A look at a recent High Court decision which updates the law on trustees' duties in respect of investment policies and environmental impact.
The recent High Court decision in Butler-Sloss & ors v Charity Commission & anr [2022] EWHC 974 (Ch) approved the investment approach of two charities that wished to exclude investments which would not be aligned with the goals of the Paris Agreement on limiting global warming temperature rises.
The trustees of two charitable trusts, the Ashdean Trust and the Mark Leonard Trust, wished to adopt investment policies for their respective charities which would exclude any investments which the trustees considered did not align with the Paris Agreement (which aims to limit global warming temperature rises). Both charities have general charitable objects and are part of the Sainsbury Family Charitable Trusts. The trustees brought proceedings at the High Court to establish whether their adoption of such investment policies was permissible under their respective charities' powers of investment.
Prior to the decision of the Honourable Mr Justice Michael Green in this case, the guidance from the Charity Commission surrounding investments made by charities focussed on the importance of investments generating the best financial return available. This was seen to help demonstrate that a charity's trustees were meeting their fiduciary duties in relation to their investment decisions. This meant there appeared to be limited manoeuvrability for charity trustees to make ethical or socially motivated investments where the financial return was identifiably lower than that of other investments in products or companies which did not carry the same ethical or social return.
The Charity Commission guidance is set out in CC14 (Charities and investment matters: a guide for trustees) where investments are broken down into the three categories of (i) financial investments (made with the motivation of maximising financial return), (ii) programme-related investments (made with the motivation of furthering a charity's objects) and (iii) mixed-motive investments (being a mix of financial and programme-related). It is this guidance which states that charity funds should be invested to produce the best financial return within the level of risk considered by the charity trustees to be acceptable. The Charities (Protection and Social Investment) Act 2016 then allowed charities to make social investments by way of programme-related and mixed motive investments, but its has not been clear to what extent such investments could be made (where a lower than possible financial return is identifiable) before the trustees risked breaching their fiduciary duties to their charity.
At the beginning of 2020 sufficient pressure had built up around this topic that the Charity Commission commenced a consultation on its guidance set out in CC14 to identify the areas of concern and to update it. The consultation resulted in acceptance by the Charity Commission that the current guidance fell short and that this has resulted in uncertainty for charity trustees who wished to invest their charity's funds in a more responsible, and ethical, manner.
Whilst it produced a draft of its revised guidance in April 2021 (introducing the language of "responsible investment", for ethical or social investment), the Charity Commission has been holding off on publishing a finalised version of it until the outcome of the Butler-Sloss case in the High Court, given its significance to the matters concerned.
In his judgement Michael Green J has accepted the decision made by the trustees of the two charitable trusts and so approved their investment policies, upholding that the trustees can align the investments made by their charity with products/companies that aim to meet the goals of the Paris Agreement – and that this can be done even where financial risk arises as a result of the trustees alienating a substantial part of the investment market.
Michael Green J considered the previously leading principles on charitable investment which were set out in the 1992 Bishop of Oxford case (Harries v Church Commissioners for England [1992] 1 WLR 1241). In brief, these principles were that investments should maximise return for their charity and ought not to take into account other considerations that could cause financial detriment to their charity.
This re-interpretation now opens the door to charity trustees to adopt investment policies and approaches which adopt ethical and social considerations, even where this will lead to a lesser financial return on such investments, and is now set in English law as the leading case on this subject.
Notwithstanding the above, charity trustees are likely to want to wait to see the updated Charity Commission guidance, before revising their investment policies. On that front the Charity Commission will now continue with their programme of updating CC14 and we will have to wait and see how far the guidance will go in implementing Michael Green J's decision, and whether responsible investment may become the expected position for charities to adopt.
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