Analysis
The Ashden Trust and the Mark Leonard Trust (the charities) were charitable trusts whose principal purposes were environmental protection and the relief of poverty.
The trustees of the charities sought the court’s blessing for an investment policy inspired by the Paris Climate Agreement (the Paris Agreement). The Paris Agreement’s primary objective was to limit global warming to 1.5 – 2 degrees, below pre-industrial levels, in part by reducing greenhouse gas emissions and by promoting ‘climate resilient development’.
The charities’ investment policy stood to exclude investments that did not align with the Paris Agreement. The policy was intended to further environmental protection, one of the charities’ purposes. It would also exclude a significant, but as yet unknown, proportion of the investable universe: at least ‘over half of publicly traded companies and many commercially available investment funds’. This would cause financial detriment to the charities.
The defendants (the Charity Commission and the Attorney General) submitted that the charities’ trustees had not adequately balanced that financial detriment with the conflict with their charitable purposes.
The only leading case on the point was the decision of Sir Donald Nicholls VC (the Vice-Chancellor) in Harries v Church Commissioners for England [1992], known as the Bishop of Oxford case. Michael Green J, hearing the charities’ claim, accepted there was ‘uncertainty’ over the effect of that decision in the field of charitable investment and further clarification was needed.
In the Bishop of Oxford case, the Vice-Chancellor had found that maximising financial return was the ‘starting point’ when charitable trustees considered how to exercise their power of investment. The Vice-Chancellor set out three exceptions to that starting point:
- (1) A direct conflict between the investment and the charity’s purposes, such as a cancer research charity investing in tobacco shares. In such a case, a trustee ‘should not so invest’.
- (2) An indirect conflict, as when the investment might alienate the charity’s supporters or donors. In such a case, a trustee would balance the advantages and disadvantages before deciding whether to invest.
- (3) An investment made, or not made, for moral considerations. Trustees should not make investment decisions on the basis of moral considerations. A trustee might accommodate moral objections in a decision, but only where it would not involve a risk of significant financial detriment to the charity.
Michael Green J took the opportunity to review the Bishop of Oxford decision and to restate the law relating to how charitable trustees should take into account non-financial considerations when investing.
Held:
- (1) The Bishop of Oxford case did not lay down an absolute prohibition on investments which directly conflicted with a charity’s purposes.
- (2) Where there is a conflict or potential conflict between an investment and a charity’s purposes, the trustees have a discretion and must balance all relevant factors. In that balancing exercise, a direct conflict ‘is likely to be the most significant factor’.
- (3) Trustees can take into account the risk of losing support from donors and the damage to a charity’s reputation, but ‘need to be careful’ about making investment decisions on purely moral grounds.
- (4) Trustees must act honestly, reasonably and responsibly to formulate an investment policy in the best interests of the charity:
‘Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgement by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.’
- If that balancing exercise is done properly, the trustees cannot be criticised, even if the court might have reached a different conclusion.
- (5) On the facts of this case, the investment policy was a momentous decision. That decision had been made by the charities’ trustees, despite an attempt by one defendant to argue that the trustees had not yet formally approved the policy. Both defendants challenged the adequacy of the reasoning given by the trustees, but Michael Green J found that adequate reasoning had been given.
- (6) The charities’ trustees had considered all relevant factors, balancing the financial effect of excluding investments against the charities’ purposes, and made a proper and lawful decision to adopt the investment policy. The primary declaration sought by the charities was granted.
- (7) The other declarations originally sought by the charities, as to elements of how the decision was made, were unnecessary and inappropriate.
Declaration made that the charities were entitled to adopt the investment policy and, in so doing, the trustees had properly exercised their powers of investment.
JUDGMENT MICHAEL GREEN J: Introduction [1] Should charities, whose principal purposes are environmental protection and improvement and the relief of poverty, be able to adopt an investment policy that excludes many potential investments because the trustees consider that they conflict with their charitable purposes? One might be forgiven for thinking that the answer should obviously …Continue reading "Butler-Sloss & ors v Charity Commission & anr [2022] WTLR 865"