Stephen Claus: Charity trustees and investment – ESG

Environmental, social and governance (ESG) investing is a part of an investment strategy you can use to put money available for investment to work with those that basically strive to make the world a better place. ESG investing relies on independent ratings that help you assess a company’s behaviour and policies when it comes to environmental performance, social impact and governance issues.  Your investment advisor can guide you in these matters.

This article is really about the now very topical issue of responsible investing.  There has been a recent case regarding charity investments before the Courts.  Charity trustees and others with ESG within their investment policy will find the recent case (Sarah Butler-Sloss and Ors v The Charity Commission and Attorney General) and a judgment, provided on 29 April 2022, interesting. The case demonstrates how a modern Court could view the application of ESG in cases where trustees are able to legitimately focus on things other than traditional returns, and how a court may or may not be willing view ESG for trustees in applying their investment discretion.

It was back in 1992 when the Bishop of Oxford brought a case to court concerning taking things into account other than strict financial returns when investing as a trustee.  Choosing who or what to invest in is complex, for example should a cancer charity really be required to invest in a company that produces tobacco products just because it is the best return on your money?  Such cases are not therefore common but are important.

The recent cases offers confirmation that there is no absolute prohibition against a charity making investments that directly conflict with its purposes, such as the tobacco example.  Where trustees reasonably believe that an investment is not in line with their purposes, they have a discretion as to whether to exclude it – and should exercise that discretion on proper evidence.

The Sloss case was brought by the trustees of two charities (they were the Claimants), the Ashden Trust and the Mark Leonard Trust. Both of these charities had general charitable purposes but the trustees had decided to focus primarily on environmental and related purposes.

Understandably with this focus, the trustees wished to adopt investment policies which would, try to exclude things that did not in particular, align with the Paris Climate Agreement 2016. With the recent COP in Egypt of course this is even more relevant as the world wrestles with the worrying impact of climate change.

However, the policy to be adopted would exclude over half of publicly traded companies and commercially available investment funds. Even so it targeted an annual return of Consumer Price Index +4 per cent which is not dissimilar to a lot of targets set for investment.   In the bringing of the case the trustees could not accurately calculate what if any downside this would represent as a result of taking these steps.

The trustees went to the Court to see whether the Investment Policy would be lawful for them to proceed with.

The Current Law

Before the new case, as mentioned above the only real significant case on this topic had been the Harries case. In this case it was held that primarily trustees should seek to maximise financial return. There was then stated to be three exceptions (which the Judge in that case being Vice Chancellor considered would be comparatively rare):

1. where an investment directly conflicted with a charity’s purposes (such as the cancer example above and investing in tobacco companies);
2. where an investment indirectly conflicts with a charity’s purposes (say for example donors would object to that type of investment or beneficiaries refuse help as they saw the money as tainted) so trustees must “balance the difficulties they would encounter against likely financial loss; or
3. where to do so would not involve a “risk of significant financial detriment”.

In this case we see that, the greater the risk of financial loss, the clearer the trustees needed to be able to identify advantages. The Court indicated Trustees use this policy to make what would be their moral statement at the potential cost to charity.

Current Charity Commission guidance (the CC14, Charities and investment matters: a guide for trustees and its associated “Legal Underpinning”) is based on the Bishop of Oxford case.

The Position post the Sloss case

The Court was asked to consider if the new policy was lawful, and whether there was in fact an absolute prohibition against making investments that directly conflict with their charities’ purposes (again such as the cancer and tobacco example).

The Court said that the first case regarding the Bishop of Oxford did not represent such a prohibition. This would represent a duty not to invest in a particular way which would be difficult to comply with in all but relatively simple cases.  Consider for example unit trust investments in which the underlying investments may not be obvious.

The Court provided a summary what was considered the law in relation to trustees in such cases and provided guidance which we summarise as follows:

1. Where there is no specific prohibition but there is a reasonable view that particular investments potentially conflict with the charity’s 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”.
2. In considering the financial effect of making or excluding particular 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”.
3. Where particular investments are specifically prohibited from being made by the trusts of the charity, they cannot be made.  So for example “I give you £XYZ but you may not invest in anything connected to Tobacco”.
4. “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.”  We would advise that there is a real need to take professional advice here to ensure you are within the law when taking this type of issue forwards;
5. “If a 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.”  We consider this is a reflection of the approach the Court takes in assessing the actions of trustees more generally, when they come before the Courts.

So What Now

There are currently in circulation guidance materials from the Charity Commission in the form of a CC14 (written before this case), and an updated but not yet finalised CC14 issues in August 2021 with proposed changes reflecting the new case guidance from the Court.  Our view would be to follow the updated CC14, as there is not reason to suppose at this stage it will change.

Trustees should be carefully in adopting an ESG policy and ensure that they fully document all the reasoning behind their decision so that if challenged they can demonstrate they have made a decision upon the basis of the guidance we now have from the Court.  The talking of professional advice before adopting such a policy should support the trustee decision and potentially provide a defence if a challenge is every made.  Such advice should be kept on file with an appropriately compete set of minutes as part of the Charity’s records.

This blog is not intended to be legal advice, and you should seek professional advice from appropriate people in respect of any action you propose to take.  We cannot accept any liability in respect of the contents of this blog.

Stephen Claus.

These are the views of Stephen Claus, and therefore does not constitute individual legal or financial advice, this article is for information only. If you require guidance or advice, please get in touch.

Click here to go to our Charities and Trusts page to read about our approach when it comes to guiding and advising charity trustees.