Charity investment policies: Butler-Sloss and the balancing exercise

13th July 2022

Trustees are equipped with powers of investment whilst managing a charity. These powers derive from the charity’s trust deed or an alternative governing document. For unincorporated charities, the power stems from the Trustees Act 2000.

In April this year, the High Court delivered an important judgment which clarifies the law with regards to charity trustees exercising their powers of investment of charity assets.

The trustees of Ashden Trust and Mark Leonard Trust, whose charitable purposes include environmental protection and relief of property, wished to adopt new investment policies. These excluded potential profitable investments that conflicted with the charities’ objects – in particular, investments which were not aligned with the 2016 Paris Climate Agreement.

By doing so, the trustees risked causing financial detriment to their charities. The trustees of the charities sought the court’s approval both for the adoption of policies to ensure they were acting lawfully, and also declarations as to the proper approach to be taken in relation to such issues generally by charity trustees.

Previous court decisions had given rise to uncertainty as to the extent of the powers of trustees about responsible investment.

In his judgment in the case, Michael Green J set out a helpful summary of the law in relation to charity trustees, taking into account non-financial considerations when exercising their powers of investment. In brief, this is:

  • The investment powers of trustees derive from the charity’s governing document and, in the case of unincorporated charities, the Trustee Act 2000
  • The power to invest must be exercised to further the charitable purposes of the charity
  • That is normally achieved by maximising the financial returns on the investments that are made
  • Social investments or impact or programme-related investments are made using separate powers than the pure power of investment
  • Where specific investments are prohibited from being made by the trustees under the charity’s governing document, they cannot be made
  • However, where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with their charitable purposes, the trustees have discretion as to excluding 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 of any potential financial effect from the exclusion of such investments
  • In considering the financial effect of making or excluding certain investments, the trustees can take into account the risks of losing support from donors and/or damage to the reputation of the charity generally, in particular among its beneficiaries
  • However, trustees need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among their charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues
  • Essentially, 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. Where there are difficult decisions to be made involving potential conflicts or reputational damage, trustees need to exercise good judgment by balancing all relevant factors, in particular the extent of the potential conflict against the risk of financial detriment.
  • If that balancing exercise is properly done and a reasonable and proportionate investment policy is adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.
  • As this balancing exercise will be individual to each charity it is impossible for there to be a single ‘right’ investment policy. Thus, while the case does not provide a fixed rule on investment policies, it does clarify that trustees will not be breaching their duties by avoiding certain profitable investments if they can demonstrate that they followed a well-balanced decision-making process.

The judge decided that the trustees of Ashden Trust and Mark Leonard Trust had exercised their powers of investment properly and lawfully and permitted them to adopt the proposed investment policies.

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