ETHICAL INVESTMENT BY CHARITY TRUSTEES: SOME ANSWERS, NEW QUESTIONS

Abstract

IN Butler-Sloss v Charity Commission for England and Wales [2022] EWHC 974 (Ch), the High Court confirmed that two charities were entitled to adopt an investment policy which excluded investments deemed to be incompatible with the Paris Agreement, even though this risked reducing the charities’ investment returns. The decision is significant because it establishes that charity trustees have a broader discretion to take ethical and other non-financial considerations into account when exercising their powers of investment than had been previously understood. The judgment provides much needed clarification of the law governing ethical investment, but also poses difficult questions for trustees. The charities concerned were grant-making trusts established for general charitable purposes. Their trustees had chosen to focus the charities’ grant-making on two purposes in particular: the advancement of environmental protection or improvement, and the relief of those in need. The trustees wished to avoid investing the charities’ funds in investments which conflicted, or might conflict, with these purposes, prompting the development of the new investment policy. The policy significantly narrowed the universe of assets from which investments could be selected, which the trustees recognised was likely to result in diminished returns in the short term. For this reason, and because there was widespread uncertainty concerning the reach of the only previous reported case on ethical investment by charity trustees, Harries v Church Commissioners [1992] 1 W.L.R. 1241, the trustees asked the court to make a declaration blessing their decision. In Harries, Sir Donald Nicholls V.-C. held that, when exercising their powers of investment, the “starting point” was to maximise financial return, since “[m]ost charities need money; and the more of it there is available, the more the trustees can seek to accomplish”. However, trustees would be justified in departing from this starting point in certain “comparatively rare” cases, including where the trustees were satisfied that there was a direct conflict between the investment and the charity’s purposes (p. 1246). The trustees in Butler-Sloss claimed that the proposed investment policy fell within this exception; they considered the policy was needed because any investments which did not align with the goals of the Paris Agreement directly conflicted with the charities’ purposes. However, the scope of the direct conflict exception was unclear. Were the trustees required to divest from investments which they considered conflicted with their charity’s purposes, or did they simply have a discretion to do so? What was meant by a conflict in any Cambridge Law Journal, 82(1), March 2023, pp. 9–12 © The Author(s), 2023. Published by Cambridge University Press on behalf of The Faculty of Law, University of Cambridge. doi:10.1017/S0008197323000107