Clarity for Charities

A recently decided case has brought some welcome clarity to Charities looking to formulate an ethical investment policy that helps fulfil their charitable objectives.

Background

Two Charitable Trusts related to the Sainsbury Family had both “environmental protection or improvement and the relief of those in need” amongst their objectives.

The Trustees wished to revise their investment policy so that any investments made on behalf of the Trusts would be limited to organisations who committed to the aims of the Paris Climate Agreement and exclude organisations who did not.

The policy was carefully considered, formulated in consultation with the Trusts’ investment managers and contained benchmarks and goals for investment performance.

Why Were Changes to the Charity Investment Policy Not Approved?

The Trusts sought clearance from the Charity Commission on the change in investment policy.

The Commission declined to give authority to the new policy, stating that the Charitable Trustees would be in breach of their duties because they would be limiting their investment options too drastically.

They were also concerned the Charities would be left with a vague investment policy as the Paris Treaty was, necessarily, vague in its definitions.

If the policy were vague, it would be impossible to evaluate the financial detriment to the charity.

Ethical Investment Policy Changes Denied: Another Example for Charities

The previous leading case on the question of Charities and ethical investment policies is Harries v Church Commissioners for England [1992] 1 WLR 1241, widely referred to as the Bishop of Oxford case.

That case involved an application by the Bishop of Oxford and others for a declaration to limit the ethical investment policy of the Church Commissioners.  The Charitable objectives of the Church Commission were “financial assistance for the clergy of the Church of England”.

The Bishop of Oxford and his co-claimants' concerns arose from an existing policy which they felt did not go far enough in prohibiting investment in apartheid-era South Africa.

Their application went even further and sought to limit the investments of the Charity to investments which were in accord with promoting the Christian faith through the established Church of England.

That application was rejected as being too vague to be enforceable.  The judge was also satisfied that the existing ethical investment policy was robust and so a declaration was unnecessary.  He went on to lay out the general principles of law for charities considering ethical investment policies.

Guiding Principles for Charities Considering Ethical Investment Policies

The starting point for any Trustee was to maximise returns so that they could further their objectives.  Deviation from this point would only occur in rare circumstances.  These would be where investments would directly conflict with the purposes of the charity or where investments would indirectly conflict with the purposes of the charity by alienating donors or beneficiaries.

He was clear that Trustees must not use investment policies to make moral statements at the expense of the charity but that they may consider moral objections to investments, as long as they did not present a risk of significant financial detriment to the charity.

There was a question mark over whether the Bishop of Oxford case established that Charities must not make investments if they directly conflicted with the purposes of the charity.  The Judge in the current case concluded this was not so as, within the established parameters, Trustees had a discretion as to the type of investments they made.

Those parameters are:

• The powers of investment (and the limits on those powers) contained in the Trust Instrument.
• The Trustee Act 2000
• The obligation to further the charitable purposes of the Trust

Further Guidance

The judge offered further guidance.

Subject to the above, if the Trustees felt that particular types of investment conflicted with their purposes then they had a discretion to exclude such investments having balanced all relevant factors including the likelihood and seriousness of the conflict and the risk and seriousness of the financial effect of the exclusion.

Trustees formulating an investment policy that undertook this balancing exercise carefully and formulated a reasonable and proportionate policy, as a result, will have complied with their legal duties.

As the world transitions towards a sustainable future, it is a welcome decision that recognises that the true value of an investment for a charity will not always be measured purely in financial terms and confirms that Charities can consider exclusionary investment policies for moral reasons within reason.

Further Reading

The Charity Commission had been about to update their guidance to charities on the issue of ethical investment policies prior to the case but delayed pending the outcome.  Their revised guidance should now reflect this conclusion and is keenly awaited.

At Muckle, we work with Charities and Charitable Trusts, advising on their powers and duties.  We also assist in establishing Charitable Trusts and liaising with specialist accountancy services and investment managers.

If you have any queries regarding charities, please contact Joanne Davison on 0191 211 7958 or email [email protected] or contact Chris Hook on 0191 211 7801 or email [email protected].