Investing with purpose: Guidance for trustees

In Butler‑Sloss and Ors v Charity Commission for England and Wales and Anor,[1] the England and Wales High Court (the Court) blessed the charity trustees’ decision to adopt investment policies that restricted investments to those aligned with the charities’ purposes, thereby excluding many potential investments. In so doing, the Court provided clarification regarding Harries v Church Commissioners for England.[2]

The Charities

The Ashden Trust and the Mark Leonard Trust (the Trusts) were part of the Sainsbury Family Charitable Trusts network. The Trusts held assets of significant value. They had been established for general charitable purposes; however, the trustees subsequently decided to principally pursue the purposes of environmental protection, the prevention and relief of poverty and those in need.

The Trusts’ terms provided the trustees with broad investment powers in addition to statutory investment powers. The terms did not restrict the investments the charities could make.

The aims and development of the investment policies

The financial objective of the investment policies was to generate capital growth exceeding inflation over the long term, while generating a sustainable spending level to support the Trusts’ ongoing grant making. With the objective of reducing a direct conflict between the charities’ purposes and their investments, the trustees sought to exclude, insofar as possible, investments that did not align with the Paris Agreement.[3] The trustees wished to pursue such policies even if financial returns might consequently not be maximised. The trustees worked carefully with appropriate specialists to develop detailed investment policy statements, guidelines and portfolio allocation.

The investment guidelines effectively excluded over half of publicly traded companies and about 20 per cent of the total investible universe. Nevertheless, the investment policies’ targeted investment return was 4 per cent above the consumer price index over five‑year rolling periods (consistent with published rates of return of other large charities), with the managers expected to outperform relevant Paris Agreement and ESG investment benchmarks. The trustees conceded that any financial detriment to the charities of implementing the investment policies could not be fully assessed presently, but believed that there would not be any material long‑term adverse financial impact on the Trusts.

Court application and issues

The application was principally a category two Public Trustee v Cooper,[4] whereby the trustees sought the Court’s blessing of their decision to implement the proposed investment policies. The Charity Commission of England and Wales (the Commission) and the Attorney General for England and Wales opposed the application, asserting that a Court determination was premature because the trustees had not properly considered the risk of financial detriment to the charities from implementing the investment policies. They asserted this was reflected by an absence of documentation, including minutes, detailing reasons for the trustees’ decisions.

Consequently, the Court explored how charity trustees should balance the risk of making investments contrary to the charity’s express purposes (and thereby potentially risking the loss of stakeholder support) against financial detriment caused by adopting an investment policy aligned with the charity’s purposes, dismissing other investment classes.

How should charities approach conflicts between their purposes and investments?

In respect to charity trustees’ duties when balancing conflicts between the charities’ purposes and investments, the Court considered the Commission’s publication Charities and Investment Matters: A guide for trustees (the Guide)[5] and Harries.

The Guide contains a summary of the Commission’s understanding of the relevant law relating to charities’ investments based on its interpretation of Harries. The case explored situations where charities’ trustees might forgo financial investment returns, provided that would not risk significant financial detriment to the charity. These situations include direct conflicts with the charity’s objects and indirect conflicts that might alienate donors or otherwise reduce support for the charity. The Guide considers whether a charity can ‘decide to make ethical investments’[6] and confirms so where:

• A particular investment conflicts with the charity’s aims.
• The charity might lose supporters or beneficiaries if it does not invest ethically.
• There is no significant financial detriment to the charity.

The Court concluded that Harries did not determine there was an absolute legal prohibition against charities making investments that directly conflict with the charities’ purposes.

Consistent with the Guide, the Court accepted that charities may invest ethically, even if the investment might provide a lower rate of return than other investments. The Court agreed that a charity’s trustees must be able to justify why it is in the charity’s best interests to restrict investments.

Key legal principles

The Court summarised key principles regarding charity trustees’ consideration of ethical factors when investing:

• Source of powers: Trustees’ investment powers derive from the trust instruments and statute.
• Primary duty: Charity trustees’ primary overarching duty is to further the charity’s purposes. Trustees must exercise their investment powers to further those purposes.
• Risk‑adjusted financial return: Furthering charitable purposes is normally achieved by maximising financial returns on investments.
• Social, impact or programme‑related investments: These are made using different powers than the pure power of investment.
• Prohibition under governing document: Where specific investments are prohibited under the governing document, they cannot be made.
• Conflict with purposes: Where trustees reasonably consider that investments potentially conflict with charitable purposes, the trustees have a discretion as to whether to exclude such investments. Trustees should exercise that discretion by reasonably balancing all relevant factors, including the likelihood and seriousness of the potential conflict and the probability and severity of any possible financial effect of excluding such investments.
• Risk of losing support: When considering the financial effect of making or excluding certain investments, the trustees can assess the risk of losing support from donors and damage to the charity’s reputation.
• Purely moral grounds: Trustees need to be careful if investing on strictly moral grounds outside of the purposes, as there may be differing views among the charity’s supporters and beneficiaries
• Trustees’ duties of investment: 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. Trustees need to exercise sound judgement by balancing all relevant factors, particularly the extent of the potential conflict against the risk of financial detriment.
• Balancing exercise: If that balancing exercise is properly done and a reasonable and proportionate investment policy is adopted, the trustees have complied with their legal duties. They cannot be criticised, even if the Court or other trustees might have come to a different conclusion.

Observations

The Butler‑Sloss decision clarifies the duties of charity trustees when adopting ethical investment policies. Its principles apply to charities with different and wide‑ranging charitable objects. Notably, the Court accepted the trustees’ carefully considered expert advice when formulating restrictive environmentally friendly investment policies and determining their financial impact.

The decision does not support trustees adopting purely moral views when investing. The Court indicated trustees should be mindful that not all beneficiaries swill have the same moral stance. Maximising financial return remains the starting point.

Questions include: will the Butler‑Sloss decision be influential outside the charities context, such as in the pension context or a dynastic private family trust? Would trustees benefit from trust instruments or statute granting specific powers permitting or requiring consideration of ESG factors when investing trust assets?

Trustees with discretionary investment powers must consider all materially relevant factors in making investment decisions in accordance with the trust’s terms, including ESG factors that may have a material impact on financial performance.

-----------------

Ashley Fife wrote this article with the valuable contribution of Gina Pereira, co-managing director of Meritus Trust Company Limited. An original version of this article was first published by STEP Journal, Issue 4. 

Carey Olsen Bermuda Limited is a company limited by shares incorporated in Bermuda and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009. The use of the title “Partner” is merely to denote seniority. Services are provided on the basis of our current terms of business, which can be viewed at: www.careyolsen.com/terms-business