4. What can and should charity trustees do in relation to investments?

Published: 12/11/2018
Updated: 12/11/2018

 

This section covers what charity trustees can do in relation to investments and what charity trustees should do when it comes to fulfilling charity trustee duties.


Charity trustees need to consider if they have the power to invest charity assets before undertaking this activity.

Legal duty 1

Charity trustee investment powers come from a combination of sources:        

Investment_diagram1

The name given to your governing document will depend on your charity’s legal form. The common legal forms for charities with investments are:

Legal form

Type of governing document

Company

Articles of association

Unincorporated association

Constitution

Trust

Trust deed

Scottish Charitable Incorporated Organisation (SCIO)

SCIO constitution

Royal Charter charity

Royal Charter, and any by-laws and rules

Investment powers may be listed in your governing document. If you’re not sure, seek advice. 

If your governing document is silent on the matter of investment powers, there may be default investment powers available to the charity trustees, depending on the legal form of your charity.  For example:

Legal form

Default investment powers

Trust

The Trusts (Scotland) Act 1921 gives trustees power to make ‘any kind of investment of the trust estate’. However, there are exceptions to this, if in doubt, you should seek advice.  

Company

 

Generally anything done by a company must be to advance its purposes and subject to any restriction in the governing document or in company law. If in doubt, you should seek advice.

SCIO

 

The 2005 Act gives a SCIO power to invest, subject to the requirement that anything done by a SCIO must be calculated to further its purposes or conducive or incidental to doing so.




Legal duty 1

All charity trustees have legal duties and responsibilities under the 2005 Act.  A duty is something that you must do and all the duties must be met. The general charity trustee duties in the 2005 Act set out a broad framework that all charity trustees must work within. As a charity trustee, you are trusted to look after the charity’s assets and you are responsible for making sure that the charity fulfils its charitable purpose(s).

General duties:

1. You must act in the interests of the charity

1.1 You must operate in a manner consistent with the charity’s purpose

1.2 You must act with care and diligence

1.3 You must manage any conflict of interest between the charity and any person or organisation who appoints charity trustees


Charity trustee duties apply equally to all charity trustees and all activities carried out by charities. All of the charity’s trustees should work together to make sure that these duties are met. 

As a charity trustee, you must make sure that any activities are in the interests of the charity. You need to weigh up the pros and cons before making any decision that could significantly impact the running of the charity. The risk associated with any investment needs to be properly understood. You may want to undertake training, attend information events, and take professional advice to help inform your decisions and help you understand more about investments, so that you can scrutinise and discuss this aspect of the charity’s finances. 

As a charity trustee, you have a duty to act with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another person. 

This means that you must act with a higher level of care than you do with your own finances and affairs. When you are dealing with the charity’s affairs, you should do so as carefully as you would if you were looking after someone else’s affairs, for example a relative or a friend.

For example: You might decide to invest some of your own money on a high-risk investment with potentially large losses and/or returns. You would not be able to do that with the charity’s money.  

You must make sure that you protect the charity’s resources and that you do not put the assets of the charity at undue risk. Charity trustees need to consider what’s appropriate for their charity, considering all relevant factors.

When charity trustees are making decisions about investments, they should make sure that: 

  • they have the power to make investments in terms of the governing document, or law governing the legal form of the charity.
  • appropriate advice is taken, where necessary. You can use the charity’s money to get professional advice for the charity if needed.  
  • they identify potential risks to help with good decision making and decide how to manage risk where it exists.
  • the investments are in the interests of charity, for example making sure the investments are not inconsistent with the charity’s purposes.
  • they are acting in accordance with their charity trustee duties,
  • investments are diverse where possible.
  • any conflict of interest affecting a charity trustee is identified, declared by that trustee and managed appropriately by all charity trustees. This should be done in line with the charity's conflict of interest policy. 

Conflict of interest examples:

  1. The board of a charity might include a charity trustee whose sibling is the partner in a financial planning firm. If the charity is considering appointing a financial planner to assist the charity with its investments, that charity trustee should declare the family relationship and not take part in any process to select a financial planner, if their sibling is among those being considered. 
  1. A conflict of interest can arise where charity trustees are considering investing in a company, and one or more of them are directly involved in that company.  For example, a community trust may consider investing in a local hydro scheme.  One of the trustees of the charity is also a director of the local hydro scheme.  This conflict of interest should be declared by that trustee to the other trustees and managed by all charity trustees. The conflicted charity trustee should not be present or involved in any discussions about the investment in the hydro scheme, or the final decision.  

Acting in this way will help charity trustees to meet their legal duties. 

Charity trustees of certain legal forms of charity will also have duties under other legislation. For example, where the charity is a trust there are specific requirements in the Trusts (Scotland) Act 1921. Where the charity is a company there are requirements in the Companies Act 2006 that will apply to the charity trustees as company directors. 


It could be that some of your investments form part of an endowment fund. An endowment is a fund consisting of assets which are held for the benefit of the charity. The objective is to provide the charity with income to spend on its charitable purposes. There are two types of endowment funds - permanent and expendable.  

  • A permanent endowment fund is one that consists of assets that have been gifted to the charity with specific conditions attached and where the capital cannot be spent in any circumstances. 
  • In an expendable endowment, the capital may be spent in those circumstances specified in the terms of the endowment document.  

A charity may have an endowment even though it no longer holds the paperwork that originally established it. It is important for charity trustees to know and understand any constraints that exist on how they may spend/use the charity’s assets. Other information may assist charity trustees in identifying whether they do hold an endowment, for example accounts for previous years and minutes of charity trustee meetings.  

Despite a charity being given an endowment which is designed to provide income for future use, it may be possible (depending on the terms of the endowment) to change the assets within the fund. For example, some of the original investment portfolio could be sold and the proceeds reinvested in different investments. It may depend on the nature of the endowed asset as to whether it can be changed or not – for example, a building that was given to the charity for its own use is less likely to be capable of change.

Find out how to apply for consent to reorganise a restricted fund.