Charities Ethical Investments Update

I add my comments in red to the Judge’s 10 points.

(1) Trustees’ powers of investment derive from the trust deeds or governing instruments (if any) and the Trustee Act 2000. The trust deed may tailor the power of investment, including (as below) excluding specific investments.

(2) Charity trustees’ primary and overarching duty is to further the purposes of the trust. This was stressed as the fundamental principle, and was at the heart of the power of investment, rather than maximising financial returns, per se – see below. The power to invest must therefore be exercised to further the charitable purposes.

(3) That is normally achieved by maximising the financial returns on the investments that are made; the standard investment criteria set out in s.4 of the Trustee Act 2000 requires trustees to consider the suitability of the investment and the need for diversification; applying those criteria and taking appropriate advice is so as to produce the best financial return at an appropriate level of risk for the benefit of the charity and its purposes.

(4) Social investments or impact or programme-related investments are made using separate powers than the pure power of investment.

(5) Where specific investments are prohibited from being made by the trustees under the trust deed or governing instrument, they cannot be made. To avoid the below discretionary exercise, consideration could be given to specific exclusions in the trust deed. That said the interpretation of the exclusion, in a changing world and diverse market-place, could create difficulties.

(6) 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 and 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. The main issue in the case was whether a charity was prohibited from having investments which conflicted with its objects. (cf. Harries v Church Commissioners for England [1992] 1 WLR 1241). Such an approach was found to be too rigid, and one which would lead to substantial practical difficulties. The Judge was able to provide a sensible, workable framework.

(7) In considering the financial effect of making or excluding certain investments, the trustees can take into account the risk of losing support from donors and damage to the reputation of the charity generally and in particular among its beneficiaries.

(8) However, trustees need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among the charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues. This was another theme of the Judgment – that trustees expressing their own moral sentiments (also in the context of ex gratia payments) was controlled by the law.

(9) 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, the 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. This balancing exercise is typical of trustee decision-making, and expert advice may well be required (cf. s.5 Trustee Act 2000).

(10) If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby 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. It is perhaps unlikely that there will be further blessing applications in this area. Whilst adopting a radical new investment policy could be considered a ‘momentous’ decision, such applications are costly and the law, as to investments, is flexible. It is noted that the Commission was concerned as to the level of the level of costs incurred in this case – a point not supported by the Judge.

Comment

This is an instance of the Court clarifying and simplifying charity law, in a very important area. It did help that the underlying case was not hotly contested, and everyone wanted to see the same thing – appropriate flexibility in charity investment. Having the Charity Commission as a properly represented party was (it appears) useful, in a case of broad application.

I had thought that it would be preferable to leave the Charity Commission’s draft guidance (despite some lack of clarity), as is, rather than risk the Court adopting a ‘conservative’ view of trustee powers in this area. We were, however, in safe hands!