Provides comprehensive guidance on investment matters for trustees, including considerations for developing an investment policy. Charity Commission CC14 Guidance
The importance of an investment policy
An investment policy serves as a foundational document that guides a charity's investment decisions, ensuring alignment with its mission, values, and financial objectives. It provides a structured framework for trustees to make informed decisions, manage risks, and uphold their fiduciary responsibilities. A well-crafted investment policy offers several key benefits:
Clarity and consistency
It establishes clear guidelines for investment decisions, promoting consistency even amidst changes in board membership or external economic conditions.
Risk management
By outlining the charity's risk tolerance and diversification strategies, the policy aids in mitigating potential financial risks.
Accountability and transparency
It serves as a reference point for evaluating investment performance and decision-making processes, enhancing accountability to stakeholders.
Legal compliance
Ensuring that investment activities adhere to legal and regulatory requirements, thereby protecting the charity from potential legal challenges.
Key components of a charity investment policy
When developing an investment policy, trustees should consider including the following components:
- Purpose and Objectives: Clearly define the primary purpose of the investments, whether it's to generate income, preserve capital, or fund specific programs. Align these objectives with the charity's overall mission and strategic goals.
- Governance Structure: Detail the roles and responsibilities of those involved in investment decisions, including trustees, investment committees, and external advisors. Specify decision-making processes and delegation protocols.
- Investment Philosophy and Strategy: Articulate the charity's approach to investing, including asset allocation strategies, investment horizons, and the balance between income generation and capital growth.
- Risk Tolerance and Management: Define the charity's risk appetite and outline strategies for managing various types of risk, such as market, credit, and liquidity risks.
- Ethical and Responsible Investment Criteria: Establish guidelines for ethical considerations, consider how the charity may wish to reflect their values with their investments, including environmental, social, and governance (ESG) factors, specify any sectors or industries to avoid, and how they wish to report.
- Performance Monitoring and Reporting: Set benchmarks for evaluating investment performance and outline the frequency and format of performance reports to the board and stakeholders.
- Review and Revision Procedures: Establish a schedule for regular policy reviews and outline procedures for making amendments in response to changing circumstances or objectives.
Steps to develop an effective investment policy for a charity
- Assess the Charity's Financial Situation and Goals: Conduct a thorough analysis of the charity's current financial status, funding needs, and long-term objectives. This assessment will inform the investment strategy and objectives.
- Engage Stakeholders: Involve key stakeholders, including trustees, senior management, and beneficiaries, in discussions to ensure the policy reflects diverse perspectives and the charity's mission.
- Consult Legal and Financial Advisors: Seek guidance from professionals to ensure the policy complies with legal requirements and aligns with best practices in investment management.
- Draft the Policy: Develop a draft incorporating the key components outlined above, ensuring clarity and coherence.
- Review and Approve: Present the draft to the board for review, incorporate feedback, and obtain formal approval.
- Implement and Communicate: Once approved, implement the policy and communicate its provisions to all relevant parties, including investment managers and stakeholders.
- Monitor and Review: Regularly monitor investment performance against the policy's objectives and conduct periodic reviews to ensure continued relevance and effectiveness.
Resources and templates
To assist in developing an investment policy, trustees can utilise various resources and templates:
Charity Excellence Framework: Investment Policy Template
A free, editable investment policy template tailored for UK charities.
The Charity Investors Group: Investment policy guide
By developing a comprehensive investment policy, trustees can ensure that their charity's investments are managed prudently, ethically, and in alignment with their overarching mission and objectives.
Explore the next section
Ethical and Responsible Investing.