Investing for the Public Benefit: A New Proposal in the Charitable Sector May Not End There

The letter therefore requested that the Attorney-General make a reference (or consent to the Charity Commission (which regulates charities in England and Wales) making a reference) to the charity chamber of the Tribunal, an arm of the judiciary that hears references on points of law from the Attorney-General or Charity Commission.

The letter made essentially three arguments.

The first argument concerned the potential conflict between investments and charitable objects. Charities in England and Wales must only undertake activities in pursuit of their charitable objects, which are statutory categories, such as the relief of poverty, the advancement of education or religion, the arts, etc. Meanwhile, the trustees of charities also have a duty to invest charitable funds to maximise the resources available for those charitable activities.

The letter postulated that trustees’ duty to invest could conflict with their charity’s objects – for example when an environmental charity finds itself investing in the fossil fuel industry because it promises substantial returns – and that there is inadequate guidance for trustees as to how to proceed in such circumstances. Indeed, the letter implied, trustees might find themselves in breach if they do invest (because the investment might conflict with the charity’s objects) and in breach if they don’t invest (leading to foreseeable financial underperformance).

The second, wider argument related to the public benefit requirement. Charities must act in the public benefit when pursuing their charitable objects, meaning that the public in general (or a sufficiently large segment of the public) must benefit from the charitable activities that the charity undertakes. The letter claimed that it is unclear how the public benefit requirement applies to investment by charities (if at all) and whether this requirement imposes obligations on trustees which might somehow set them apart from other investors in the market. The coalition was particularly concerned with climate change: could any charity, regardless of its objects, be said to be acting for the benefit of the public if it invests in fossil fuels – even if that investment might be financially prudent?

The third argument was the most extensive. Alluding to the recent fall in public confidence in the charitable sector following numerous scandals at several prominent charities, the letter warned that investment by charities in fossil fuels could further damage public trust at a time when concern about climate change is on the rise.

A devil’s advocate might argue that from a legal perspective, the matters raised in the letter are interesting but potentially overstated. From a commercial point of view, they may be of greater concern.

The first argument – concerning the conflict between investments and objects – was addressed in a 1991 case, which the letter discusses. At the time, the Bishop of Oxford urged the court to declare that the Church Commissioners of England were obliged to have regard to the object of promoting Christianity in their investment practices. The court declined to do so, but did provide some guidance – and the legal basis – for “ethical investment”, whereby trustees are permitted to refrain from certain investments, even if it might lead to financial underperformance, if they consider that the relevant investments conflict with their charity’s objects. For example, cancer research charities might be excused from investing in tobacco companies, temperance charities from breweries, and pacifist charities from the arms industry.

The letter claims that because the case is old and charity law and environmental concerns have developed significantly since then, updated guidance is needed. After all, the letter notes that ecology was not referenced in the case and the impact of climate change was not then understood. However, our devil’s advocate might point out that the legal precedent established by that case – and enshrined in the much more recent Guidance (CC14)[i] from the Charity Commission – would nevertheless still apply to, say, an environmental charity whose trustees consider that fossil fuels contribute to climate change in conflict with the charity’s objects, and in such a scenario the trustees are permitted to refrain from making such investments, even if it is to the charity’s financial detriment. Indeed, the Guidance, which the coalition believes is deficient, expressly provides as an example of ethical investment “an environmental charity with aims to protect wildlife and the environment” which decides “to avoid investing in companies that have a poor environmental record”[ii].

In fact, the Guidance goes further. Not only does it allow negative screening, whereby trustees can avoid investing in industries that may be harmful to the charity’s interests, but it also permits positive screening, which is when trustees actively choose to invest in companies or sectors that reflect a charity’s values. Again, the Guidance cites “environmental protection” as an example, elaborating that “for example, positive screening might involve only investing in companies that have targets/proven records for reducing their carbon footprint”.[iii] Thus, trustees’ powers to adapt their investments to their charitable objects are already wide and established.

The letter goes on to suggest that the Guidance, which permits ethical investment, may be “misleading and even potentially unlawful”[iv], because the law may, in fact, require trustees to invest in line with their charitable objects. This point may be of legal interest, but it is difficult to see how it is likely to manifest in practice under the current regime (as it would require the Charity Commission to raise cases against trustees contrary to its own Guidance). Above all, the prevailing rules give trustees the flexibility to make their own investment decisions, and one could be forgiven for speculating that it is less about the coalition charities wanting to clarify their own legal duties and more about constricting the investment opportunities available to the trustees of all charities.

This brings us to the second argument – regarding public benefit and climate change – which is more intriguing but is vulnerable to a similar charge. While the claim that investment in industries thought to exacerbate the effects of climate change is contrary to the public benefit may have merit, this approach has no obvious limits. Why stop at climate change when other investments may also compound presumed societal ills, such as payday loans or childhood obesity? In fact, the letter proceeds to illustrate other potential conflicts with reference to investments in “high cost credit or high sugar foods” and notes that this is “to name only two examples.” The implication is, rightly, that examples abound. Indeed the premise of many charities is that there is a problem in society that needs addressing and naturally the trustees, employees or volunteers at such charities may be inclined to think that rules should be put in place to reduce the incidence or intensity of the problem to which they are devoting their time.

The inevitable question is: who decides? How are we to identify those problems that are so grave that no charity should be permitted to invest in companies that might exacerbate them – and, indeed, who should be empowered to determine which trends are problems in the first place and which are not? If the coalition’s approach is adopted, the answer will be the government (since the role of the Tribunal is essentially to clarify and apply the law as stipulated in legislation), albeit that the letter itself makes it very clear what position the coalition believes the government should take.

The public may have concerns about the government assuming the authority to bar investments in major industries. And, if rules specifying in which industries’ (or even companies’) charity trustees are permitted to invest or prohibited from investing are introduced, it is not difficult to imagine that pressure to extend those rules might be brought to bear on other investors, particularly within the public sector. The private sector may eventually be caught as well.

We turn now to the third argument, regarding the waning of public trust in the charitable sector. The Guidance already in place permits trustees of charities, in making ethical investments, to consider the impact of their investment choices on the reputation of their charity and its level of support. Although the reputation of individual charities is not the same as public confidence in the charitable sector as a whole, it is also not entirely different; as one is conditioned by – if not an aggregate of – the other. Public trust ultimately rests on trustees investing responsibly, overseeing their charities’ operations and staff adequately and advancing their charitable objects for the benefit of the public.

The legal concerns of the coalition may therefore be overstated. Trustees of charities already have the means to tailor their investments to their objects, whether through ethical investments or social investments. Indeed, all recent legislation and guidance appear to be aimed at increasing, rather than restricting, the flexibility available to trustees to make investments for reasons other than maximising financial returns, as long as those investments can be justified. But to deny trustees the power to invest for financial gain alone could mean depriving charities of resources that might otherwise be available to them to carry out their activities.

Moreover, limiting trustees’ scope for investment would not only constrict trustees but would impose a burden on the financial institutions on which many charities rely to make investments on their behalf. Some of these institutions may decline to accept charities as clients altogether (especially smaller charities) for fear of breaching the enhanced rules or simply to avoid the extra administrative responsibility. But that might only be the start. If these proposals proceed, in the longer term their impact may be felt far beyond the charitable sector.

[i] "Charities And Investment Matters: A Guide For Trustees", GOV.UK, 2019 <https://www.gov.uk/government/publications/charities-and-investment-matters-a-guide-for-trustees-cc14/charities-and-investment-matters-a-guide-for-trustees>

[ii] Ibid.

[iii] Ibid.

[iv] "Charity Investments - Alignment With Objects - Request For A Tribunal Reference", Bateswells.co.uk

Ceris Gardner
Ceris Gardner is a Partner, and Head of Charities and Immigration, at Maurice Turnor Gardner LLP, London. Ceris' areas of expertise include tax, estate planning, family governance, charity law and philanthropy and immigration.

Jonathan Neumann
Jonathan Neumann is a trainee at Maurice Turnor Gardner LLP.