In April 2021, the Charity Commission launched a consultation on responsible investment guidance for charities. This was not finalised pending the outcome of the Butler-Sloss v Charity Commission case in which the trustees sought a judgment on whether it was reasonable for the trustees to take non-financial considerations into account when investing.
In this case, the non-financial considerations were related to excluding investments that did not align with the Paris Climate Agreement 2016. The proposed policy excluded a significant number of publicly traded companies and commercially available investment funds but still targeted a return in line with the published rates of other large charities.
The claimants 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 their proposed Investment Policy. The previous policy in this area was set by the Bishop of Oxford judgment and incorporated in CC14 Charities and investment matters: a guide for trustees.
CC14 set out that Trustees could invest ethically based on the following reasons:
- a particular investment conflicts with the aims of the charity
- the charity might lose supporters or beneficiaries if it does not invest ethically
- there is no significant financial detriment
And stated that “Trustees must ensure that any decision that they take about adopting an ethical investment approach can be justified within the criteria above.
They must be clear about the reasons why certain companies or sectors are excluded or included. Trustees should also evaluate the effect of any proposed policy on potential investment returns and balance any risk of lower returns against the risk of alienating support or damage to reputation.”
The law in relation to charities trustees considering non-financial aspects when using their powers of investments are as follows:
- Where specific investments are prohibited from being made by the trustees under the trust deed or governing instrument, they cannot be made.
- But 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 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 and in particular among its beneficiaries.
- Trustees need to be careful when making investment decisions. They should be on purely moral grounds, recognising that among the charities supporters and beneficiaries, there may be differing legitimate moral views on certain issues.
- Trustees are required to act honestly and responsibly when formulating an appropriate investment policy that is in the best interests of the charity and its purposes. Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.
- If that balancing exercise is properly done, and a reasonable investment policy is then adopted, the trustees have complied with their legal duties. This cannot then be criticised, even if the court or other trustees might have come to a different conclusion.
However, it remains that the power to invest must be used to further charitable purposes. In this case, the purposes of the trusts included environmental protection and improvement. Therefore, climate change was directly connected with the objectives of the trusts.
The judge concluded:
“The Claimants have decided, reasonably in my view, that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions and for there to be any chance of ensuring that there is no more than a 1.5°C rise in pre-industrial temperature. The only question is whether they have sufficiently balanced that objective with any financial detriment that may be suffered as a result. In my view they have and the performance of the portfolio will be tested regularly against recognised benchmarks and will seek to provide the financial return specified in the Proposed Investment Policy.”
Aarti Thakor, director of legal services at the Charity Commission is reported as stating that the Charity Commission ”will be publishing our updated guidance in due course to ensure trustees can confidently adopt appropriate policies including in the context of pressing concerns around climate change.”
We wait to see how the judgment will impact this guidance for charities operating and investing in the UK.
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