Charity Trustees: ethical investments

A recent High Court decision (Butler-Sloss v Charity Commission 2022 EWHC974 Ch) has confirmed that charity trustees can pursue an investment policy which excludes profitable investments that conflict with their charitable purposes, even if this may result in lower returns.

The starting point, however, remains that charity trustees should seek to maximise the financial returns on their investments, and only depart from this in certain circumstances.

There had been some expectation that the judgement might provide some support for private (non-charitable) trustees who wish to pursue a similar ethical investment policy. In the event, the comments made by the judge reinforce the traditional approach; that trustees of private trusts have an overarching duty to maximise returns for their beneficiaries.

In more detail

Background

The case was brought by two grant-making environmental charitable trusts, both part of the Sainsbury’s family trust group. The charity trustees sought permission to pursue an investment policy that specifically excluded investments which did not align with the Paris Climate Change Agreement. The charity trustees had taken extensive advice on the investment approach, which concluded that such an approach could mean less profit for the charities, at least in the short term. The previous leading case in this area is known as the Bishop of Oxford case. There, the Court had concluded that charity trustees should seek to maximise returns on their investments, except where such investments were in direct conflict with the charity’s purposes. It was therefore unclear whether the charity trustees could lawfully approve this investment approach, and they sought the Court’s approval.

Judgment and methodology for investment

The judge in these proceedings concluded that “charity trustees’ primary and overarching duty is to further the purposes of the trust. The power to invest must therefore be exercised to further the charitable purposes”. It is worth noting that the judge emphasised “that is normally achieved by maximising the financial returns on the investments.” Also that charity trustees cannot make investments that are specifically prohibited by the charity’s governing instrument.

The judge held that where the charity trustees are of a reasonable view that a particular investment, or classes of investments, potentially conflict with their charitable purposes, they have a discretion as to whether to exclude such investments. In exercising their discretion not to pursue a policy of maximising financial return:

• They should balance all relevant factors, including the likelihood and seriousness of the potential conflict and of any potential financial effect of the exclusion of such investments.
• In considering the financial effects the charity trustees can take into account the risk of losing support from donors and damage to the reputation of the charity generally and in particular among its beneficiaries.
• The charity trustees should exercise caution when making decisions about investments on purely moral grounds, as there may be differing legitimate moral views on certain issues.

The Court concluded that, provided the charity trustees balanced all of these factors honestly reasonably and responsibly and adopted a proportionate investment policy, they will have complied with their legal duties and cannot be criticised even if the Court or other charity trustees might have come to a different conclusion. The judge therefore made the requested declaration that adopting the proposed policy would discharge the charity trustees’ duties in respect of the proper exercise of their powers of investment.

A welcome clarification?

Overall the decision is a welcome clarification about the law relating to charities and ethical investment. The Charity Commission will now revise its investment guidance which has been on hold pending the outcome of this decision. Questions do remain, however.  The decision clarifies that charity trustees can pursue a balanced investment policy pursuant to their charity’s objects and gives an indication as to what this may look like for environmentally-focussed charities wishing to pursue a climate friendly investment policy.  It does not necessarily clarify how charity trustees with different charitable objects should balance these competing factors. In practice, the distinction between strategies which support the charitable purposes and “moral decisions” may not be clear cut.

What about private trusts?

The judgment distinguishes the duties of charitable trustees from the duties of trustees of private trusts.  The judge notes that trustees of charitable trusts, like all trustees, are obliged to invest following the standard investment criteria set out in the Trustee Act 2000.  The judgement notes that the standard criteria says nothing about non-financial considerations that can or cannot be taken into account by trustees when exercising their powers of investment.   Further, the judge made a comment about the legislation introducing social investments (where a charity invests for a financial and a non-financial return) “This [legislation] came about because there was uncertainty as to whether charity trustees were able to use their ordinary power of investment when there might be no anticipated positive financial return.” This comment may be read as supporting the view that non-financial considerations cannot be a factor for private trustees. Overall, although the decision is focussed on charitable trusts, the commentary about non-charitable trusts supports the established position that private trustees have an overarching duty to beneficiaries to maximise returns, whilst balancing risk.