The Butler-Sloss case – what does it mean for decisions on investments?

27 June 2022

It’s been a couple of months since the High Court judgement in the case brought by the Ashden Trust and the Mark Leonard Trust to confirm that their “Paris-aligned” investment policy was permissible under charity law. Now the dust has settled, just how much of a change does the judgement represent? Rick Hebditch, ACF’s director of external affairs, writes about the case.

Some have seen the Butler-Sloss judgement as marking a definitive moment in a shift towards ethical or moral investment policies. Others see it as confirming the discretion that trustees already have to decide their investment approach to best further their charity’s purposes.

This blog provides a summary of the decision with some additional commentary from Luke Fletcher of Bates Wells (Bates Wells represented the two trusts) and from Jonathan Brinsden of BDB Pitmans LLP.

Background

The two charities, the Ashden Trust and the Mark Leonard Trust, are members of ACF and have general charitable purposes with a particular focus on environmental protection. Their trustees developed new draft investment policies that sought to exclude investments that didn’t align with the 2015 Paris Agreement on climate change. This meant the total investment portfolio would need comply with the target of limiting warming to 1.5°C (compared the projected 2.7°C warming from activities permissible under current government policies around the world).

The investment approach originally presented by the trusts’ advisers Cazenove would have excluded approximately a fifth of the total investable universe, although trustees expected that the exclusions would actually be much higher once further information about companies' alignment with the Paris Agreement was forthcoming. Subsequent trustee discussions resulted in reducing the amount to be directly invested in equities, and increasing that to be invested in thematic funds with a green focus and in general sustainability funds. The proposed investment policy still had a target financial return.

As part of the court case, both the Charity Commission and the Attorney General submitted that the two trusts did not adequately balance the potential financial detriment that would be suffered by the adoption of their proposed investment policy with the conflict to the charitable purposes.

A new framework for investment decisions?

In his judgement, Mr Justice Green found that trustees “decided, reasonably in my view, that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions and for there to be any chance of ensuring that there is no more than a 1.5°C rise in pre-industrial temperature. The only question is whether they have sufficiently balanced that objective with any financial detriment that may be suffered as a result. In my view they have and the performance of the portfolio will be tested regularly against recognised benchmarks and will seek to provide the financial return specified in the Proposed Investment Policy.”

The judgement also provided clarification of the 1992 Bishop of Oxford case that informs the CC14 guidance on investment from the Charity Commission for England and Wales. The key section from the judgement is paragraph 78 – you can check it out here.

My (very) short summary of the judge’s 10-point framework is below (but do read what he says yourself):

Trustees’ first duty is to further their charity’s purposes, and investment decisions need to do this too
Maximising financial return “from the investments that are made” is the “normal” way to do this (social investment or programme-related investments use separate powers) in a manner that also manages risk appropriately and benefits the charity and its objects
Where trustees consider investments to be potentially in conflict with charitable purposes, they have discretion to exclude them from investments subject to a “balancing” exercise on the extent of the conflict and the potential financial effect (including reputational damage)
Acting honestly, reasonably and responsibly and with a properly done balancing exercise allows trustees to comply with their legal duties (and making sure this is all properly minuted helps too…)

The judgement should now pave the way for the Charity Commission to complete the review of CC14 they have been undertaking. You can read ACF’s response on revising CC14 which we sent to the Commission in 2021 here.

So how much of a shift is this?

We asked three questions to lawyers Luke Fletcher and Jonathan Brinsden and we’ve summarised their thoughts below.

1. How has the 'starting point' changed for trustees when considering their foundation's investment approach?

Luke Fletcher, Bates Wells: “The judge said that the ‘primary and overarching duty of trustees is to further the purposes of the trust’ and the power to invest ‘must therefore be exercised to further the charitable purposes’.

“The judge also said that the trustees task is to develop an investment policy that is ‘in the best interests of the charity and its purposes’. The judgment therefore brings a helpful new clarity and emphasis to the priority of charitable purposes in the context of investment. That said, the judge did not suggest any particular starting point for trustees when determining what investment policy is in the charity’s best interests.

“It is conceivable that different trustee boards will approach decision-making in different ways. However, in our view, the most logical starting point for trustees will likely be a review and consideration of the charitable purposes, which should lead in turn to an analysis of whether there are certain classes of investment that are particularly suitable or unsuitable for the charity given the nature of its purposes.

“In other words, are there any investments which (a) potentially conflict with or (b) potentially support the charitable purposes? It seems desirable for trustees to ask these questions at the outset."

Jonathan Brinsden, BDB Pitmans: “The starting point has not materially changed. Prior to this case, the law on this subject was based upon principles from one case, the ‘Bishop of Oxford’ case, Harries v Church Commissioners for England. That case forms the basis for the principles on ethical investment in the Charity Commission's guidance CC14. The Judge in the case provided that the ‘starting point’ was that the charity will be best served by the trustees seeking to obtain the ‘maximum return which is consistent with commercial prudence’ and in ‘most cases’ that starting-point ‘will govern the trustees’ conduct’.

“The Butler-Sloss judgment has not changed this. Charity trustees' primary and overarching duty is to further the purposes of the trust. The power to invest must therefore be exercised to further the charitable purposes and that is normally achieved by maximising the financial returns on the investments that are made. However, Trustees may exercise their discretion to modify the investment approach if they are of the view that to do so will be in the best interests of the charity and its purposes having regard to potential conflicts and reputational damage.”

2. What will a balancing approach (‘balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment’) mean in practice for foundations?

Luke Fletcher: “It will be for trustees to determine, acting honestly, reasonably and responsibly, what is and what is not a relevant factor to balance when developing an investment policy to advance the charitable purposes.

“It seems likely that best practice will develop and settle in the light of the judgment over time. Umbrella bodies like ACF, advisers, the Charity Commission and others will have a role in shaping best practice.

“The judge did not specify what weight ought to be given to different factors in any balancing exercise but did say that a ‘direct conflict’ with the objects is ‘likely to be the most significant factor’ and ‘should be avoided if at all possible’ and that, in particular, trustees should weigh up the seriousness and likelihood of potential conflicts against the seriousness and likelihood of any potential financial effects.”

Jonathan Brinsden: “The Judge made reference to a “balancing” exercise to be conducted where the trustees consider an investment may conflict with the charity’s purposes. However, again, I do not consider that to be new law – rather, it is implicit in the exercise where trustees consider whether an investment may conflict and the likely impact if they exclude it from the portfolio; it is just that in most straightforward cases, such as that of a cancer charity and tobacco investments, the exercise requires very little balancing in practice in order to justify the exclusion. With a “balancing” exercise the Judge recognised that such decisions may be more nuanced and that a number of factors may be in play.

“Some might be concerned that the balancing exercise may appear less permissive of exclusion than the Bishop of Oxford case which provided that “Carried to its logical conclusion” trustees “should not so invest” even if it would “likely” result in “significant financial detriment” to the charity. However, there is no suggestion that the judge in this case disagreed with any of the Bishop of Oxford case conclusions. Instead the intent appears to be to restate the Bishop of Oxford principles for the world in which they are now being applied – as exemplified by the claimant trustees’ proposed investment policy which would exclude a very significant percentage of potential investments in the context of something which is very difficult to define (“There is an obvious difficulty in defining which investments are or are not aligned with the goals of the Paris Agreement” (para 23)). It has always been the case that charity trustees must be ready to justify how they decide to exercise their powers, including their powers of investment.”

3. What might be the impacts on different foundations and their investment approach (eg those with substantial assets, smaller foundations, those whose mission is expressly environmental, those with a more general purpose such as funding “charitable purposes or charitable activities at the discretion of trustees”)?

Luke Fletcher: “The Ashden Trust and the Mark Leonard Trust are charities with general charitable purposes but which have elected to advance the charitable purposes of protecting the environment and relieving need. Importantly, the judge accepted and approved the trustees’ conclusion that investing in companies without a credible plan to align with the Paris Agreement goals would conflict with these charitable purposes.

“It seems likely that many charities, not only those with environmental objects but also with objects for example in relation to advancing health, relieving need and relieving poverty will come to similar conclusions.

“The principles in the case, particularly the notion that it is for trustees to determine whether there are potential conflicts with objects and to weigh up any such conflicts as part of a general balancing exercise, are applicable to all manner of different charitable objects and potential conflicts. The case also established the principle that these potential conflicts might be much more widespread than previously envisaged.

“The judge said that trustees should aim to develop a ‘reasonable, ‘proportionate’ and ‘appropriate’ investment policy, which suggests that different foundations with different levels of assets and capacity might come to different conclusions in light of what is proportionate and appropriate to the size and sophistication of the foundation. There is no single ‘right’ investment policy for foundations to adopt. Ultimately, it is for trustees to determine what is in the best interests of each foundation’s purposes.”

Jonathan Brinsden: “From a legal perspective very little [impact]. The 10 principles set out in the judgment are essentially a restatement of the principles in the Bishop of Oxford case, albeit there is some helpful clarification about how trustees should approach their decision making. The judge has helpfully presented a reformulation designed to give charity trustees more confidence about their responsibilities when making investment decisions in this area. To the extent that trustees were perhaps hesitant about making certain decisions the judgment may provide some additional comfort.

“The Charity Commission had not implemented its draft “responsible investment” guidance, pending the Court’s decision in this case. It will now proceed to update its guidance, presumably to reflect the guidance given in this decision.”

So what now?

Technically, the judgement is a clarification of the law and by nature a restatement of the relevant legal principles — it was always going to have this status in law. The real question is therefore what impact it has in practice and that will be determined by how foundations and other charity investors apply the principles in the coming years and potentially decades, which will be the real test of the judgment’s impact.

The second progress report from signatories to the Funder Commitment on Climate Changes shows that more foundations are considering climate change in considering how to approach their investments, so this is likely to be something that more and more trustee boards will consider, particularly when the Charity Commission publish their revised guidance.

Thank you to Jonathan and Luke for sharing their thoughts on the case with us.