Responsible investment and charities – High Court provides clarity

Although the case concerned the implementation of a responsible investment policy by charities with an environmental focus the decision has wider application.

Background to the present case

The two charities involved had general charitable purposes. However, the trustees had decided to focus on causes relating to environmental protection or improvement and the relief of those in need.

In investing the charities’ assets (which were substantial), the trustees had already taken an approach which excluded certain investments such as fossil fuel companies and favoured others with better “green” credentials. However, they had come to the conclusion that this did not go far enough and were concerned that many of their current portfolio holdings conflicted, or might conflict, with their charitable purposes. Accordingly, they sought the court’s approval for the adoption of new policies which would exclude investments that are not aligned with the goals set out in the 2016 Paris Climate Agreement.

Bishop of Oxford case

The Charity Commission’s current guidance in this area is based on principles set out in Harries v Church Commissioners for England [1992] 1 WLR 1241 (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 and suggested that “…the circumstances in which charity trustees are bound or entitled to make a financially disadvantageous investment decision for ethical reasons are extremely limited.” It did, however, accept that there are exceptions to this general rule.

In particular, Sir Donald Nicholls V-C (as he then was) noted that if the trustees “were satisfied that investing in a company engaged in a particular type of business would conflict with the very objects the charity is seeking to achieve, they should not so invest…even if it would be likely to result in significant financial detriment to the charity.” However, he did not anticipate that significant financial detriment would be likely to arise in practice, commenting that “it is not easy to think of an instance where in practice the exclusion for this reason of one or more companies or sectors from the whole range of investments open to trustees would be likely to leave them without an adequately wide range of investments from which to choose a properly diversified portfolio.”

In the present case, however, the trustees had concluded that investments that do not align with the goals of the 2016 Paris Climate Agreement would be in direct conflict with their charitable purposes. Their proposed investment policies would have the effect of excluding over half of publicly traded companies and many commercially available investment funds and, although the proposals targeted an annual return of CPI +5% (which the Charity Commission indicated would be in line with the published rates of return of other large charities such as the Church Commissioners or the Wellcome Trust), the trustees accepted that they were unable to accurately determine the extent of the financial detriment which may be suffered by the charities as a result of adopting the proposed investment policies.

Butler-Sloss v Charity Commission – clarity provided

The claimant charities considered that the Bishop of Oxford case imposed an absolute prohibition on their holding investments which did not align with the Paris agreement. The judge (Michael Green J) therefore carefully considered whether the Vice-Chancellor’s judgment in the Bishop of Oxford case imposed an absolute prohibition on charity trustees making investments which directly conflict with their charity’s purposes. The judge decided that the case should not be read as imposing an absolute prohibition in such circumstances and summarised (at paragraph 78 of the judgment) his understanding of the law in this area.

He began by noting that charity trustees’ investment powers must be exercised to further their charitable purposes, and that this will normally be achieved by maximising the financial returns on the investments that are made. However, “where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors including, in particular, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion of such investments.”

In performing this balancing exercise (and specifically in considering the financial effect of making or excluding certain investments), trustees may take into account the risk of losing support from donors and potential reputational damage to the charity.

The judge issued a note of caution about trustees making investment decisions on purely moral grounds – on the basis that there may be differing legitimate moral views on certain issues among a charity’s supporters and beneficiaries.

Overall, if charity trustees act honestly, reasonably and responsibly in balancing all relevant factors, and a reasonable and proportionate investment policy is adopted as a result, the trustees will have complied with their legal duties “even if the court or other trustees might have come to a different conclusion.”

In the present case, the court concluded that the trustees of both charities had performed the necessary balancing exercise properly and so would be permitted to adopt their proposed investment policies.

Outcome for charities

The judgment in this case provides some clarification of the law on responsible investing by charity trustees. Although there is no absolute prohibition on making investments which conflict with a charity’s objects, it is now clear that trustees may (in their discretion) decide to exclude such investments and frame their investment policy accordingly – provided they have taken into account the relevant factors and in particular balanced the seriousness of the potential conflict against the risk of financial detriment.

Last year, we commented on a Charity Commission consultation which sought views on draft revised responsible investment guidance. This process was put on hold pending the outcome of this case; however, it is now expected that the Charity Commission will publish updated guidance to reflect the decision.  

The judgement still implies some limits on the extent to which moral considerations can be taken into account. The judge’s summary of the law deals with situations where there is an actual or potential conflict between certain investments and a charity’s objects. For charities with no such focus seemingly the Vice-Chancellor’s admonition against trustees using “property held by them for investment purposes as a means for making moral statements at the expense of the charity of which they are trustees” still stands; this may be what lies behind Michael Green J’s caution about making investments on purely moral grounds.

For charities focused on environmental causes, this decision, alongside updated Charity Commission guidance (once published), should enable trustees to proceed with confidence in weighing up potential conflicts with their objectives against financial return, and implementing a suitable investment policy which reflects the objects of their charity.