Charity investments: is it time to divest from fossil fuels?

17 October 2016

The Paris Agreement on Climate Change will come into force on 4 November. Should charities now review their investments and switch from carbon-intensive industries?

Paris Agreement

The Paris Agreement on Climate Change will come into effect on 4 November 2016. To date more than 90 members of the United Nations Framework Convention on Climate Change have signed the Agreement and over 75 have ratified it. As an international treaty, it will not have legal effect within the UK’s domestic law. However, it is indicative of wider attitudinal changes towards the environment and provides a timely opportunity for trustees to review their charity’s investment policy accordingly.

Investment decisions – financial versus ethical considerations

It is now more than 20 years since the leading case on ethical financial investments, Harries v The Church Commissioners for England (also known as “the Bishop of Oxford case”).

In 1992 the Bishop of Oxford challenged the Church Commissioners for England over their investment policy in relation to apartheid-era South Africa. In particular, he sought a declaration that the Church Commissioners, in exercising their investment powers, were obliged to have regard to the object of promoting the Christian faith and were therefore required to apply ethical consideration to their choice of investment.

The Vice-Chancellor judged that the purposes of a charity are generally “best served by its trustees seeking to obtain the maximum return [from the charity’s investments], whether by way of income or capital growth, which is consistent with commercial prudence.” He further made clear that 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.”

However, the Vice-Chancellor also acknowledged that “in a minority of cases the position will not be so straightforward”:

1. Conflict with mission – “When the objects of the charity are such that investments of a particular type would conflict with the aims of the charity”, it would be right for the trusts to reject any such investment, regardless of the financial consequences.  Examples mentioned included cancer research charities buying shares in tobacco companies and Quaker charities investing in in distilleries or weapons manufacturers;
2. Alienation of supporters – Where a charity’s investments “might hamper [its] work by making potential recipients of aid unwilling to be helped because of the source of the charity’s money, or by alienating some of those who support the charity financially”, the trustees would have to balance any potential financial detriment caused by excluding the relevant investment against the potential reputational damage among supporters and/or beneficiaries.  The Vice-Chancellor made clear that, if there was greater risk of financial detriment, the trustees needed to be more certain of the benefits to the charity of their chosen course of action.
3. No financial difference – Even where there is no objectively right or wrong moral conclusion about a particular investment, if the decision to make a particular investment would have no risk of material financial detriment to the charity, the trustees are free to “accommodate the views of those who consider that on moral grounds a particular investment would be in conflict with the objects of the charity.”

The Bishop of Oxford case remains good law and trustees should continue to adhere to the factors set out above when considering ethical issues in their investment decisions.

Other factors for trustees to consider

Since 1992 two important pieces of legislation have not so much changed the law as positively required charity trustees to consider the wider context of any financial investment decision, which necessarily includes ethical and reputational factors.

The Trustee Act 2000 applies to trustees, including charity trustees of a trust or unincorporated association. Section 4 requires trustees, when exercising any power of investment, to have regard to (amongst other things) the suitability to the charity of any particular investment proposed to be made.

These statutory provisions do not directly apply to directors of a charitable company (unless there are replicated or referenced in the company’s articles of association) although they arguably apply by inference to directors as fiduciaries. But what does “suitability” mean in any event? Perhaps company law can assist us by analogy?

All company directors, including directors of a charitable company, have an express duty under section 172 of the Companies Act 2006 to promote the success of the company, having regard to (amongst other things): the likely consequences of any decision in the long term; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; and the desirability of the company maintaining a reputation for high standards of business conduct.

Neither section 4 of the Trustee Act 2000 nor section 172 of the Companies Act 2006 specifically changes the law in relation to ethical investments. However, those provisions do mean that ethical factors form a part in enabling trustees or company directors to discharge their respective duties.

Furthermore, charity law does not stand still. It evolves over time as society changes.

Conflict with mission – scientific knowledge

What has certainly changed since 1992 is the scientific understanding around climate change and the environmental, health and social impact of carbon-intensive industries including coal, gas and oil.

For this reason, it is now questionable whether a charity established for environmental or health purposes could legitimately invest in carbon-intensive industries. To do so would likely conflict with the charity’s own purposes and thereby cause the trustees to be in breach of duty. It might also be highly embarrassing for the charity (see below).

Alienation of supporters – changing public attitudes

What may also have shifted in recent years is the public and political consensus about the importance of environmental protection and standards of ethical conduct.

Although the Bishop of Oxford case envisaged that it would be relatively rare that trustees would have to avoid making certain investments (see above), there may now be a greater public expectation that charities should opt to be more discerning in their investment decisions, which does indirectly force charities to consider divestment for fear of reputational damage and, in cases of particular public concern, regulatory intervention by the Charity Commission.

Wider implications for the charity sector

The Charity Commission has recently updated its guidance document Charities and investment matters: a guide for trustees.

Charities with an environmental or health purpose should review their investment policies and speak with their investment managers to check that they are not investing in carbon-intensive industries contrary to their own purposes.

Charities reliant on public support – either from public donations or government funding – are also advised to do the same to ensure that they meet public expectations about being green and acting ethically.

Chris Hook is an associate solicitor based in Newcastle upon Tyne. He provides specialist legal advice to charities, social enterprises and educational institutions on a wide range of charity, commercial and public law matters. You may also be interested in his other articles below.

Disclaimer: This article contains information which is necessarily general. It does not constitute legal advice. It is essential that, before proceeding with a particular course of action, you take specialist legal advice on any relevant considerations which may apply in your specific circumstances so that you can properly assess your options and any associated risks and benefits.

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