Momentous ruling by the UK High Court

• A new High Court judgement has ruled on trustees’ ability to align their investments with their charities’ values.
• The judgment has clarified that trustees ‘need to’ undertake a balancing exercise between maximising their returns and avoiding investments that could contradict their aims.
• We believe that this ruling should make trustees more confident in their ability to align their investments with their charitable missions. However, we do not believe that they necessarily have to sacrifice returns to achieve this.

Should charities be able to align their investment strategies to their charitable purpose even if that means excluding many potential investments?

In a new judgement the UK's High Court has ruled that the trustees for the two charities can align their investments with their mission even if this involves financial risk by excluding a large part of the market.

The case, brought by the Ashden Trust and the Mark Leonard Trust (two of the Sainsbury Family Charitable Trusts), sought clarity on whether the charities could align their investments with the goals of the Paris Climate Change Agreement. The ruling stated that this was possible, even if it had a dramatic impact upon their portfolio, as it was reasonable to suggest that investing in companies that are not aligned with the goal to limit global temperature rises would contradict their objectives in regard to the environment and the relief of poverty.

What is the existing guidance for trustees?

The existing guidance for trustees is set out by the Charity Commission in CC14.

This states that trustees of any charity can decide to align their portfolios with their mission (referred to as ethical investing), even if the investment might provide a lower rate of return than an alternative investment. However, a charity’s trustees must be able to justify why it is in the charity’s best interests to invest in this way. The law permits the following reasons:

• A particular investment conflicts with the aims of the charity; or
• The charity might lose supporters or beneficiaries if it does not invest ethically; or
• There is no significant financial detriment.

This guidance is based upon ‘the Bishop of Oxford case’ which is the only reported case dealing with ‘so-called’ ethical investments by charities. It was brought by the then Bishop of Oxford (and two other priests) against the Church Commissioners in relation to their investment policy concerning South Africa. The case was heard in 1991, at the time South Africa was transitioning to democracy and there were a range of views within the Church of England about the appropriateness of investing in South Africa.

What does the new ruling mean?

This landmark ruling reinterprets the Bishop of Oxford case. Most visibly this relates to climate change which was not considered in the original case. The ruling clarifies the extent to which climate change can be considered to be in conflict to a broad range of charitable objects and thus a large number of charities can take action to align their portfolio with, or use their investments to contribute to, the goal of limiting temperature rises. On the back of this ruling, we expect that more and more charities will seek to align their investments to support climate action even if environmental protection is not explicitly stated within their charitable objectives.

However, the ruling has further implications – beyond climate change - as to how charities can align their assets with their mission. It states that ‘the power to invest must … be exercised to further the [charities’] charitable purposes’ and that whilst this ‘is normally achieved’ by maximising financial returns trustees ‘should’ avoid direct conflicts between their investments and their purpose. It goes further to state that trustees ‘need to’ exercise ‘good judgement’ by balancing this requirement against the risk of financial detriment.

We therefore believe that the ruling will create a more permissive environment for charities to put their purpose at the forefront of their investment strategy and opens the door to charities adopting increasingly ambitious investment approaches where climate change and their values are concerned.

How can charities align their portfolios with their values?

There are several ways that charities can take steps to integrate their values into their investments. These include:

• negative screening: this means avoiding investment in companies or sectors or companies undertaking a particular activity or operating in a way which may be harmful to the charity’s interests.
• positive screening: this means investing all or part of an investment portfolio in companies or sectors which reflect a charity’s values in areas like environmental protection, health, employment or human rights, or in a wider range of companies that demonstrate good corporate social responsibility and governance; for example, positive screening might involve only investing in companies that have targets/proven records for reducing their carbon footprint

• stakeholder activism: this is where a charity, as a shareholder, exercises its voting rights in order to influence a company’s policies in a way that reflects its values and ethos; this could mean that a charity might invest in companies whose environmental policies it does not approve of in order to encourage more responsible business practices within those companies - it is also possible to engage in stakeholder activism as a programme related or mixed motive investment.

Each of these approaches are included in the management of CCLA’s pooled funds for charities.

Every CCLA pooled fund adopts some form of ethical restriction, designed specifically to meet the needs of the charities that invest in them. We also seek to dedicate capital to activities – such as the provision of renewable energy – that will provide a market rate return and a social and/or environmental good. Finally, we seek to be active owners of the assets that we manage; engaging and voting in a way that is designed to improve companies’ sustainability.

How should we consider climate change after this ruling?

Whilst the clarity bestowed by the new ruling will be helpful to charity trustees, we have long-seen climate change as a material financial issue for investors. If unmitigated, climate change will continue to lead to increased poverty in many low- income countries, erratic weather patterns and accelerated biodiversity loss. For instance, loss of biodiversity, natural resource crises are all listed by the World Economic Forum as key global risks, that are impacted by the physical effects of climate change, for companies and the functioning of the global economy. Because of this it is also a material threat to the functioning of investment markets and shareholder value. This is a critical issue for investors and for this reason we have long supported the effort to limit global temperatures to substantially below 2 degrees above pre-industrial levels. For this reason, we believe that investors have a fiduciary duty to push for accelerated climate action and begin to take steps to protect their portfolios from the financial risks it will cause.

As a founding member of the Net Zero Asset Managers’ initiative, CCLA has committed to seek to achieve net-zero emissions portfolios for all our assets under management no later than 2050. We therefore already help charities align their investments with positive climate action in line with the Paris Agreement. Specifically, we do this within our Act, Assess, Align framework in the following ways:

• Act: We act to increase the pace of climate action by leading impactful engagements with the companies in which we invest and push policymakers for progressive regulation and legislation.
• Assess: We assess companies’ position against the energy transition as part of our investment process and avoid those that do the most harm. CCLA has no direct investment in fossil fuel companies¹in carbon intensive sectors are assessed against sector specific decarbonisation requirements against decarbonisation scenarios. As part of our commitment to real-world change, any business that is not assessed as being aligned with a ‘below 2 degrees’ future is prioritised for engagement. The efficacy of this engagement is monitored by the Investment Committee who can mandate divestment if sufficient progress is not being made.

• Align: We align our portfolios with our clients’ specific climate requirements and disclose information about our approach to managing the risks and opportunities associated with climate change.

We are therefore well equipped to continue helping charities achieve their goals whilst aligning their investments with their values including those concerning climate change.

More information about our climate approach can be found here.

1 Defined as companies that generate more than 5% of their revenue from the extraction of energy coal or tar sands or companies that generate more than 10% of their revenue from the extraction and/or refining of oil and gas