On 29 April 2022, the High Court handed down judgement in the case of Sarah Butler-Sloss & Others v Charity Commission  EWHC 974 (the “Butler-Sloss” case) which addressed the extent to which it was proper for charity trustees to have a wide regard to the impact of their investment decisions on the attainment of the charitable purposes which they intended to pursue, not simply the need to maximise investment returns.
The facts in this case related specifically to charities with general charitable purposes that are pursuing environmental objects, but the principles of the case have wider implications for charity trustees generally and clarify the judgment in the leading case in this area, Harries v Church Commissioners for England  1 WLR 1241, commonly referred to as the “Bishop of Oxford’s” case.
Background to the case
This case was brought by the trustees of two charities (constituted as trusts), the Ashden Trust and the Mark Leonard Trust, (the “Claimants”) both of which are part of the Sainsbury Family Charitable Trusts network. Although both were grant-making charities established for general charitable purposes, both in practice made grants largely for environmental protection or improvement. The trustees therefore wished to adopt investment policies that enabled them to exclude, “so far as practically possible”1 investments that were not aligned with the Paris Agreement (which aims to limit global warming to below 2°C above pre-industrial levels, alongside other plans for reducing greenhouse gas emissions and improving approaches to climate change).
The purpose of the case was to clarify whether it was proper for the trustees to do so as it would effectively prevent them from investing in “over half of publicly traded companies and many commercially available investment funds”2 and, as a result, it was almost impossible for them to quantify the financial detriment that could result following the adoption of the new investment policy.
The Charity Commission has provided guidance in relation to charity trustees’ investment duties in light of the Bishop of Oxford’s case, which set out a number of examples of when charity trustees might properly forego investment return. This guidance distinguishes four types of investment: financial, programme related, mixed motive, and social.
This case was concerned only with financial investments, the purpose of which the Commission describes as being “to yield the best financial return within the level of risk considered to be acceptable – this return can then be spent on the charity’s aims”. The Commission’s guidance considers ethical (often nowadays called “socially responsible”) investments, which may result in lower rates of returns for the charity) under this heading and says that such investments should not result in “significant financial detriment” to the charity. In this case, the Commission’s position was that the Claimants’ consideration of the issue had not properly balanced the potential financial detriment to the charities against the risk of conflict with their charitable purposes.
What the High Court decided
There have been a number of cases looking at the underlying trust issues, the most well-known (and charity specific) being the Bishop of Oxford’s case. It will be recalled that the Bishop of Oxford’s case had held that while the “starting point” for trustees’ investment policies should be to obtain maximum financial returns, there were exceptions to this:
- Direct conflicts with the charity’s objects: for example, cancer charities investing in tobacco;
- Indirect conflicts, which could result in the alienation of charity donors or impact the support of the charity; and
- Other cases, which could be justified by the trustees. However, the Bishop of Oxford’s case made clear that such “other cases” could not be justified on the basis of “making moral statements at the expense of the charity” and that, broadly speaking, using charity assets to take a moral stance was not appropriate. If, however, the trustees felt that a particular investment would (on moral grounds) conflict with the charity’s objects, then accommodations to the investment strategy could be made, provided that the course of action “would not involve a risk of significant financial detriment”.3
In the Butler-Sloss case, Mr Justice Michael Green, sitting in the Chancery Division of the High Court, went back the underlying principle of trust law which had been set out by the then Sir Donald Nicholls, the Vice-Chancellor, in the Bishop of Oxford’s case, and noted that Sir Donald had described the exceptions which he had specifically identified as “no more than the reasoned application of that principle in particular contexts.”
Mr Justice Michael Green noted that the Claimants had wide investment powers and that the investments which they proposed to exclude were not prohibited by the terms of their trusts. This meant that the case concerned the exercise of their discretion in relation to their investment powers. Against this background, he set out ten points that he considered to be “the law in relation to charity trustees taking into account non-financial considerations when exercising their powers of investment”  which can be summarised as follows:
- Trustees’ investment powers will derive from (a) the charity’s governing document and/or (b) the Trustee Act 2000 (as applicable).
- The power to invest must be used to further the charity’s purposes. Furthering the charity’s purposes through investment is usually achieved by maximising financial returns (with reference to the standard investment criteria in the Trustee Act 2000).
- Where investments are specifically prohibited under the governing document, they cannot be made.
- Where investments are not prohibited but the trustees take a “reasonable” view that investments (or classes of investments) could potentially conflict with the charity’s objects, the trustees have discretion to decide whether to exclude these investments.
- When considering whether or not to exclude such investments, the trustees must balance “all relevant factors”, including: * The likelihood and seriousness of the potential conflict with the charitable objects occurring; and * The overall financial impact of including or excluding such investments, which includes considering the risk of losing donors and (particularly among the charity’s beneficiaries) damaging the charity’s reputation.
- In relation to the latter point, it is important to remember that a charity’s beneficiaries are unlikely to be a homogenous group, and within that group there may be differing moral views.
He concluded that there was no “absolute prohibition” on making investments that directly conflicted with the charity’s objects, but that any such conflict was simply one of several factors that the trustees must balance when making their investment decisions. As with any trustee decision, the decision to exclude certain investments must be exercised with due care and skill, and trustees must act honestly, reasonably and responsibly, using their powers solely for the purposes for which they were given – namely the achievement of the charity’s purposes. Where trustees act in this way, a Court will not interfere with the conclusion which they have reached, even where other trustees or the Court itself may have reached a different conclusion.
Here, the High Court found that the Claimants had exercised their powers of investment properly and lawfully. Although the exact level of potential financial detriment resulting from adopting a Paris Agreement-compliant investment strategy could not be quantified exactly, this was not due to a lack of engagement by the trustees, but rather due to the rapid changes in the market, particularly in the area of environmentally-friendly investments. Positive features of the proposed investment plan include regularly testing the portfolio against recognised benchmarks, and – crucially – that the investment policy still planned to deliver financial returns that would support the charities financially. Accordingly, the High Court granted the Claimants a declaration to that effect.
What the High Court did not decide
While the Claimants had initially sought a number of declarations, seeking Court approval for specific steps in the decision to support the Paris Agreement in the Claimants’ investment strategy, the High Court determined that these were “both unnecessary and inappropriate”: the issue at hand was simply whether the trustees’ investment powers had been properly and lawfully exercised, not whether the Court itself considered that the specific terms of the proposed investment policy were appropriate. Two points flow from this:
First, the case solely determined whether what the trustees of two particular charities proposed to do was a proper exercise of their discretions in particular circumstances. It was not a decision by the High Court that those charities should adopt a particular course of action, merely that it was not improper for them to do so.
Secondly, the High Court did not make any specific comment regarding the need for charities to consider environmental issues in general (or the Paris Agreement in particular) but merely set out the factors that all charity trustees must consider when contemplating responsible investment strategies (which are, fundamentally, those applicable to any trustee decision).
Implications for charity trustees
- When considering financial investment policies, charity trustees should adopt the same fundamental approach as to any trustee decision. They must engage with “all relevant factors” and disregard irrelevant ones, specifically considering the balance between the risk of lower financial returns, impact on that charity’s reputation and beneficiaries, and any potential or actual conflict with the charity’s objects. In simple terms, given that their powers are given to them to further the objects of their charity, they must consider, honestly and diligently, how that might best be done overall.
- Although it was not a deciding factor in this case, criticism was levelled at the Claimants by the Commission’s legal team for not setting out their reasons for adopting the new policy in trustee minutes. Particularly for decisions that could be scrutinised, it is good practice to make and keep notes of both discussions and decisions taken at trustee meetings so that the trustees can evidence that they have reached their decisions properly.
- Charity trustees must still be careful about making moral decisions when exercising their powers of investment. Not only does the fact that a charity’s trustees have a moral concern about something not necessarily mean that it is in conflict with the charity’s objects, but trustees also need to be alive to the fact that not all the charity’s beneficiaries (or supporters) will have the same moral stance.
- Finally, although the High Court noted that the Charity Commission had “expressed some concern”5 about the high level of costs associated with this litigation, about which it declined to comment specifically, the judge’s view was that it was important for charities generally (and not just the Claimants) that the law on charity trustees’ investment powers was clarified. It is therefore to be hoped that the Charity Commission may now update their guidance to reflect the relatively clear and straightforward, legal principles at the heart of the Bishop of Oxford’s case, which remain unchanged, and which are reinforced in this new case.
The Charity Commission has previously consulted on updating the guidance on responsible investment; however, the response to this consultation was paused pending the outcome of this case.
We expect that the Commission will now update the guidance, but it is not clear if it will consult further before publishing an update.
For further information, please contact:
Chris Priestley, Partner, Withersworldwide