather narrow area relating to permanent endowments. Therefore, in drawing the Committee’s attention to my charitable entries in the register of interests, I should disclose that three of the charities of which I am a trustee have endowments, but in all cases these are expendable rather than permanent.

Before I address my specific point on permanent endowments and social investment, I pay tribute to the extraordinary work done by charities across the whole range of everyday life in our society. But, as Bill Gates, for all the financial muscle of the Bill and Melinda Gates Foundation, has regularly emphasised, philanthropy cannot and should not be seen as a substitute for proper governmental funding of public services and international aid. Unfortunately, the economic policies of the Conservative or Conservative-led Governments since 2010 have led to devastating cuts to public service budgets in so many areas, notably that of local authorities. That has forced many charities and funders to replace statutorily provided or funded services. The Government’s levelling-up rhetoric might suggest that this will be reversed, but any detailed examination of the spending assumptions for non-protected departments in the most recent Budget would dispel that optimism. None the less, I hope that in time these cuts will be reversed and philanthropy can return to a greater extent to its correct role of innovation.

Clause 13 gives trustees the power to make social investments out of a permanent endowment as long as the charity has opted into the total return investment approach. Under current legislation, social investment is made with a view to directly furthering the charity’s purposes and achieving a financial return for the charity. It is acknowledged that these investments are likely to deliver sub-market returns, including the possibility of the loss of all or a significant portion of the capital invested.

The example given in paragraph 94 of the Explanatory Notes envisages a charity with a permanent endowment committing half its funds to a single social investment in the hope or expectation that the other half of its assets would deliver sufficient return to protect the long-term value of the endowment. Maybe, but the concentration of risk in one social investment means that a perfectly realistic scenario could be the total loss of that investment, which would be highly unlikely to be compensated for by any normal level of return from a diversified portfolio of mainstream financial investments. The Esmée Fairbairn Foundation, of which I am a trustee and past chair, has been making social investments for 20 years and has suffered a number of partial and total losses on them, but that has been from about 150 different social investments with a maximum exposure of no more than a few per cent of the total value of the endowment.

I understand from the Minister that it is intended that regulations to be made by the Charity Commission in respect of this issue will have specific requirements on trustees to balance the risk and returns on a portfolio of social investments with those on a portfolio of financial investments. Will they include limits on the concentration of risk through diversification among social investments as would apply to a prudently managed portfolio of financial investments?

There is a story, probably apocryphal, of a Boston heiress arrested for an offence which she acknowledged brought shame on her prominent family, who pleaded, “But I thought it was better than dipping into capital.” Unlike her, I do not make a fetish of the preservation of capital, and I applaud major trusts and foundations, such as Gatsby, Monument Trust and the Atlantic Philanthropies, which have adopted spend-down policies, but perpetual endowments derive from the wishes of the philanthropist and settlor to enable a trust or a foundation to do its work in perpetuity, and we owe it to those philanthropists to ensure as far as possible that that is the case.

I am a bit puzzled by why this has been included. I believe that trusts and foundations predominantly have expendable endowments. Social investments can do interesting and innovative work, but they are still only a sideline and, in my view, will remain a sideline to the core activity of grant-making foundations of making grants. Will the Minister say what representations have been made on this? Did they come from trusts and foundations that have perpetual endowments, or from sponsors and promoters of social investments who may have been seeking to broaden the universe of potential investors?

The Minister said in her opening remarks that the Bill was intended to reduce overly bureaucratic processes. Investing endowments have become ever more complicated, not least because of the concerns about responsible or sustainable investing, which the noble Baroness, Lady Hayman, referred to. I am afraid I disagree respectfully with her about what I hope will come out of the Charity Commission consultation. A permissive and clarificatory outcome would be helpful, but a prescriptive one would be unhelpful.

For that reason, I deplore the legal action being taken by a number of trusts and foundations to try to make it legally required for trusts and foundations to invest in line with their mission. It should be left to the trustees of each of those foundations to judge the extremely complex issues around that. One trust or foundation may have a single focus or objective, say in the area of climate change. It is relatively possible to embed that in an investment policy, and most investors, whether individuals, pension funds or trusts and foundations, are in any event incorporating these sorts of ESG and responsible investing criteria. But making it a legal requirement to align investment with charitable objectives could make it almost impossible for a trust or a foundation with diverse objectives to invest without sacrificing significant financial return, from which the trust or foundation’s grant-making activities are derived.

I am afraid that the overly bureaucratic processes we may be eliminating in other areas may inevitably grow in the investment area. I hope that they are not excessive, but I believe that the regulations that will detail what permanent endowments can do in the area of social investment should be a little bit bureaucratic.