Articles

RACHEL TITCHEN, Charities and Investment Director at consultancy BROADSTONE, calls for a more flexible and adaptive approach to charity investing.

Trustees and their investment managers should be prepared to think more imaginatively about harnessing their investment approach to achieving their key goals, whether, at one end of the spectrum, this be security or, at the other, aligning with their mission.

For a start, there is the situation of having cash as the ultimate security but the question has to be asked, “Why are charities holding so much cash in the bank?”

In today's complex and volatile financial landscape, many charities find themselves grappling with elevated risks and challenges when it comes to sourcing funding and by default opt to keep their assets as “safe” and as “liquid” as possible. Fair enough.

However, the latest data from The Charity Commission suggests that 13% of the £250bn held in assets by charities with over £0.5m annual income is sat in cash. We should all take a minute to reflect on what that could mean for UK charities. That’s £31bn of charity assets potentially sitting idle.

Assuming all of this is held in a current account (not accruing interest or at low rates), that means there is potentially up to around £1.5bn of investment return foregone for the charity sector over the last year (assuming 5% return on £31bn of assets over a year) had this money been held in a typical money market fund offering returns in line with market rates of interest.

Bank risk

Bank risk does exist. There are plenty of examples over time where capital owners have been exposed to banking failures. So why is it some charity investors have more confidence in banks than they do in investments?

Many, particularly smaller charities, may believe they lack the internal expertise or cannot afford the third-party support they need to make investments work for them. However, simple investments, such as money market funds, offer the opportunity to access potentially higher returns than most traditional bank accounts without the volatility of more risky investments such as equities.

Instead, many charities opt to keep their capital in the bank which can, in contrast, restrict them from improving their capital position and supporting their endeavours.

Fundamentally, when cash is kept idle or relatively so, it fails to generate significant returns (especially during bouts of high inflation) and therefore loses value in real terms over time. Periods of economic volatility and currency fluctuations can also impact the value of cash holdings.

This lack of significant investment return from cash reserves can hinder a charity’s ability to fund its objectives and missions, particularly if it has an untailored and inflexible strategy in place to achieve its investment goals.

The Charity Commission’s published data, based on the annual returns of 12,973 charities during 2022 with annual income of over £0.5m, shows that 7,551 do not hold any long term investments. That’s 57% of the largest UK charities holding only cash and fixed assets such as land, buildings, equipment and vehicles.

Unrestricted assets

Surprisingly, 59% of the assets held by these charities are unrestricted – meaning that they can be invested as the trustees see fit to benefit their charitable purpose. That’s £147bn in the UK economy that could be used to generate returns, drive impact through investing and provide charities with the ability to increase societal benefits.

Fortunately, the under-utilisation of cash is as easily avoidable as it is common. Essentially, investments can provide a higher potential for return and more impact than simply holding money in a bank. However, it’s critical to align these investments with the charity's risk tolerance and financial objectives.

Many charities with commendable causes are forgoing opportunities to invest in simple, relatively secure vehicles that are straightforward, practical and likely to provide a good return, unlocking valuable capital.

Investing does not have to be synonymous with risk and complexity. In fact, it can open up avenues to promote individual charity objectives and ensure capital is working hard through mission aligned investments.

Frequent misconception

A frequent misconception is that investing requires the expertise to pick the highest returning investment vehicle. However, picking the highest returning investments in insolation is not necessarily the only consideration.

The Charity Commission’s Guidance (CC14) for trustees is that investment decisions should be made to “further your charity’s purpose”.

Charities are uniquely positioned to set their own objectives. Many charities hold cash in bank accounts as a way to avoid difficult decisions around investing, but the Charity Commission’s Guidance (CC14) has made it clear that cash counts as investments. So, no decision, is a decision…

Practical steps

Set some objectives. It’s normally really clear how the capital of a charity benefits causes, people or places. What’s not always clear is how trustees can further those causes by using their capital more wisely. Setting objectives for your investments will help.

Avoid setting arbitrary objectives like “generate CPI + 4% p.a. over the long term”. Instead, set objectives that clearly relate to your cause. For example: “maintain growth in line with inflation to ensure our grant making continues to be effective by keeping up with rising project costs”.

Use your capital to align with your mission. Whilst capital might be useful to provide growth so trustees can better support their causes, there’s much more charities can do to unlock positive impact through their investments.

At its core, mission aligned investing allows charity trustees to allocate capital towards investments that support the causes they are championing.

Investing for good

Rather than setting objectives for your assets to target a particular level of return, the Charity Commissions’ Guidance (CC14) has given trustees flexibility to invest for good. This way, even in a poor year for financial growth, charities can at least make note of the positive impact they made through their investments.

For example, charities aligned to medical improvements might want to see their investments in an equity fund that is heavily weighted towards the pharmaceuticals sector to improve the level of research and development in their portfolio. Equally, charities which provide end of life medical support might invest more of their assets in care homes or hospitals to help ensure patients have access to the best possible services.

A combination of investing for financial return whilst supporting causes that are aligned can add significant value.

Charity investors have the responsibility and ability to make this happen. Championing this direction of travel and pushing for investment solutions that align with a wider array of objectives than purely best financial return will help create this change.

We’ve seen demands for investment solutions to meet non-financial objectives result in change before:

·    There was the call for ethically screened funds – done.

·    There was the demand for more environmental, social and governance screens applied to investments – managers changed their practices.

·    The growing demand for aligned investments – these are beginning to happen.

Environmentally sustainable funds are increasingly common now in response to investor demand. But there need to be more funds that support social housing and welfare, that support the prevention of homelessness, that support research and development into medical advancements across the developed and developing world. There are funds that invest to reduce racial inequalities and even funds that promote animal welfare.

Mission aligned investing is a growing area and increasingly there are solutions for charities which want to grasp the opportunities to move into it.