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Investing With Purpose: Guidance For Trustees – Trusts



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Businesses and investors are increasingly considering relevant
environmental, social and governance (ESG) factors. However, trust
law may not have kept pace with this phenomenon. How can trustees
navigate this friction when investing in trust funds? A recent
judgment provides guidance for trustees of charitable trusts
wishing to align investments with their charitable purposes.

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.

Footnotes

1. [2022] EWHC 974 (Ch)

2. [1992] 1 WLR 1241

3. 3 The Paris Agreement is an international treaty on
climate change. The principal goal of the Paris Agreement is to
limit global warming to well below 2°C above pre-industrial
levels, and preferably to 1.5°C. The Paris Agreement does not
attempt to identify what investments are or are not aligned with
it.

4. 4 [2001] WTLR 901

5. Published 2011, last updated 1 August
2016.

6. 6 i.e., in a way that reflects the charity’s
values and aims.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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