What does the Butler-Sloss v Charity Commission High Court judgment mean for trustees when making investment decisions? CFG's Head of Policy, Richard Sagar, sets out the principles.
It is positive news that the High Court has ruled with the Ashden Trust and the Mark Leonard Trust to confirm that the trustees of charitable trusts can prioritise climate change outcomes of their investments even if it risks financial returns.
This ruling occurred in light of last year's consultation by the Charity Commission of their responsible investment guidance (CC14). At the time of the consultation, CFG argued that the approach proposed by the Commission did not go far enough in encouraging trustees to invest responsibly, and highlighted a tension between financial return and reducing carbon emissions.
The law firm Bates Wells, who represented both trusts in the recent case, have provided a helpful explanatory note on the judgment.
As Bates Wells point out, charities do not need to wait for the Charity Commission to update their guidance; the judgment in this case sets out the law which now has priority over the guidance.
Nonetheless, many directors and trustees who are time poor are likely to rely on the updated guidance, so we would hope that CC14 is revised as soon as is practicable, and that it faithfully applies the principles set out in the case (paragraph 78 of the judgement).
It is important to note that it is still imperative that trustees consider financial return as well as the other relevant factors.
Emphasis was placed on a trustee's primary duty of furthering the charitable purpose of the charity. In ordinary circumstances this will be done by maximising financial returns at appropriate risk (with criteria set out in S.4 of the Trustees Act 2000).
But crucially, where trustees consider there to be a reasonable conflict with the charitable purposes, they have discretion to exclude certain investments once all relevant factors have been balanced. This balancing can include any reputational damage the charity might incur should they continue to invest in a particular area.
In response to the case, the Charity Commission was keen to emphasise the discretion that trustees have when choosing to invest ethically, but failed to mention the additional duties that this judgement also places on trustees. To quote Bates Wells:
'Where the trustees conclude that there is a potential for conflict, trustees are not duty bound to exclude investments. However, where the trustees conclude that there is a ‘direct conflict’ with the charitable purposes – where investment would by its nature oppose the charitable purposes, as the trustees of the claimant charities determined in the case – trustees are obliged to carry out a balancing exercise. The existence of the direct conflict is likely to be the most significant factor in any balancing exercise and so the direct conflict should be avoided if possible'.
In the case, the trusts' trustees believed that investments not aligned with the UNFCCC Paris Agreement were in conflict with their charitable purposes.
It is likely that many charities will consider their charitable purposes to be directly linked to climate crisis, and therefore will be obliged to carry out the balancing exercise. Principle 9 is helpful:
'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.'
The judgement further emphasises that there is no one size fits all approach for every charity when determining an investment policy. The key is to comply with their legal duties and honestly and reasonably balance the relevant factors. It is perfectly reasonable to take your own approach and different charities will come to different conclusions.
For more information on the case, listen in to the following webinar from Bates Wells.