Charity trustees' powers of investment: Does the Butler-Sloss decision change the law?
The short answer is “no”. The decision is a reinterpretation of the 30-year-old decision in the Bishop of Oxford case for our modern world and a reinstatement of the fundamental duty of charity trustees to act in the best interests of their charities’ purposes.
We summarise the decision before offering our thoughts on what the case means in practice for charity boards.
Until this year the only reported case dealing with “ethical investments” by charities was Harries v Church Commissioners for England in 1992, brought by the Bishop of Oxford and two other priests against the Church Commissioners in relation to their investment policy concerning South Africa at that time.
The case was heard by the then Vice-Chancellor (the most senior judge in the Chancery Division of the High Court), who set out the fundamental principle underlying the exercise of any power by charity trustees:
"It is axiomatic that charity trustees, in common with all other trustees, are concerned to further the purposes of the trust of which they have accepted the office of trustee. “That is their duty. To enable them better to discharge that duty, trustees have powers vested in them.
“Those powers must be exercised for the purpose for which they have been given: for the purposes of the trust. That is the guiding principle applicable to the issues in these proceedings. Everything which follows is no more than the reasoned application of that principle in particular contexts.”
Regarding the power of investment, the Vice-Chancellor said that maximising financial return is the starting point because charities always need money: “…the more of it there is available, the more the trustees can seek to accomplish.”
Then he described three situations where the “starting point” was not necessarily the end point and other considerations could come into play, and which he considered would only be “comparatively rare” cases:
- Where an investment directly conflicts with a charity’s purposes.
- Where an investment indirectly conflicts with a charity’s purposes, for example where particular investments might alienate supporters or donors or make beneficiaries less willing to accept help because of the source of the charity’s money.
- Trustees must not use property held by them for investment purposes as a means of making moral statements at the expense of their charity, although they may if they wish accommodate the views of those who consider that on moral grounds a particular investment would be in conflict with the objects of the charity, provided that the trustees are satisfied that that course would not involve a risk of financial detriment.
The greater the risk of financial detriment, the clearer the trustees will need to be of the advantages to the charity of the course of action they are adopting.
A lot has happened in the past two years, let alone in the last 30 years, over which time the issue of climate change and what humanity needs to do to save the planet has come to the fore.
There have been increasing calls from the charity sector for clarity about how this existential threat impacts upon charity trustees’ powers/duties of investment. Last year the Charity Commission sought to consult on potential changes to its guidance “Charities and investment matters (CC14)”.
But the trustees of two charities with general charitable purposes, albeit focussing on environmental protection and improvement and the relief of poverty, took matters into their own hands.
They sought the blessing of the High Court for their proposal to adopt an investment policy that would exclude, as far as practically possible, investments that are not aligned with the goals of the 2016 Paris Agreement, under the UN Framework Convention on Climate Change, for limiting the increase in global temperature to well below 2°C and preferably to 1.5°C.
The trustees were concerned that adopting such an investment policy might not be lawful and consistent with their duties, as it would exclude many potential investments that conflicted with their charities’ purposes and, at least in the short term, diminish their financial return.
The main issue in the case was whether the Bishop of Oxford decision laid down an absolute prohibition against charity trustees making investments that directly conflicted with their charities’ purposes, or whether this was always a discretionary exercise by trustees, such that a direct conflict was a major but not decisive factor in the balancing process.
In April this year the High Court confirmed that there is no absolute prohibition and that trustees enjoy the exercise of discretion when making investment decisions. Mr Justice Green (an appropriate name in these circumstances) granted the trustees’ application and made a declaration that they were permitted to adopt their proposed investment policy, which aligned their charities’ investments with their charities’ purposes, prioritising climate change outcomes, even though this risked reducing financial returns.
The judge found that the claimants had exercised their powers of investment properly and lawfully, having taken account of all relevant factors and not considered irrelevant factors, and he provided a helpful summary of the law:
- Trustees must consider the sources of their powers of investment in particular within their charities’ governing documents and sections 3 and 4 of the Trustee Act 2000 (where applicable).
- Trustees’ overriding duty is to further their charities’ purposes (as set out in Charity Guidance CC3).
- Normally this would be achieved by maximising financial returns at an appropriate level of risk.
- The question of social investment is a separate one which is regulated by the Charities Act 2011.
- Trustees should consider whether specific investments are excluded by their governing documents or even by legislation. (See for example guidelines set out The Salvation Army 1980 Act relating to that charity).
- Trustees have a discretion to exclude investments which potentially conflict with their charities’ purposes.
- Trustees can take into account the risk of losing support from donors or damage to the charities’ reputation.
- Trustees must be careful in making decision as to investments on purely moral grounds – there may be differing legitimate moral views.
- Trustees are to act honestly, reasonably and responsibly in formulating appropriate investment decisions in the best interests of their charity and its purposes.
- A balancing exercise is required to produce a conclusion within a reasonable range of decisions.
What does this all mean for charity trustees in practice?
In the hallowed response of the legal profession, “It depends!” It is all about a particular board of trustees making its decisions to advance the charity’s purposes in the charity’s own set of circumstances. Charity Commission Guidance CC27 is invaluable in reminding boards of how they should approach their decision-making.
For the purpose of illustration let us consider a couple of hypothetical examples.
Take a charity whose purposes are to promote the relief of and to treat people suffering from Alzheimer’s disease and other forms of dementia. That charity may already exclude certain investment stock that is considered harmful to people with dementia - for example businesses concerned with tobacco and boxing.
This month (July 2022) the Committee on the Medical Effects of Air Pollutants (Comeap), an independent panel of experts, reviewed 70 previous studies and concluded that “it was “likely that air pollution can contribute to a declining mental ability and dementia in older people”.
The experts believed that polluted air causes damages to the blood vessels in the brain and this in turn can cause vascular dementia, which is estimated to affect about 150,000 people in Britain.
Steps that could reduce the most dangerous type of air pollution (known as PM2.5) would include eliminating fossil fuel power stations, reducing wood burning in homes and removing old vehicles.
In such circumstances the board of that dementia charity might decide to exclude fossil fuels from the charity’s investment portfolio.
But then again, it might not. Instead, it might follow the reported approach of Wellcome Trust which until very recently held oil and gas stock which it has now decided to sell – not because of climate change but because of a decision to concentrate its holding more in companies that are non-cyclical industries. Divestment is not the only possible response to climate change and Wellcome Trust has chosen shareholder activism. In its latest trustees’ annual report it explains:
“Engagement remains the cornerstone of our approach rather than excluding whole sectors, which we view as a one-dimensional tool in a complex world. Climate change is a seismic risk that will affect all sectors. Equally, it is an issue to which all sectors contribute, albeit to different degrees.”
Take another example of a small charity supporting a primary school in a deprived urban area next to a busy main road. That charity has recently received a windfall of a legacy of £1million. Where possible it intends to preserve the capital sum and to use only the income generated to support the work of the school.
The board of that charity might decide to maximise the income which its capital can generate in order to plant more trees in the school and to buy state-of-the-art air filters, whilst continuing to lobby its local authority to impose speed limits and “no parking” on the road in question.
By choosing not to restrict its potential investment pool by excluding oil and gas businesses, that charity’s trustees have made a rational decision to act in the best interests of their charity’s purposes and they are no less responsible than the trustees of the dementia charity.
These fictional examples highlight the importance of a board of trustees following a robust decision-making process and evidencing it, as a safeguard against any future challenges to its decisions which may be made with the benefit of hindsight.
So as well as talking about the fundamental duty of charity trustees, we should not lose sight of the fundamental freedom a board of trustees retains in deciding how to act in its charity’s best interests.
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