Responsible Investment – more clarity for charities

The recent High Court case of Butler-Sloss v Charity Commission [2021] has provided additional clarity for charities wishing to adopt a responsible investment policy.

Although it is becoming increasingly common for investors to adopt responsible investment strategies, taking into account environmental, social and green agendas ("ESG") as well as how well an investment will perform financially, questions have always arisen for charity trustees when ESG considerations do not already form part of a charity's objectives.

In a move away from precedent case law, the case of Butler-Sloss helpfully found charity trustees being granted permission to bring proceedings to obtain declaratory relief and directions when they wished to adopt responsible investment policies.

This case comes shortly after the Charity Commission published a consultation seeking views on draft revisions to charities' responsible investment guidance. The consultation is due to close this month.

The leading case on investment by charity trustees has, for the last three decades, been Harries v Church Commissioners for England [1991] 10 WLUK 372 (commonly referred to as the "Bishop of Oxford" case), where the court held that “… the circumstances in which charity trustees are bound or entitled to make a financially disadvantageous investment decision for ethical reasons are extremely limited”. The Bishop of Oxford case creates an issue for charities:

a) which may wish to invest in riskier companies with ESG potential; or

b) where ESG considerations may not fall within their objects.

The Charity Commission's draft guidance uses the Bishop of Oxford case as its basis, albeit following a new interpretation of the case. Although presently ESG portfolios tend to perform extremely well, this has not necessarily always been the case, and may not be so in the future (notwithstanding that the cultural change that has led to improved ESG portfolio performance seems unlikely to diminish). The draft guidance as it stands will still place limits on a charity's ability to responsibly invest.  

In Butler-Sloss the High Court granted permission for charity trustees to bring charity proceedings to obtain declaratory relief and directions where they wished to adopt responsible investment policies, thereby allowing them to exclude investments that were not aligned with their charities' objects. The court noted that ethical and environmental considerations have moved on significantly over recent years and expressed a hope that the case might influence future Charity Commission Guidance.