Charitable trusts ruling is significant for net-zero investments

A judgment allowing trustees of two charitable trusts to exclude investments on the grounds that they conflict with their environmental values could have wider impacts for other organisations’ investment activity.

The Butler-Sloss v Charity Commission case, which was heard in the High Court of England and Wales, concerned whether a charity can make investments that conflict with its purposes or objects.

In the judgment, Mr Justice Michael Green said the trustees of the Ashden Trust and the Mark Leonard Trust, had decided “reasonably” that there must be a “dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions”.

The judge said that it was acceptable for the trustees, who both work in environmental protection and sustainable development, to exclude investments not aligned with the goals of the Paris Agreement because the investments would conflict with the charitable purposes of the trusts.

The judgment acknowledged the discretion of charities to balance their objectives with the risk of financial detriment, showing the extent of the possibilities for exclusions.

Ben Fairhead, partner at law firm Pinsent Masons said: “In principle, if a charity has a charitable purpose relating to environmental protection, this case shows there is scope for that to be taken into account when considering whether to make or exclude certain investments. There is a balance to strike, as with any discretionary decision, so financial impact does still need to be considered – charities need to make money so that cannot be overlooked.”

The court considered whether implementing policies and excluding certain investments would result in lower investment returns and therefore be consistent with trustees’ duties under the Trustee Act 2000 and the requirement to maximise a charity’s financial returns.

Due diligence 

“Based on the facts of this case, the judge placed weight on the level of due diligence undertaken by the trustees and, in particular, their assessment of any financial detriment that may be suffered as a result of adopting what was perceived to be a narrower investment policy, yet one aligned with the charities’ purposes. This was certainly scrutinised.”

John Hanratty, head of pensions North at law firm CMS, said it was difficult to see the judgment having wider application, particularly for the UK Local Government Pension Scheme (LGPS). However, he said it could have an impact on the covenant of charities:

“Whether the effect of the Butler-Sloss case on charitable investment policy may affect how the covenant of charities is considered for LGPS admission body purposes is a financial question but my view is the immediate impact is that this is unlikely to be a priority for the LGPS this year.”

There are a number of differences between charitable trusts and pensions, for example the latter has beneficiaries unlike the former.

Fairhead said this has made it easier for the court to allow some leeway in the Butler-Sloss case, whereas financial interests of pension scheme members remain at the forefront of considerations.

However, he added: “That said, there is scope to take into account members’ views, and there is generally a lot of momentum towards greater regulation and focus upon climate change when it comes to pension scheme investment policy. It is only a matter of time before we see more court cases on this issue.”