Butler-Sloss v The Charity Commission: the pursuit of charitable purposes through ESG investing

In Butler-Sloss v The Charity Commission for England And Wales [2022] EWHC 974 (Ch) (“Butler-Sloss”), two charitable trusts sought a declaration that they were entitled to adopt an investment policy which excluded investments inconsistent with the Paris Climate Agreement, notwithstanding the fact that this strategy might be detrimental to the anticipated rate of return. The High Court held that trustees’ powers to invest must be exercised to further a charity’s purposes (in this case, “environmental protection” and the “improvement and relief of poverty”). Although the court ruled that this would normally mean maximising financial returns, it held that trustees had a discretion as to whether to exclude investments which they reasonably believed were in conflict with their charity’s purposes.

Butler-Sloss clarifies, and helpfully restates (see [78]), the principles to be derived from the decision in Harries v Church Commissioners for England [1992] 1 WLR 1241 (the “Bishop of Oxford” case). It is trite law that the ‘primary and overarching duty’ on a charitable trustee is to further the purposes of the trust. In the Bishop of Oxford case, it was held that the purposes of the charity are usually best served by the trustees seeking to obtain the maximum return on investments, whether by way of income or capital growth: “most charities need money; and the more of it there is available, the more the trustees can seek to accomplish.” Previously, it was thought that only in “comparatively rare” cases would trustees be justified in departing from this principle. Such cases might include situations in which there was a straightforward and direct conflict between an investment and a charitable purpose (e.g., a cancer research charity investing in tobacco shares), in circumstances where divestment would not result in significant financial detriment.

The decision in Butler-Sloss is significant because it establishes that charitable trustees have a considerably wider latitude in determining a suitable investment policy than previously thought. Mr Justice Michael Green held (at [78](6)) that “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,” including where this would cause an appreciable detriment to the anticipated rate of financial return. The decision is focused on ‘divestment’ (i.e., ‘negative screening’). Nonetheless, provided that trustees have regard to their obligation to maintain a reasonably diversified portfolio (see s.4(3)(b) of the Trustee Act 2000), its logic also extends to investment decisions designed to simultaneously grow the capital of the trust whilst promoting its charitable purposes (‘positive screening’). Aspects of the decision could therefore be read across to inform the correct approach to the exercise of charitable trustees’ discretion in relation to “mixed-motive” investments made under Part 14A of the Charities Act 2011.

How should trustees go about exercising this discretion? They must research and think about the relevant issues “responsibly and diligently” (at [84]), and would be “well advised” to have “set out their reasons” for their decisions in writing (at [86]). If trustees reach the “reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes” they should exercise their 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.” Clearly, the greater the anticipated financial detriment, the stronger the justifications for excluding a given class of investments will need to be (compare the Bishop of Oxford case, at p.1247).

Significantly, the Court re-emphasised that in considering the “financial effect” of a decision, trustees are entitled to take into account the risk that failing to divest could damage their charity’s reputation and decrease support amongst its supporters or the public at large. If consumer pressure for ESG action continues to mount, this factor will undoubtedly take on increasing significance. Nonetheless, we think it relatively unlikely that interested persons amongst the public could legally compel charitable trustees to divest (using the enforcement provisions in s.115 of the Charities Act 2011), in light of the substantial deference granted to the decision making of trustees on this issue (see further below).

Although the Court observed that investments directly conflicting with a charity's purpose “should be avoided if possible,” it declined to make this an absolute rule (paragraph [73]). We think this approach is sensible, for at least two reasons. First, in some cases, it may be difficult to define what constitutes a ‘direct conflict’ (see paragraph [70]), such that it should be automatically excluded. Second, this approach facilitates shareholder activism. For example, in this case, “even though the [charities] had divested their investments in fossil fuel companies, they still retained single shares in them in order to be able to exert pressure on green policies at shareholder meetings.” (paragraph [18])

Perhaps the most significant remaining uncertainty rests in the Court’s caution to trustees “to be careful” to refrain from making investment decisions with possible financial detrimental implications on “purely moral” grounds (at [78](8)). There are sound reasons underlying this longstanding principle (see, for example, the Bishop of Oxford case, at p.1247). As Rosy Thornton argues, this is because it is likely impossible to come up with “workable or objectively defined criteria for determining what constitutes an ‘ethical’ investment” (in the abstract) against which one could sensibly judge the actions of trustees.” Questions will, however, undoubtedly arise as to the degree of connection required between a given charitable purpose and an investment, such that trustees can justifiably claim that they are not acting on purely ethical considerations that are entirely independent of the trust purposes. As noted by Mr Justice Michael Green, “the boundaries of law and morality are sometimes difficult to define and perhaps even more so in the context of charities, which are often underpinned by a strong sense of moral imperative” (at [64]). Would a charitable trust whose sole aim was the relief of poverty be justified in adopting the criteria ratified by the Court in this case? Given the inextricable link between the effects of poverty and the climate crisis, would this be sufficient to permit trustees to avoid their decision being characterised as one taken purely on moral grounds? Alternatively, what about a charity whose purpose was the advancement and protection of human rights?

In our view, the warning to trustees not to act for “purely moral” reasons should not be understood as implying that it is necessary to show that there is a potential financial detriment to the charitable trust, in order for a conflict to arise. For example, it is easy to envisage cases in which the ability of charities to persuasively advocate or campaign could be undermined by ‘contradictory’ investment decisions (even, say, where this would make no meaningful difference to the funding received from the public). Leaving such instrumental considerations aside, a power to exclude conflicting investments could arguably be justified by reference to the implied intentions of the settlor of the trust (who could, had they turned their mind to the question, have provided express powers of exclusion in the trust deed). From a practical point of view, this approach also has the advantage of avoiding courts becoming drawn into the heated ongoing debate as to whether divestment strategies actually succeed in raising the cost of capital in a way which meaningfully changes the behaviour and investment decisions of affected firms.

Lastly, there is much to be said for allowing charitable trustees substantial levels of discretion to adopt the investment strategy that they consider best suited to fulfilling their charities’ purposes, with the Court adopting a relatively light-touch supervisory rule. First, it is reasonable to assume that, in general, trustees are better placed both to assess how investments might conflict with their charitable purposes and the potential opportunity cost arising out of any possible detriment to the rate of return. Further, in more complex cases, these decisions will also have been reached (as in this case) with the benefit of expert advice (see s.5 of the Trustee Act 2000). Second, in the case of charities, there are no beneficiaries from whom a trustee can seek consent for a proposed ‘unconventional’ investment strategy, which does not seek to maximise financial returns (see paragraph [52]). Third, from a more practical standpoint, this stance also helps to minimise the need for trustees to apply to the Court (as in this case) to seek approval for their proposed investment policy. This can be an expensive undertaking (perhaps prohibitively so, for smaller charities), as demonstrated by this litigation: at paragraph [92], the court noted, without expressing a view, the Charity Commission’s concerns as to the level of costs incurred in this case.

In conclusion, Butler-Sloss is indicative of an increasing degree of trustee autonomy in the charitable trust context. It gives trustees greater latitude to advance the charitable purposes which underpin the trust when exercising their investment functions. There is increasing recognition that the way in which individuals and institutions allocate their investments is not value-neutral and can have substantial real-world effects, whether positive or negative. For this reason, we welcome the ruling as an invitation to charities to consider whether their purposes are best served by an investment strategy chasing the highest rates of financial return, and to develop their policies accordingly.