We previously wrote about whether trustees can take an ESG approach to investments in light of the fiduciary duties they owe to beneficiaries. In the context of charitable trustees, this dilemma has been put to the test in the recent High Court case of Butler-Sloss & ors v Charity Commission  EWHC 974 (Ch) before Justice Michael Green.
The case concerned charities whose principal purposes are environmental protection and improvement and the relief of poverty. The question for the Court was whether these charities should be able to adopt an investment policy that excludes many potential investments because the trustees consider that they conflict with their charitable purposes.
The two claimants, who were seeking the Court’s blessing for their new investment policies, were the trustees of two charities, the Ashden Trust and the Mark Leonard Trust. Both are part of the Sainsbury Family Charitable Trusts network and share the same investment manager, Cazenove.
The Defendants were the Charity Commission and the Attorney General. Whilst they invited the Court to make judgment on what is the correct approach generally for charity trustees to apply in adopting responsible investment policies, they both claimed that it was premature for the Court to approve the Claimants’ particular new investment policies.
Despite the Paris Climate Agreement not applying to private persons and charities, the Claimants argued that the goals of the Agreement for the limiting of global warming should be the appropriate basis for assessing whether their investments are consistent with their charitable purposes. They wished to exclude investments that are not aligned with the agreement, even if the financial returns may not be maximised as a result.
The new investment policies effectively excluded over half of publicly traded companies and many commercially available investment funds. It was anticipated that the preferred investment portfolio option had the highest overall costs and volatility and a higher green revenue exposure than the other options presented by Cazenove. The trustees conceded that they were unable to accurately determine the extent of the financial detriment which may be suffered by adopting the proposed investment policies.
The Defendants submitted that the Claimants did not adequately balance the potential financial detriment that would be suffered by the adoption of the new investment policy with the conflict to the charitable purposes.
The current guidance (the Bishop of Oxford case)
The Charity Commission’s current guidance on this issue (“Charities and investment matters: a guide for trustees”) is based on the case commonly referred to as the “Bishop of Oxford case”. In that case the Court held that maximising financial return is always the starting point for charity trustees when considering the exercise of their investment powers, yet there are exceptions to this general rule. In particular, it was accepted that trustees could choose not to invest in a particular type of business if they were satisfied it would conflict with the very objects of the charity. However, this judgment did not anticipate significant financial detriment arising in practice as result of this methodology. As the judge in Butler-Sloss put it “the Vice-Chancellor only had in mind the relatively simple cases of cancer charities not investing in tobacco or the Quakers not investing in armaments companies”.
Clarity on the law for charity trustees
Green J held that the Bishop of Oxford case should not be read as imposing an absolute prohibition on charity trustees making investments that directly conflict with the charity’s purposes. He went on to helpfully set out what he considered to be the law in relation to charity trustees taking into account non-financial (i.e. ESG) considerations when exercising their investment powers. We have summarised these points of law as follows:
- Trustees’ powers of investment derive from the trust deeds and the Trustee Act 2000.
- The power to invest must be exercised to further the charitable purposes of the trust.
- That is normally achieved by maximising the financial returns on the investments that are made, whilst considering the need for diversification and taking appropriate advice.
- Social investments are made using separate powers than the pure power of investment.
- Where specific investments are prohibited under the trust deed, they cannot be made.
- But where trustees are of the reasonable view that particular investments potentially conflict with the charitable purposes, the trustees have discretion as to whether to exclude such investments and they should do so by reasonably balancing all relevant factors including, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion.
- In considering the financial effect of making or excluding certain investments, the trustees can take into account the risk of losing support from donors and damage to the reputation of the charity generally and among its beneficiaries.
- However, trustees need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among the charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues.
- Essentially, trustees are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy for the charity that is in the best interests of the charity and its purposes. Where there are conflicts, good judgment should be exercised by balancing all relevant factors.
- If that balancing exercise is properly done and a reasonable and proportionate investment policy is adopted, the trustees have complied with their legal duties and cannot be criticised, even if the Court or other trustees might have come to a different conclusion.
In applying the above, Green J held that the Claimants had reasonably decided that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on GHG emissions. He considered that they had sufficiently balanced that objective with any financial detriment and that the investment performance would be tested regularly against recognised benchmarks. As a result, he held that they had exercised their investment powers properly and lawfully and gave the Court’s blessing for adopting the new investment policies.
Following this case, the Charity Commission is set to publish updated guidance to reflect the decision. Whilst the case helps to provide clarity for charity trustees and can be interpreted as a ‘pro-ESG investment’ outcome, on closer examination its relevance may be limited to environmental charities, as the decision was focused on the charities’ purpose. It should certainly not be viewed as automatically applying to trusts (including discretionary trusts) generally.
As this judgment demonstrated, the terms of the trust are key, and it is important for trustees of both existing and new trusts (both charitable and non-charitable) to consider whether additional powers and protections should be incorporated into the trust deed.
Whenever there is doubt as to the correct application of a power, a trustee’s best move is to seek advice.