Updated guidance on charitable investments

Significance of the case

Prior to this judgment, the Charity Commission Guidance advised charity trustees that they should seek to make investments on the basis of obtaining the maximum return for their charity, unless they could justify an investment for lower financial return on the basis that it directly furthered the charity’s objects (a “programme-related investment”).

In Butler-Sloss, Justice Green found that although charity trustees’ power to invest must be exercised to further a charity’s purposes, and that this would, ordinarily, mean maximising the financial returns on any investment, trustees have a discretion as to whether to exclude investments that they reasonably believe are in conflict with their charity’s purposes. Trustees are permitted to exclude such investments, even where such exclusion may be of a financial detriment to the charity.

This was a significant judgment for the sector, as it made it clear that trustees do have the discretion to exclude certain investments, even where the potential return from those investments would be greater, if the trustees reasonably believe that the investments would be in conflict with the charity’s objects.

Updates to the Charity Commission Guidance

In its recent update about this case, published on 15 November 2022, the Commission said that although the judgment offers “welcome clarification” of how existing legal principles should be interpreted by trustees in a modern context, it “does not fundamentally alter those principles”.

It has therefore confirmed that charity trustees can continue to rely on the position in its current CC14 Guidance, which was last updated in 1 August 2016.

In particular, the Commission has stated that while the judgment confirms that trustees have wide discretion to exclude certain investments based on non-financial considerations, the judgment also confirms that there is no obligation on trustees to do so. As such, trustees can still, where appropriate, make financial investments designed only to secure the best financial return.

However, the Commission is undertaking a wider redesign of CC14, based on the results of a consultation it held in 2020-2021, to reflect the fact that that practice around investment has evolved, especially in the context of climate change and wider ESG considerations. The Commission acknowledges that trustees may wish to take these considerations into account when making judgments about their investment approach.

The Commission plans to share a draft of the new guidance, to test its useability with charities and sector experts, and incorporate any feedback before it is finalised. It then expects its final guidance to be published by summer 2023.

Next steps

While we await updated guidance from the Commission on this area, the key points to remember when formulating your charity’s investment policy will be those set out in the framework provided by Justice Green in Butler-Sloss. These are as follows:

• 1. Charity trustees’ powers of investment derive from the charity’s constitution, and their primary and overarching duty is to further the purposes of the charity. As such, the power to invest must always be exercised to further the charity’s purposes.
• 2. This is normally achieved by maximising the financial returns on the charitable investments that are made. However, where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have discretion as to whether to exclude such investments.
• 3. Trustees should exercise this discretion by reasonably balancing all the 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. In considering the financial effect of certain investments, the trustees can take into account the risk of losing support from donors and damage to the reputation of the charity.
• 4. Essentially, trustees are required to act honestly, reasonably and responsibly in formulating an appropriate investment policy for the charity that is in the best interests of the charity and its purposes. Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.
• 5. Provided they undertake the balancing exercise above properly, and a reasonable and proportionate investment policy is thereby adopted, the trustees will have complied with their legal duties in that respect, and cannot be criticised, even if the court or other trustees might have come to a different conclusion.

You can read the full High Court judgment of Butler-Sloss & Ors v The Charity Commission for England and Wales & Anor 2022 here, and the current CC14 Guidance on charitable investments here.

If you have any queries about the topics discussed above, or there are any other issues we can help you with, please do get in touch with Laura Sherratt or Ben Brice.