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Winter come early: the charity sector and the impact of Covid-19

Posted: 13/05/2020


As the world contemplates an uncertain economic future, trustees of UK grant making charities will be all too aware that many operational charities will be looking to them to plug the gap in their finances left by falling income, closed shops and the cancellation of fundraising events. With little idea of how long the lockdown will last, or how severe the long-term economic effects of Covid-19 will be, the impact of the virus will present considerable challenges to charity trustees.

Income freeze

Many trustees will have already received FCA mandated notices informing them that their charities’ portfolios have fallen by 10% and more. In addition to falling capital values, income from investments looks set to suffer a dramatic reduction. Between 19 March and 20 April 2020, 176 companies made dividend announcements, of which only 14 made payments. The remaining 162 cancelled or suspended dividend payments. While some sectors of the market have continued to perform well, many charities can expect their income from investments to be significantly reduced until at least the lifting of lockdown restrictions and possibly beyond.

In many cases charitable trustees may look to their reserves and, if necessary, restricted funds (including permanently endowed funds) as a means of continuing their charitable activities. Whether restricted funds can be used will depend upon the nature of the fund and advice should be sought before restricted funds are allocated for anything other than their strictly designated purpose. Trustees must be aware that unless there is a power that allows the donor to consent to the funds being released and used for another purpose, only certain instances set out in charity law allow the trustees to deviate from the stated purpose and, in many instances, it will be necessary to seek professional advice before doing so.

Some charitable trustees may decide that their charity should either be distributed in its entirety or amalgamated with another charity that shares its objectives. Bringing a charitable trust to an end is not a decision to be taken lightly and professional advice about the liability of trustees and the position of creditors should be sought at an early stage. In many cases, permission from the Charity Commission will be necessary.

Managing investments

Existing discussions with investment managers about the trustees’ appetite for investment risk - what proportion of the portfolio they were prepared to lose in the short term if there was to be a collapse in the markets – have suddenly became very, very real and trustees must be aware of their legal duties when managing investments.

Charity Commission guidance requires charities to invest in order to generate returns which are to be used to further the charity’s aims. For grant making charities, they will want to maximise what little investment returns are currently available within an ‘acceptable’ risk profile in order to make grants to operational charities and organisations which deliver the charitable objectives. However, as these charities are much more likely to be organised as trusts, the individual trustees will have unlimited personal liability and may not take much comfort in the stock market’s historic record of recovery over the long term, when a fifth of the value of the charity is wiped out on their watch.

Clearly, the economic impact of the current pandemic is outside the control of any trustee but it does concentrate the mind on investment performance and whether the trustees have adopted an ‘acceptable’ risk profile. Nobody expects charity trustees to be Warren Buffett, but they do need to demonstrate that they have complied with the legal duties incumbent on trustees of all charities, especially grant making charities, when they are investing charitable funds.

In order to satisfy their legal duties, trustees must:

  • know, and act within, their charity’s powers to invest;
  • exercise care and skill when making investment decisions;
  • select investments that are right for their charity. This means taking into account how suitable any investment is for the charity and the need to diversify investments;
  • take advice from someone experienced in investment matters unless they have good reason for not doing so;
  • follow certain legal requirements if they are going to use someone to manage investments on their behalf;
  • review investments from time to time; and
  • explain their investment policy (if they have one) in the trustees’ annual report.

The above are legal requirements and the trustees will be in breach of their legal duties if they fail to comply with them. To help them comply, the Charity Commission guidance recommends that trustees:

  • decide on the overall investment policy and objectives for the charity;
  • agree the balance between risk and return that is right for their charity. This may include a wide range of factors that will impact on return including environmental, social and governance factors;
  • have regard to other factors that will influence the level of return, such as the environmental and social impact of the companies invested in and the quality of their governance;
  • be aware that some investments may have tax implications for the charity;
  • invest any permanently endowed funds in a way that helps them to meet their short and long-term aims; and
  • decide whether to adopt an ethical, socially responsible or mission-related approach to investment and ensure that it can be justified.

While the Charity Commission appears acutely aware of these challenges and has promised to be “as flexible and pragmatic as possible” when regulating charities, many charitable trustees will soon be faced with difficult decisions. During such times, trustees must ensure they have an active, constructive and ongoing dialogue with each other and their investment managers.

Conclusion

Charities are far from immune from the economic, social and practical difficulties presented by Covid-19 but with careful planning, appropriate outside advice and clear decision-making processes in place, trustees should be well placed to ride out the storm and ensure they continue to act in the best interests of their charitable objectives and beneficiaries.


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