CHARITY INVESTMENT: WHAT DO THE LATEST LEGAL DEVELOPMENTS MEAN FOR FOUNDATIONS?

Tom Montagu-Pollock, co-head of charities at Cazenove, looks at how a recent High Court judgment puts more responsibility on foundation trustees to balance financial and non-financial considerations.

The claim was rejected, but the judgment did give a firmer legal basis for foundation trustees opting for ethical investment policies. The judge said that the “maximum return … consistent with commercial prudence” should be the “starting point for all charity trustees”. But he acknowledged that there could be circumstances where other considerations should be taken into account. These include both direct conflicts with a charity’s purpose (such as a cancer research charity investing in tobacco) and indirect conflicts (where potential investments could alienate potential charity donors or recipients).

The Charity Commission’s current guidance on ethical investment is based on a relatively conservative interpretation of the case. It quotes the judge’s observation that “most charities need money; and the more of it there is available, the more the trustees can seek to accomplish”. It follows up by advising trustees to “keep in mind the fundamental principle of maximising return” when making ethical investments.

WHY WAS THE BUTLER-SLOSS CASE NECESSARY?

This framework is no longer satisfactory for many foundation trustees. This became apparent to the trustees of the Ashden Trust and Mark Leonard Trust after the release of the IPCC report in 2018, which highlighted the “rapid and far-reaching” transitions needed to limit global temperature rises and the terrible consequences of inaction.

The judge in the Butler-Sloss case accepted the view that investments that are not aligned with the Paris Agreement could be in direct conflict with their charitable objectives. “He didn’t say this was necessarily right … but accepted that it was a reasonable conclusion for the trustees to reach,” explained Luke Fletcher. “The Bishop of Oxford case predated climate change. When the trustees of the Ashden Trust and Mark Leonard Trust asked the question ‘What are our duties in light of climate change?’ the case wasn’t that illuminating. Different lawyers would have given very different answers.”

One issue identified by the trustees was that limiting investments to those aligned with the Paris Agreement would result in a much-reduced investment universe. This is a very different scenario to those set out in the Bishop of Oxford judgment, which contemplated narrow sectoral exclusions (for example, tobacco or defence) with much more limited investment implications as a result.

The Bishop of Oxford case is also unclear about exactly how trustees should balance their duty to maximise return with other considerations. The judgment says that trustees “should” avoid investments that directly conflict with their charitable objects – but does this mean they are prohibited? What if there is a potential for conflict, but insufficient information to know for sure? This could often be the case when it comes to assessing whether or not a company is aligned with the Paris Agreement.

So, in part, the Butler-Sloss case was a way of clarifying current law. And the judge gave a clear summary of the law on charity investment.

In short, trustees must use their power to invest “to further the charitable purposes”. He goes on to explain that this is “normally achieved by maximising the financial returns on the investments that are made” while taking into account “the suitability of the investment, the need for diversification and taking appropriate advice to produce the best financial return at an appropriate level of risk for the benefit of the charity and its purposes.

“But 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. 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.”

Key Takeaways For Foundations

“This judgment recognises that potential conflicts with charitable objects could exist across the investment universe,” said Luke Fletcher.

“The judgment places a lot of emphasis on the idea of trustees’ discretion. It’s not for the court or the Charity Commission to decide whether a conflict exists – it’s for trustees. In many ways, the judgment is empowering trustees to think about these questions and come to their own conclusions. It is placing a far greater responsibility on trustees to weigh up all relevant factors.”

BATES WELLS’ PRACTICAL STEPS FOR FOUNDATIONS

1. Brief foundation trustees on legal principles

2. Review and reflect upon objectives and investment

– Identify potential conflicts with objects (and relevant positive impact)

– Identify any relevant relational or reputation risks

– Consider relevant evidence regarding conflicts

3. Develop investment policy in best interests of charitable purposes

– Consider seeking advice (financial and other)

4. Document discussions/ decisions in minutes and investment policy

– Include conclusion on conflicts and any balancing exercise

5. Instruct your investment manager and review over time

Cazenove Capital manages investment portfolios for the two charities that were involved in this case. We can advise trustees on developing investment policies that are aligned with a wide range of charitable objectives. This article does not constitute legal advice.

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