16 May 2023
The Charity Commission recently announced that they were dropping the terms ‘ethical’ and ‘responsible’ from their draft revision of CC14, the regulation that sets out how charities can manage their money. This, if supported by the proper guidance, has the potential to be an important change and allow a wider shift in how charities can use their money.
CC14, currently, gives charities two permissible reasons for incorporating non-financial, or sustainable, considerations in the management of their portfolio, ethical and responsible investment.
In the guidance, ‘Ethical Investment’ permits charities to take into account their mission and values. In contrast, ‘Responsible Investment’, encourages charities to protect the value of their investments by integrating by voting and engaging with companies and integrating environmental, social and governance factors into their investment processes.
Whilst adopting the moniker ‘ethical’ and ‘responsible’ investment in the previous versions provided clarity to charity trustees, this distinction did not reflect the ‘real-world’. In reality it is clear that ‘values’ and ‘value’ are inherently interlinked, not distinct motivations that can be separated.
Many of the issues that charities exist to change, such as climate change, inequality and mental health, are recognised as long-term economic risks by the World Economic Forum Global Risk Report. This reflects the fact that economies and investment markets do not exist in isolation, they require healthy communities and a healthy planet to properly function. It is, therefore, impossible to separate ‘value’ from ‘values’ in the way that CC14 previously did and it would be detrimental to charities, both from a financial and missional perspective, to force them to do so.
It is, also, no longer possible for charities to be as specific about which ethical investment factors they should adopt as was required under the old CC14. As set out by the 2022 High Court Ruling, many sustainability issues are not limited to specific charities. Instead, they transcend multiple purposes. For instance, climate change – if unmitigated – will significantly impact upon nearly every charitable organisation, irrespective as to what it is they specifically focus upon.
The re-write of CC14 is therefore welcome, and long overdue. However, just changing some names is not enough to unlock the full potential of the sector.
Moving forwards, the investment industry will need to play a key role in addressing the sustainability challenges that we face. With the right regulation and guidance charities are well placed to lead this charge.
Charities have an unrivalled experience of delivering positive change and a strong history of participating in investment markets. Whilst the majority of charities will want to continue to maximise their returns – and we exist to help them with that – by transcending the boundaries of mission and investment they can have a significant impact.
Therefore, removing ‘ethical and responsible’ should not be about investment industry semantics, it should be about permitting the charitable sector to unleash its full transformative and creative power to drive change. As the largest investment manager for UK charities1, CCLA intend to help the sector to do this every step of the way.
1 Charity Finance Survey 2021 & 2022
The value of investments and the income derived from them may fall as well as rise. Capital at risk. CCLA Investment Management Limited is authorised and regulated by the Financial Conduct Authority