Charities and Ethical Investment - Context, Conflict and Consequences

We could write that it confirms mainstream understanding of trustee investment powers, that it is about general principles, and it is just coincidental that the charities involved had environmental objects. But that would be to miss the point. Much of the interest in this case derives from its context, a wider context including the following:

• In the words of as sober a figure as the Chair of the International Panel on Climate Change (IPCC), "we are at a crossroads. The decisions we make now can secure a liveable future."
• Most charity trustees agree that climate change exists and action must be taken to tackle it, but board members can reasonably differ on what action is required, how urgently charities should act, and what (if any) role non-environmental charities should play.
• For many charity trustees, these are urgent and important issues with which they are grappling in their personal lives, their professional lives, and as charity trustees. Given that, it is not surprising that they find a gravity in questions such as these and, in this case, seek guidance from the Court.

We consider these wider issues below. First, however, we should consider the core of the case, what the law says about charity trustees and when they can make investment choices taking into account non- financial considerations.

Charity Trustees, Investment and Their Objects

There is a well-established framework for charity trustees to take decisions relating to investment. It explains how factors like risk and diversification of investments are used in order to get to the best financial return for their charity. Since Harries v The Church Commissioners for England [1992] 1 WLR 1241 a case in 1991 relating to the investment approach of the Church Commissioners (the Bishop of Oxford case), it has been recognised that for trustees investing to further the interests of their charities, financial return is just a starting point. Trustees can also take into account whether investments:

• conflict with the charity's objects
• may alienate supporters
• accommodate supporters' moral views

Taking those points in reverse order, accommodating supporters' moral views is only permissible if there is no significant financial impact.

When considering the risk of alienating supporters, difficulties that causes are to be weighed against the financial impact of excluding the investments in question. The latest case concerns the remaining point, where proposed investments conflict with the charity's objects.

Where conflict with the objects is concerned, the Charity Commission's published analysis appeared to be permissive, that trustees could choose not to make investments which were directly contrary to their objects. In doing so, they had to consider the potential impact on returns. The Bishop of Oxford case on the other hand could be read as supporting a blanket prohibition on holding any investment directly contrary to their objects with no choice and no need for a balancing exercise. In any case, the analysis in the Bishop of Oxford case had been effectively volunteered for the benefit of the sector by the judge, because it wasn't necessary for the decision. Whilst helpful and persuasive, this meant it wasn't strictly binding law.

A Lot Has Changed Since 1991

In 1991, the judge thought that an investment directly contrary to a charity's objects would be a rare thing. The examples given in the Bishop of Oxford case are stark and, perhaps unlikely to arise in practice. They included Quakers considering an investment in armaments and cancer charities considering an investment in a tobacco manufacturer.

Today that is not the case. The trustees in question were concerned with environmental protection objects under their general charitable purposes.

From the judgment, we understand the trustees studied IPCC reports about climate change and in particular the reasoning underlying the Paris Agreement: the impact of warming above 1.5°C and what needs to be done in order to avoid that. The trustees concluded therefore that, although the Paris Agreement is not binding on charities or individual trustees, their overall investment portfolio should be managed in accordance with detailed policy statements designed to ensure that the charities' investments are aligned with the Paris Agreement goals on greenhouse emissions and by doing so avoid conflict between their investments and the charities' objects

The difference between 1991 and 2022, for environmental charities at least, is the growing and increasingly urgent evidence base regarding climate change, including authoritative UN scientific research and intergovernmental agreement. On some evaluations of that evidence base, investments contrary to the objects of environmental charities have gone from being a rare hypothetical, to being widespread.

The Court's Decision in the Butler-Sloss Case

The Court approved the draft investment policies proposed by the two charities on behalf of which this case was brought. In doing so, the Court confirmed:

• trustees could choose not to make investments directly contrary to their objects
• that it was a discretion, to be exercised where trustees are of the reasonable view an investment may potentially conflict with the charity's objects
• that trustees consider the likelihood and seriousness of both the conflict and the financial effect on a properly informed basis

The Court was presented with, but declined to approve step-by step the building blocks of the decision, so there is no detailed breadcrumb trail for other trustees to follow in order to be properly informed on how they might go about establishing a suitable investment policy themselves. But it did approve the trustees overall decision on how to construct an investment portfolio. It gives us a sense of their reasoning and shows us the reasoning encompassed IPCC reports, the Paris Agreement and Greenhouse Gas Protocols. It also shows us that even if a hard figure for financial detriment was elusive, investment advice confirmed investment performance targets were achievable and in this case, that was sufficient justification.

At a more basic level, the judgment also includes (at paragraph 78) a concise statement of the law in relation to charity trustees taking into account non-financial considerations when exercising their powers of investment. This decision will be reflected in due course in the Charity Commission's revised guidance note on investment (CC14 Charities and Investment matters: A guide for trustees). Meanwhile, charity trustees could do worse than review the 10 part list set out in this part of the judgment.

The Practical Implications of the Butler-Sloss Case - What Should You Do Now?

Governance professionals reading about the Butler-Sloss decision will be considering what steps to recommend to their employers or clients in response to the case. We suggest their response is likely to include the following:

• a briefing to trustees on the case and the associated legal principles. This could usefully include a review of paragraph 78 of the judgment with reference to the specific circumstances of the charity concerned, including its investment powers, objects and other relevant provisions of its governing document,
• a review of the  charity's investment policy including, where appropriate, advice from the charity's investment managers and other relevant professionals,
• facilitating, and properly documenting, a discussion by the board of the decision and its implications along with any resulting decisions. This should include consideration of any areas where current or anticipated investments could conflict with the charity's objects and, where the board concludes there is such a conflict, the resulting balancing exercise, and
• revisiting the first step, and if appropriate the others, when the Charity Commission's revised guidance is published.

For some charities, this discussion will prompt a wider discussion: are there steps beyond investment decisions which the board can take in response to climate change. This will rarely lead to easy answers but for the reasons above it is an important discussion for any charity board.

What Remains Unclear?

There lies a question, somewhere between being told there is no hard rule to exclude particular investments, and being told you have a discretion to exclude some. It is this: are the trustees with investments duty bound to consider the available discretion? Are they bound to inform themselves about the question and take a decision in the charity's best interests? That is what usually follows from having a discretion in charity law.

In this case, we think not. The judge seemed mindful that a fixed rule requiring trustees to identify and exclude investments which conflict with their objects would be burdensome. Exercising a properly informed discretion over such a complex issue is far from trivial, so it would be surprising if he intended to impose such a broad and continuing burden on all charity trustees. The explanation of the discretion to be exercised by trustees is carefully framed to make clear that the discretion arises once trustees have already formed a reasonable view that some investments potentially conflict with their objects. If the trustees don't form that view to start with, the discretion and the need to consider it probably don't arise. But once trustees do start asking the question and form that view on a reasonable basis, they should then consider what to do about it.

Beyond Investment

It is not just investment decisions which can have wider consequences for a charity's objects. This is why we think this case has a relevance beyond investment. The Bishop of Oxford case described itself as a reasoned application of the duty to further the objects. There's nothing unique to investments about that. The same reasoning would seem to apply, for example, to a charity's supply chain, providing a framework by which trustees can take into account the wider consequences of supporting supplier businesses through their custom.

Beyond Environmental Charities

The case is also of wider relevance to charities with different objects. Trivially, of course, other objects can conflict with investments squarely on their own terms. Peace objects and arms manufacturers for example. But this may also happen in less obvious ways.

This becomes clearer when one reflects on why the issue was so important for the charities involved in this case. This was because of the profound effects of climate change and the resulting impact on their objects. It is almost immaterial that those objects were environmental. The environment and climate by its nature is literally all around us and has an impact on everything we do, potentially affecting every field of human endeavour including charity. It has the potential to impact the objects, perhaps of all charities.

Conclusion

The wider opportunity then, is for all charities to examine how the hazards associated with climate change could impact their objects. For some, those climate hazards may present sufficiently serious risks in terms of their objects so as to justify a full consideration of the climate related wider consequences of their investment, administrative and operational choices.

Further Reading

• The Bishop of Oxford case: Harries v The Church Commissioners for England [1992] 1 WLR 1241
• Butler-Sloss & Ors v The Charity Commission for England And Wales & Anor
• Climate and environmental leadership principles – ACEVO
• Charities and investment matters: a guide for trustees

This piece was originally published in Governance and Compliance, the magazine of the Chartered Governance Institute.

For more information, please contact Shivaji Shiva in our Charities team on 07788 313 298, Andrew Wherrett on 0117 314 5269, or complete the form below.