Julie Hutchison examines whether Scottish charity trustees should create an investment policy statement, and gives some tips on what to include

What does good practice look like for a charity board when it comes to looking after a charity’s investments?

Glancing south of the border, there is an extremely useful pointer for Scottish charity boards in the use of an investment policy statement. Under the Trustee Act 2000, these documents are mandatory for charitable trusts in England and Wales where the investment management activities are being delegated to an investment firm.

If investments are among the charity’s assets, there is no reason why Scottish charity boards should ignore this guideance – from personal experience, I know creating an investment policy statement can prompt good board discussions on a range of important strategic issues.

Consideration of ethical criteria can be vital for a charity board in terms of risk management

Julie Hutchison

So, what kind of information should you typically find in an investment policy statement?

Firstly, it should include goals and relevant timeframes. How long is the money to remain invested? Will a portion of it be needed to fund a capital project within the next five years, for example? This will prompt discussion about the suitable way to earmark the money for the capital project, which might require a different investment approach from the longer term investments.

The statement should also include guidance on the charity's appetite for risk, sometimes expressed as low, medium or high (it’s very rare to see high when it comes to charities).

Information on income requirements and frequency of any payments, and information on the charity’s cash position will also be included in most.

In one recent example of an investment policy statement, I saw evidence of detailed analysis of reserves being linked to the approach taken to the investments. There is a clear relationship between investments and reserves.

One area of change I have noticed recently is in the ethical criteria which are to apply to a charity’s investments. In the past, it has often been the case that investment in companies manufacturing tobacco products has been excluded, for example in medical or health-related charities. I would classify this as negative screening, which contrasts with the more recent trend towards including positive screening criteria by selecting companies on social, environmental or community involvement criteria. The goal here is still an investment one – to achieve a positive financial return: what changes is the wider context of how investments are selected.

Consideration of ethical criteria can be vital for a charity board in terms of risk management. If a charity’s purposes have a focus on the prevention and treatment of lung cancer, for example, holding shares in a company manufacturing tobacco products would be directly counter to the charity’s goals. The risk management point here is not just about failure to act in line with the charity’s purposes, it is also reputational and could impact donor behaviour among other consequences. Creating (and keeping under review) an investment policy statement can therefore be an essential risk management tool.

Julie Hutchison is charities specialist at Standard Life Wealth.