Does Butler-Sloss And Ors v The Charity Commission And Attorney General Go Far Enough?

DOES BUTLER-SLOSS AND ORS V THE CHARITY COMMISSION AND ATTORNEY GENERAL¹ GO FAR ENOUGH?

Environmental, social, and governance (ESG) investing is increasingly on the agenda in the trust arena as beneficiaries and settlors are increasingly incorporating ESG data into decisions on investment objectives and strategy. Requests from beneficiaries and settlors to consider factors such as climate change or that certain industries be excluded from investment of a trust's assets because of their environmental impact, is becoming more popular. This has and is continuing to create challenges for family private trusts, in particular:

• ESG investing may conflict with the trustees' duty to preserve and safeguard trust assets and seek to obtain maximum financial return from their investments in the interests of all beneficiaries;
• The beneficial class and/or beneficiaries and trustees views may not be aligned to an ESG investment philosophy leaving trustees vulnerable to claims from disgruntled beneficiaries if they invested in ESG investments but might have produced better returns elsewhere; and
• Certain types of investments, such as non-income producing investments (including some ESG Investments), may be prohibited under the terms of the trust or violate the fiduciary obligation to balance the interests of capital and income beneficiaries.

In light of these issues, it is welcome news that cases about ESG investing by trustees are starting to filter through the Courts in many jurisdictions. Before the Butler Sloss Case handed down on 29 April 2022, it was almost 30 years since the courts last considered how charity trustees might legitimately take account of non-financial considerations when investing. However, we consider below how much protection the recent jurisprudence offers trustees of non-charitable trusts [and arguably charitable trustees] looking to adopt a responsible approach to investment.

Here is an overview of the judgment.

Background

• The case was brought by the trustees of two charitable trusts (the Trustees), the Ashden Trust and the Mark Leonard Trust. Both charities have general charitable purposes although their trustees have decided to focus primarily on environmental and associated charitable purposes.
• The Trustees wanted to adopt investment policies which would, as far as possible, exclude investments that did not align with the Paris Climate Agreement 2016 (the Proposed Investment Policy). The Proposed Investment Policy would exclude over half of publicly traded companies and commercially available investment funds, and it was accepted by the trustees accepted they were unable accurately to determine the extent of the financial detriment which may be suffered by the charities as a result of adopting the Proposed Investment Policy
• The Trustees sought declarations from the Court seeking a blessing as to whether the adoption of, and specific steps in their decision to support, the Proposed Investment Policy were a lawful exercise of their powers of investment and whether there was an absolute prohibition against making investments that directly conflict with their charities' purposes²
• .

Prior to the judgment, the last major case on moral investing for charities was Harries v Church Commissioners for England [1992] 1 WLR 1241 (the "Bishop of Oxford" case). In this case it was held³ that maximizing financial return was the starting point and trustees "must not use property held by them for investment purposes as a means for making moral statements at the expense of the charity of which they are trustees".

The Judgment

• The Court found that the Vice Chancellor's statements in the Bishop of Oxford case were not intended to be an automatic prohibition on considering moral factors in respect of investments, but a logical consequence of reasonably balancing all relevant factors in those particular cases. The Court further confirmed that a direct conflict with a charity's purposes is a major factor where the trustees are exercising their discretion as set out paragraph 78(6) of the judgment⁴ and set out the ten points that he considered to be "the law in relation to charity trustees taking into account non-financial considerations when exercising their powers of investment". ⁵
• The Court also noted (and importantly in the context of this article) that the Trustees had wide investment powers and that the Proposed Investment Policy was not prohibited by the terms of their trusts, and therefore the declarations the Trustees sought in this regard (set out above) were both "unnecessary and inappropriate". This meant that the case solely concerned the exercise of their discretion in relation to their investment powers (not whether the Court itself considered that the specific terms of the Proposed Investment Policy were appropriate).

Applying that approach, the judge approved the Proposed Investment Policy, determining that they had sufficiently considered all relevant considerations (including the potential financial detriment of their new policy) and not taken account of irrelevant facts.

What the Judgment did not determine?

• It was not a decision by the Court that the Trustees should adopt a particular course of action, merely that it was not an improper exercise of the Trustees discretion to adopt the Proposed Investment Policy.
• The Court did not make any specific comment regarding the need for charities (and indeed non charitable trusts) to consider ESG in general but merely set out the factors that all charity trustees must consider when contemplating ESG strategies (which are, fundamentally, those applicable to any trustee decision).
• There is therefore in our view a further case and/or blessing required before trustees of non-charitable trusts can rely on the Butler Sloss Case, in a general private client context (and arguably a charitable context), , as to the extent to which trustees may take ESG into consideration in respect of investments where the investments are known to have reduced financial returns. At the moment however, trustees are mostly still torn between finding a balance between investment performance and 'moral' obligations.
• Thus, the wait continues to see how receptive the judiciary will be to the idea that fiduciary market participants may properly take a wider view of their investment priorities in line with the societal change towards such ESG investments.

What can be done to overcome these problems until we have a new case that assists?

• In the case of new trusts, or where it is possible to vary the terms of an existing trust, such concerns might be addressed by:
  1. The trust deed might expressly exonerate or indemnify trustees for considering ESG or similar objectives in their investment decisions;
  2. The trustee's duties might be restricted or excluded by the terms of the relevant trust deed. For example, the trust deed could include an express power to make ESG investments and define what will qualify as an ESG investment. Or, the trust deed could permit or require the trustee to avoid certain sectors or asset classes, such as arms or tobacco.
• In the case of existing trusts it is more challenging, particularly where there is no power to vary their terms or amendment is otherwise problematic. However, even where ESG investment is not expressly permitted, trustees may still be able to make "impact" investments with good long-term investment prospects.
• Where new trusts are being established, families and trustees might consider the flexibility afforded in offshore jurisdictions e.g. in the Cayman Islands a "STAR trust", which might be set up specifically to make ESG investments. In Guernsey and Jersey, one may also have non-charitable purpose trusts.
• We are also expecting a review of the law of trusts in England & Wales with a view to modernizing the law, including consideration of whether we should adopt certain trust and trust-like entities that exist under the laws of other jurisdictions, which may include non-charitable purpose trusts.

Footnotes

1 Butler-Sloss & Ors v Charity Commission [2022] EWHC 974 (Ch),

2 This was as a result of the perceived absolute prohibition against making investments that directly conflict with their charities purposes as set out in the Bishop of Oxford Case as set out below.

3 Subject to three expectations: where an investment directly conflicts with a charity's purposes (such as cancer research charities investing in tobacco shares); where an investment indirectly conflicts with a charity's purposes (where particular investments might alienate supporters or donors or make beneficiaries less willing to accept help because of the source of the charity's money) and where this is the case, the trustees must "balance the difficulties they would encounter or likely; or where to do so would not involve a "risk of significant financial detriment".

4 Para 78 (6) 'where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all 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.

5 Butler-Sloss & Ors v Charity Commission [2022] EWHC 974 (Ch), paragraph 78.

Originally Published by ThoughtLeaders4 Private Client Magazine 'Next Gen Wealth' Edition

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.