Charities: the investment dilemma

The powers and duties of charity trustees when investing is a complex area of the law and, as a result, questions and sometimes even disputes arise from time to time.

In the recent case of Butler-Sloss v Charity Commission [2022] EWHC 974 (Ch), the High Court provided valuable clarification regarding trustees’ powers to make (or refuse to make) investments where doing so would conflict with the charity’s purposes. While this case arose under English law, it remains to provide helpful guidance and is therefore worthy of review.

Prior to this case, the courts in England & Wales had established that receiving maximum financial return was paramount where investments are made by charity trustees. Case law provided that there were extremely limited circumstances in which trustees had the power to make investments which are financially disadvantageous in order to achieve an ethical purpose.

Powers, duties and discretion

In Butler-Sloss, the High Court considered whether there is an unequivocal ban on investments by charity trustees where the investment conflicts with the charity’s purposes, even if the refusal to invest would result in financial detriment.

Mr Justice Michael Green set out, under English law, the position in relation to charity trustees’ investments:

• Charity trustees’ powers of investment derive from (i) the trust deeds or governing instruments and (ii) the Trustee Act 2000.
• The primary duty of charity trustees is to further the purposes of the trust and investment powers must be exercised with the aim of doing so. That is normally achieved by maximising the financial returns on investments made.
• Social investments or impact or programme-related investments are made using separate powers, not solely the power of investment.
• Trustees cannot make investments that are prohibited under the trust deed or governing instrument. However, where trustees are of the reasonable view that investments potentially conflict with the charitable purposes, the trustees have discretion as to whether to exclude such investments. Trustees should exercise that discretion by reasonably balancing all relevant factors.
• When contemplating the financial effect of investing (or not investing), the trustees may consider the risk of losing support from donors and reputational damage of the charity generally and among its beneficiaries. This point will undoubtedly not have been lost on those currently involved in Prince William’s Royal Foundation and two of its chosen investment companies.
• Trustees must be careful when making decisions on investments solely on moral/ethical grounds and must acknowledge that, among the charity’s supporters and beneficiaries, there may be differing opinions on certain issues.
• Trustees must act honestly, reasonably and responsibly in devising a suitable investment policy for the charity that is in the best interests of the charity and its purposes. Trustees must exercise good judgment when making difficult decisions through balancing all relevant factors.
• Where a reasonable and proportionate investment policy is implemented as a result of a balancing exercise that is conducted properly, the trustees have complied with their legal duties and cannot be criticised, even if the court or other trustees might have come to a different decision.

What does this mean for Scottish charity trustees?

This judgment will be of particular interest to cross-border charities operating in Scotland but registered in England. Although this is an English case, the judgment is likely to be influential on Scottish courts.

Charity trustees in Scotland should refer to the OSCR’s “Charity Investments: Guidance and Good Practice” document. The guidance states that charity trustees must act in the interest of the charity and operate in a manner consistent with the charity’s purpose. The guidance also states it is “not the case that charity trustees in Scotland have ‘a duty to maximise financial returns’. An investment doesn’t have to make money at any cost. It can provide both financial and non-financial returns but charity trustees have to consider all relevant factors and act in the interests of the charity at all times”.

OSCR’s guidance is very helpful for both the seasoned trustees and those looking at an investment policy for the first time. OSCR’s key points to consider when making decisions about your charity’s investments are:

• Understand your charity’s finances, including investments.
• Check your investment powers.
• Know your charity trustee duties.
• Consider your charity’s reputation.
• Get help and advice if you need it.
• Create an investment policy statement.
• Think about your charity’s purposes.
• Think about the range of investments.
• Understand your responsibilities.
• Keep up to speed.

In conclusion

All charity trustees must be aware of their powers and duties when making investment decisions and creating an investment policy. Butler-Sloss v Charity Commission would, if nothing else, seem to align with the guidance of the Scottish charity regulator and further emphasise to charity trustees that if all relevant factors (particularly the financial and reputational repercussions for the charity) are considered, and actions are taken to be in the best interest of the charity, trustees will have fulfilled their legal duties.

Trustees should ensure that they regularly review their policies, including investment policy.