Charity investment – guidance for trustees

The recent case of Butler-Sloss & ors v Charity Commission [2022] EWHC 974 (Ch) (“Butler-Sloss Case”) provided welcomed clarity around the investment practices of charities. In this article we provide a summary of the case and outline the key takeaways.

Case summary

The Butler-Sloss Case was brought by the trustees of two charities which form part of the Sainsbury Family Trusts network. Whilst these charities were both established for general charitable purposes, they focused mainly on providing grants for environmental protection or improvement. In line with this focus, the charities sought to adopt investment policies which enabled them to exclude investments that were not aligned with the 2016 Paris Climate Agreement. As a result, the charities would be prevented from investing in over half of the publicly traded companies. Before adopting these policies, the charities sought confirmation from the court that such policies comply with the law.

In making its decision, the court referred to the leading case on the topic, Harries v Church Commissioners for England [1992] 1 WLR 1241 (“Bishop of Oxford Case”). In that case it was held that maximising return is the starting point for all charity trustees when considering an investment and noted the exceptions in which trustees are required or entitled to consider non-financial factors are extremely limited. One such exception was where the investment would directly conflict with the charity’s purposes. In this situation, it was noted that charities should not invest.

In light of the Bishop of Oxford Case, the trustees of the charities involved in the Butler-Sloss Case believed they were required to adopt the proposed investment policies on the basis that investments which do not align with the goals of the 2016 Paris Climate Agreement would be in direct conflict with their charitable purposes.  However, the court in the Butler-Sloss Case clarified that there is not an absolute prohibition on charities making investments which directly conflict with their charitable purpose. Instead, the court explained:

“where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors including, in particular, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion of such investments.”[1]

The court ultimately approved the proposed investment policies, concluding that the trustees of both charities performed the necessary balancing exercise and therefore complied with their legal duties.

Key takeaways

Trustees’ powers to invest must be used to ultimately further the charity’s purposes. Whilst this is often achieved by maximizing financial returns, there are also non-financial considerations that may be consideration. These include:

  • whether the investment is prohibited under the governing document of the charity – in which case the investment cannot be made.
  • whether the investment conflicts with, or is likely to conflict with the charity’s purposes – if so the trustees have discretion to decide whether to exclude these investments, but in doing so, must balance:
    • the likelihood and seriousness of a conflict occurring between the investment and the charity’s purpose;
    • the financial consequence of excluding the investments;
    • the likelihood of the charity losing donors if the charity makes the investment; and
    • the likelihood and seriousness of reputational damage to the charity and its beneficiaries if the charity makes the investment.

Where an investment decision is made after conducting the balancing exercise properly, trustees have complied with their legal duties and cannot be criticized, even if the court or other trustees might have come to a different conclusion. As with most decisions, trustees should ensure their reasons for making an investment decision are recorded in trustee minutes, which can be used to help demonstrate the decision was properly decided.

It is expected that the Charity Commission will update its guidance on responsible investment in light of this decision.

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