Responsible Investing For Charities

The Charity Commission has offered guidance on investing for some time, based on a legal case from 1992 which set out that maximising financial return should always be the starting point for trustees considering the exercise of their investment powers.

In recent times, this has come under scrutiny as charities seek to invest more in line with ethical or environmental principles.

In Spring 2021, the Charity Commission launched a consultation on revisions to their guidance, which initially recommended that the guidance be updated to permit trustees to take into account other factors, such as impact on climate, employment practices, sustainability, human rights, community impact, executive compensation and board accountability when choosing investments.

This was, however, overshadowed by a legal case due to be heard in court in “early 2022”, which has delayed final publication of the amended guidance…… until now!

On 29 April the High Court handed down its very eagerly awaited judgement on the case (entitled “Butler-Sloss v Charity Commission”), brought by two charities to challenge the existing Charity Commission guidance.

The charities both had general charitable purposes, but focused on causes related to environmental protection or improvement and relief of those in need. They both had significant investment assets and had already taken an approach which focused on companies with better “green” credentials (akin to many ESG portfolios), but wished to take this a step further and were concerned that some of their existing investments were in contradiction with their purposes and actions. They were therefore seeking High Court approval to align their investment criteria with the 2016 Paris Climate Agreement.

These proposed criteria would have excluded over half the publicly traded companies available, but it was noted that the targeted annual return for the portfolio was CPI + 5%, which was noted not being considerably out of line with standard rates of return. However the trustees agreed that they could not accurately establish the financial detriment that the charity may suffer as a result of adopting their approach over the more traditional approach.

The High Court judge (Mr Justice Michael Green), went back to the 1992 case and concluded that this should not be taken as binding the trustees to not considering other factors past financial return. He said “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”.

The Judge went onto conclude that if Trustees had balanced all the relevant risk factors and made proportionate and appropriate judgements, then the trustees would have met their legal requirements, even if other trustees or even the court may have not come to the same conclusion.

He therefore concluded that the charities in question had “exercised their powers of investment properly and lawfully”.

The implications for the sector are likely to be wide-ranging. It is now clear that trustees are perfectly able to decide to exclude investments that conflict with their charitable objectives – provided they have balanced this decision with the potential for financial detriment.

There was, however, some caution in the Judge’s conclusion that moral obligations may not form part of this judgement, and care should be taken where the limitation is not prescribed by a charity’s objects and is instead based upon moral considerations.

So what does this mean for the Charity Commission? Aarti Thakor, director of legal services at the Charity Commission commented after the case “We welcome this judgment and its confirmation of the law relating to ethical investments in charities. We are pleased that the judge found, in line with our proposed guidance, that trustees can continue to have wide discretion when choosing to invest ethically….. The judge confirmed that the law relating to trustees’ powers of investment should be suitable for all types of charities, offer flexibility and sustainability, and ensure the furtherance of a charity’s charitable purposes. We will be publishing our updated guidance in due course to ensure trustees can confidently adopt appropriate policies including in the context of pressing concerns around climate change”.

We are therefore expecting a final version of the guidance later this year which should hopefully provide further clarification.

If you’d like to discuss how your charity can invest with an ESG focus whilst still staying within the limits of investment powers, please get in touch with me, or Albert Goodman Financial Planners.