The judgment clarifies that decisions regarding the adoption of responsible investment policies by charities are a matter for the discretion of their charity trustees and should be taken in accordance with the usual principles for sound decision-making as set out in Charity Commission guidance.
This case relates to the power of charities to adopt a responsible approach to investment (otherwise known as ESG investment). It is the first case on this subject in 30 years, prior to which the leading case on this subject was the 1992 case known as the Bishop of Oxford case. As such, the decision in Butler-Sloss v Charity Commission provides much needed clarity on the legal powers of investment of charity trustees.
For more detailed background on the Bishop of Oxford case, please see our article on charities and responsible investment published last year.
Why was the case brought?
The claimants in this case were the trustees of two grant-making charitable trusts within the Sainsbury Family Charitable Trusts network: the Ashden Trust and the Mark Leonard Trust (the Charities). Both Charities are established with general charitable purposes, but have decided to focus their activities on environmental protection or improvement and the relief of those in need, and have adopted grant-making policies accordingly.
Whilst charities with environmental purposes are under no obligation to comply with the Paris Agreement, the trustees of the Charities (having sought professional advice) decided that it was an appropriate basis for shaping their investment policies. In drafting them, the goal of both Charities was to ensure that the greenhouse gas emissions arising in connection with their total investment portfolio would be consistent with the aim of the Paris Agreement to limit global warming to less than 2˚C (ideally 1.5˚C) above pre-industrial levels.
The impact of these proposals was that their new policies (which were substantially the same and were therefore referred to in the judgment as the Proposed Investment Policy) would exclude a significant range of investments and might have a detrimental impact on financial returns.
Due to uncertainty regarding the correct interpretation of the Bishop of Oxford case and its impact on their powers to adopt the Proposed Investment Policy, the trustees of the Charities applied for declarations from the court that adopting the Proposed Investment Policy would be a proper exercise of their investment powers and that they would be acting lawfully in so doing.
Why is the case important?
As noted above, prior to this case the leading case on this subject was the Bishop of Oxford case. In that case, Sir Donald Nicholls VC set out general principles about the exercise by charity trustees of their investment powers. Although these principles were obiter dicta (which means that they were not essential to the actual decision of the court, but were an expression of opinion and therefore not legally binding), they have been extremely influential in practice and, as stated by Green J in his judgment:
“given the great standing of the Vice-Chancellor in this field and the rarity of such cases getting to court, the judgment deserves the utmost respect.”
However, much has changed over the past 30 years in relation to responsible investment, public expectations of charities in this regard, and the importance of this topic for charities (in particular, but not only, for grant-making charities with significant investment portfolios).
Green J acknowledged in his judgment that “[e]veryone recognises that there needs to be clarification as to the effect of the Bishop of Oxford case”, and stated that he would endeavour to provide that. However, he was careful to caveat this with a reminder that this case related to a specific application on a specific set of facts, and that he would therefore be determining the issues in that context.
Clarifying the impact of the Bishop of Oxford case
Both the Charity Commission and the Attorney General contended that the Charities had not adequately taken into account the potential financial detriment of adopting the Proposed Investment Policy. However, before considering this, it was necessary for the court to clarify an issue of legal uncertainty arising from the Bishop of Oxford case, and it is this clarification that is most useful in a wider context.
The preliminary legal question was this: did the trustees of the Charities have any legal obligation to consider the potential financial detriment?
The reason that this question arose was because it was unclear whether the judgment in the Bishop of Oxford case meant that where there is a direct conflict between a charity’s purposes and a particular investment the trustees have no discretion and simply must not invest in it even if there would be a financial detriment.
This question was critical to the decision of the court in this case, because:
- (a) If the court were to find that there is, in law, an absolute prohibition on investments that conflict with a charity’s purposes, then the trustees of the Charities need not have taken into account any potential financial detriment in excluding those investments from their portfolio.
- (b) On the other hand, if the court were to find that there is no such prohibition, and that discretion must always be exercised by the trustees, then the trustees of the Charities can only be said to have acted properly if they are able to demonstrate that they took into account the potential financial detriment and adequately balanced this against the risks/issues arising for the Charities as a result of the conflict with their purposes.
It is clear that in the context of this case the contention of the Charity Commission and Attorney General was only relevant in respect of (b) above: if (a) applied, then it would have been irrelevant whether or not the trustees of the Charities took financial considerations into account in reaching their decisions.
The judgment on the interpretation of the Bishop of Oxford case
The judgment of Green J on this key question was that there is no absolute prohibition as a matter of law, and it is always necessary for charity trustees to exercise discretion.
Green J explains that he does not consider that Sir Donald Nicholls VC intended that there should be an absolute prohibition on investments that directly conflict with charitable purposes, and further that were this to be the law it would be very problematic in practice “because of the difficulties of establishing whether a direct conflict actually exists”. He concludes at paragraph 75 of his judgment:
“I do not believe that the passage of the Vice-Chancellor’s judgment should be read as imposing, as a matter of law, an absolute prohibition against directly conflicting investments. It will all depend on the particular facts of the case but the trustees have a discretion in relation to the exercise of their powers of investment and that includes in relation to potential situations of direct conflict.”
Green J helpfully went on in paragraph 78 of his judgment to summarise what he considers to be the law in relation to charity trustees taking non-financial factors into account when exercising their powers of investment.
Clarification of the legal position regarding responsible investment
We have copied paragraph 78 of the judgment in full below, as it is clear, concise and provides a helpful clarification of the law that should be referred to by all charity trustees when considering responsible investment policies:
- “Trustees’ powers of investment derive from the trust deeds or governing instruments (if any) and the Trustee Act 2000.
- 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.
- That is normally achieved by maximising the financial returns on the investments that are made; the standard investment criteria set out in s.4 of the Trustee Act 2000 requires trustees to consider the suitability of the investment and the need for diversification; applying those criteria and taking appropriate advice is so as to produce the best financial return at an appropriate level of risk for the benefit of the charity and its purposes.
- Social investments or impact or programme-related investments are made using separate powers than the pure power of investment.
- 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 generally and in particular among its beneficiaries.
- However, trustees need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among the charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues.
- Essentially, trustees are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy for the charity 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 and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.”
The judgment on the relief sought by the Charities
Having reached the above decision, Green J then turned to the specific question in this case as to whether or not the decision of the trustees of the Charities to adopt the Proposed Investment Policy was within their powers and lawful.
It might seem unusual that the court would consider blessing a decision of the trustees having concluded that it is a matter for their discretion. However, the court does have inherent jurisdiction to supervise the administration of charities, and will do so in respect of particularly momentous decisions with wider importance to the sector.
In considering the propriety of the decision of the trustees in this case, the court considered whether the trustees had:
- acted within their powers and in the best interests of the Charities;
- taken into account all relevant factors;
- disregarded all irrelevant factors; and
- reached a decision that a reasonable body of trustees could have reached in the circumstances.
It is immaterial whether the court or anyone else might have reached a different conclusion in the circumstances: what matters is the reasonableness of the decision taken by the trustees.
The above considerations are the same considerations applied by the courts in respect of any decision-making by charity trustees, and are reflected in the Charity Commission’s guidance on decision-making.
In this case, Green J ultimately concluded that the trustees of the Charities had acted within their powers in reaching their decisions to adopt the Proposed Investment Policy. In other words, he disagreed with the contention of the Charity Commission and Attorney General that the trustees had not appropriately balanced the risk of financial detriment in reaching their decision.
The discretion of trustees
In respect of his interpretation of the Bishop of Oxford case, we think it is clear that Green J was influenced by the specific facts of the case.
It is very difficult in practice to identify greenhouse gas emissions arising from a company’s value and supply chain activities (known as ‘Scope 3 emissions’ in the Greenhouse Gas Protocol), given that reporting on this is currently optional and therefore very difficult to measure. As such, it would be very difficult in practice for a charity with environmental protection purposes to ascertain with certainty which investments directly conflict with their charitable purposes. If the law were to absolutely prohibit such investments, then a failure by an environmental charity to identify such companies and exclude them from its investment portfolio might result in the charity trustees acting outside their powers of investment in breach of trust.
In our view, therefore, the decision of Green J on this point was the right one, and had due regard to the very different prevailing social and economic circumstances today compared with 30 years ago. There are difficulties for all investors (including charities) in determining an appropriate policy for ESG investment, given that not all relevant data to assess companies against environmental, social and governance factors is currently in the public domain.
It would not have been a helpful outcome had the court concluded that charity trustees are legally prohibited from making investments that conflict with their charity’s purposes, as this would have placed an undue due diligence burden upon them and potentially prevented the use of pooled investment funds for some. For charities that have relatively small portfolios, the costs involved in having a bespoke directly invested portfolio are often considered disproportionate to the size of the fund.
Application to charities with general charitable purposes
We consider that the fact that the Charities in this case have general charitable purposes is significant. In this case the relevant charitable purposes that were considered when looking at potentially inconsistent investments were the purposes that the trustees of the Charities had decided, at their sole discretion, to pursue (rather than the much broader general charitable purposes stated in their governing documents). Where reference was made in the judgment to the “charitable purposes” of the Charities, this was a reference to the charitable purposes that the trustees had decided to advance.
This is significant in our view, as it means that grant-making charities with general charitable purposes may consider their approach to responsible investment in light of their current grant-making policies.
Emphasis on discretion: it’s YOUR decision
The summary provided by Green J in paragraph 78 of his judgment is particularly useful. It makes clear that decisions regarding responsible investment are no different to any other decisions taken by charity trustees. The usual decision-making principles apply. Fundamentally, you must be able to justify your decision as reasonable in the circumstances, having taken into account all relevant factors (including the risk of financial detriment and countervailing risks to the charity from a reputational or operational perspective).
Ultimately, the decision in this case confirms that questions regarding responsible investment for your charity are YOUR decision. Provided that you can justify your decision as reasonable in the circumstances, then it is entirely within your power to take into account non-financial considerations when drawing up your Investment Policy.
It is notable that Mr Justice Green was not persuaded by the Attorney General’s argument that a lack of formal minutes in respect of the decisions of the trustees of the Charities to adopt the Proposed Investment Policy meant that there was, in fact, no decision for the court to bless. Whilst noting that “the trustees would have been well advised to have set out their reasons for adopting the Proposed Investment Policy in principle” Mr Justice Green did not accept that they had not properly considered the issues or provided adequate reasons for their wish to do so.
Whilst it is not necessary for the decision-making of charity trustees to be formally set out in detailed formal minutes, this is recommended. Given the importance placed on being able to demonstrate the reasonableness of your decision, it is helpful to have clear documentary evidence that you have carefully considered your decision, and followed the Charity Commission guidance on decision-making in so doing.
If you have any questions about your duties or powers in relation to investment, or any other matters affecting your charity, please do get in touch with Liz Brownsell or another member of the Birketts Charities Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2022.