The Charity Commission announced last year that it was exploring how to help remove some of the barriers that prevent charity trustees from investing their assets ‘responsibly’. Responsible investments will look different for each charity, but broadly it means investing in line with the charity’s purpose and values, rather than with the sole aim of generating the highest return.
The Commission sought views on what prevents charity trustees from deciding to make responsible investments. One of the clear responses received was that the legal framework surrounding charity investment is unclear and some believe the case law is ‘outdated’.
In 1992 the Bishop of Oxford challenged the Church Commissioners over their investment policy (Harries v Church Commissioners for England  1WLR 1241)
In particular, he sought a declaration that the Church Commissioners in exercising their investment powers were obliged to have regard to the object of promoting the Christian faith and thus to apply ethical consideration to their choice of investment. The judgement in that case (amongst other things) summed up the responsibilities of charity trustees with regard to investment very succinctly:
“Most charities need money; and the more of it there is available the more the trustees can seek to accomplish.”
Thus, the purposes of the charity are usually “best served by the trustees seeking to obtain therefrom the maximum return, whether by way of income or capital growth, which is consistent with commercial prudence’”
However, the Court recognised that “in a minority of cases the position will not be so straightforward.” These were cases “when the objects of the charity are such that investments of a particular type would conflict with the aims of the charity”. Examples were cancer research charities investing in tobacco shares and for example, trustees of temperance charities investing in brewery and distillery shares.
The Court also identified another category of case where trustees’ holdings of particular investments “might hamper a charity’s work by making potential recipients of aid unwilling to be helped because of the source of the charity’s money, or by alienating some of those who support the charity financially.”
The decision made clear that the greater the risk of financial detriment the clearer the trustees needed to be of the advantages to the charity of the course of action they were adopting.
The case also made clear that trustees “must not use property held by them for investment purposes as a means for making moral statements at the expense of the charity of which they are trustees.”
This case was decided nearly thirty years ago and remains the leading case on the subject yet for many it now seems outdated given the modern ESG focus. In the Companies Act 2006 for example, there is a requirement on directors of companies, including charitable companies, in complying with their duties to have regard to “the impact of the company’s operations on the community and the environment” and “the desirability of the company maintaining a reputation for high standards of business conduct”. Many commentators and trustees have suggested that the Charity Commission’s guidance on investments was not as clear as it might be on the ability for charity trustees to undertake responsible investments.
In response, the Commission is running a consultation on revised ‘Responsible Investments’ guidance within CC14. The revisions aim to clarify that trustees have discretion to decide whether to adopt a responsible investment approach and reassure trustees that they can decide to adopt a responsible investment approach in most circumstances.
The revised guidance sets out that in taking a responsible investment approach, trustees must base decisions on what is in the best interests of the charity. It also notes that there are extra rules for charities that hold money or investments as permanent endowment, because it is subject to a duty to invest. The guidance says that charities could still take a responsible investment approach if, for example, trustees are avoiding an investment that directly conflicts with the purposes of the charity, or if there is a risk of losing supporters if a responsible investment approach isn’t taken. If this was the case, trustees should balance the risk of lower returns against the risk of losing support or damaging the charity’s reputation.
The ‘Legal Underpinning’ document that accompanies CC14 and sets out the Commission’s view of the law underpinning the guidance has now also been updated in light of the Commission’s updated approach. A new section on ‘Responsible Investment’ has been added, setting out the Commission’s view that the Bishop of Oxford case only applies to charities with a duty to invest (as with permanent endowment). Where there is no duty to invest, legislation passed since the Bishop of Oxford case was decided supports there being a broader legal framework for responsible investment: “The usual starting point (except where there is a duty to invest) is that trustees are free to decide whether to spend money or invest it”.