Have trustees been given the green light for green investing?

This week has been Good Money Week, designed to raise public awareness of the benefits of sustainable and ethical investment and finance. In light of a landmark High Court ruling from April this year, this is more relevant for trustees of charities than ever before, as Abika Martin explains.

charities trustees ruling
Abika Martin, Investment Manager

A landmark High Court ruling in April 2022 has provided greater clarity for charity trustees considering the investment of charity monies according to an ethical or sustainable policy. The case – Butler-Sloss and Ors v The Charity Commission and Attorney General – was the first time that ethical investment had been considered in the courts for 30 years.

A history of trustees’ duties

In 1992, the ruling in the so-called Bishop of Oxford case found that the starting point for trustees when discharging their duties around investment should be to maximise financial returns.

Back then, limited and specific circumstances were highlighted that justified trustees taking an ethical approach with their investment decisions, which were seen as a deviation from that central financial priority. These circumstances were:

  • If an investment directly conflicted with the charitable objectives, it was accepted it could be excluded.
  • If there was a less direct conflict that might impact the charity’s ability to deliver against its charitable objectives, such as an investment deterring future supporters or donors, or even beneficiaries from accepting help, it could be excluded.
  • If there was no financial detriment as a result of an ethical approach, it was acceptable.

It was considered that these circumstances would apply to only a minority of cases.

Conventional interpretations

The 1992 ruling has long been interpreted that if ethical values led to investment decisions which resulted in poorer financial returns, or greater risk, then trustees should not take that approach.

It’s easy to understand why this was the case. When the only tool available to express such values was divestment from companies deemed to contravene them, then clearly there could be a potentially negative impact on returns (for example, if the excluded companies did well financially) or indeed, greater exposure to risk (you may be holding fewer companies overall, so have less diversification and higher concentration).

Back then, our collective understanding and approach to issues such as climate change or diverse representation was some way from where it is today. Ethical investing was not particularly mainstream across wider society.

It may therefore have been difficult for trustees to demonstrate the need for an ethical investment approach, not only on risk and return grounds, but also in the context of their supporters’ – and donors’ – values.

What has changed?

The more recent ruling, while still clear on the financial responsibilities of trustees, and equally clear that trustees should not push their own moral views when discharging their duties, places greater emphasis on the ability of trustees to exercise discretion as to whether to exclude certain investments, weighing up the potential financial impact alongside ethical conflicts, or reputational risk.

This is a noticeable departure in tone and one that likely warrants a review of trustees’ investment approach. Investment choices that were discussed in the past through a lens of "maximising returns first" may have seemed like a necessary evil, but that may not remain the case when considered in the context of "balancing relevant factors."

Global shift

With modern day sustainable investment approaches, exclusions are no longer the only method available to reflect trustees’ ethical concerns for charity monies. We have comprehensive assessments on the Environmental, Societal and Corporate Governance practices of investee companies, we have data on where their revenues are generated and how, we have public commitments on issues such as climate change and, through voting and engagement, we can hold management boards accountable to those commitments.

With people more conscious than ever of their personal impact on the planet, there are now literally trillions of dollars in sustainable and ESG-focused investments globally. From private individuals to pension funds, money is being committed to markets in a way that increasingly prioritises making a difference alongside financial return. It isn’t a huge leap to infer that this means the risk to charities of not considering an ethical investment approach is greater than it was, as a result.

Striking the right balance

The Butler-Sloss case sets a precedent in which trustees have been found to have acted properly, even though their high conviction, climate-centric investment approach will almost certainly impact risk and return. This provides trustees a huge amount of freedom to find the balance between their financial and non-financial considerations that best serves their charity. More and more charity trustees are looking to have conversations and training on sustainable investing principles and implementation. We believe this trend will continue to grow in importance.

Read more from The Brief.

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