Charities seek legal ruling on responsible investment policies
A coalition of UK charities has sent an open letter to the Charity Commission and the country’s top lawyer seeking a landmark ruling on whether charities should ensure their investments support their goals and their duty to provide public benefit.
They have also asked for specific legal guidance on whether charities should adopt investment strategies aligned with the Paris Agreement’s aim of limiting global warming to 1.5°C above pre-industrial levels.
The letter is signed by UK charities including the Royal Society for the Protection of Birds and the Joseph Rowntree Charitable Trust, as well as the National Council for Voluntary Organisations (NCVO) – the umbrella body for civil society organisations – and environmental law firm ClientEarth.
Any clarification of the law would apply to the £63bn (€73bn) worth of investments held in total by UK philanthropic organisations and would likely be of significant interest to other investors. The coalition is growing rapidly and now has a membership of foundations responsible for £2bn of assets.
The open letter said the current law was “outdated and insufficient” and warned that there was “a risk that charity trustees misinterpret their duties”, calling on the Charity Commission and UK attorney general Geoffrey Cox to refer the matter to the Charity Tribunal for an “urgent and definitive” ruling.
The Charity Commission gives guidance to charities but is unable to pronounce authoritatively on the nature of the law governing duties of trustees – this is the purpose of the Charity Tribunal.
Existing Charity Commission guidance on investing is largely based on the Harries v Church Commissioners for England lawsuit of 1991, when the judge held that charity trustees could make investments guided by ethical considerations rather than simple financial risk and return, if it could be shown that overall financial performance would not be harmed, or if it would be consistent with the charity’s objects.
However, there is currently no legal requirement for charities to have a socially responsible investment policy.
Luke Fletcher, a partner at law firm Bates Wells Braithwaite who drafted the coalition’s letter, said: “The case law is based on a judgement made 30 years ago, before society became really aware of climate change, which touches on every aspect of life.
“We now know that if you invest in oil or gas companies [that] are not aligned with the Paris Agreement, you might be undermining your efforts to benefit society.”
Another development in recent years has been public criticism of charitable institutions holding shares in companies whose activities undermine their aims, for example, by offering payday loans or marketing high sugar foods to children. The Church of England was criticised in 2013 after it was revealed its endowment fund had indirectly invested in Wonga, a payday loans company.
The coalition’s letter warned: “Until charity trustees are encouraged to review consistency between their charity’s objectives and choice of investments, there is a real risk that stories of this kind will continue to damage public trust and confidence in charities and draw accusations of hypocrisy and inconsistency.”
Alice Garton, head of climate at ClientEarth, added: “Charity trustees have legal duties to seek financial returns from investing a charity’s assets but they also have duties not to make any investments that might conflict with its charitable purpose. A lack of clarity around how these concurrent legal duties should be balanced is fuelling uncertainty for trustees and increasing the risk of their decisions being called into question later.”
Bates Wells Braithwaite’s Fletcher said the coalition would “explore every avenue available to obtain legal clarity for trustees”, adding that the group could seek a legal ruling from the courts itself if the Charity Commission failed to act.
He added that the Charity Commission may in future require all charities to have a responsible investment policy, as this was what the public seemed expect.
Charity Commission responds
Rebecca Fry, head of legal policy at the Charity Commission, said in a statement:
“The commission’s purpose is to ensure charities can thrive and inspire trust so that they can improve lives and strengthen society. It is our role to ensure charities meet the high expectations demanded by the public of being true to their own purposes and demonstrating the difference they’re making.
“We welcome the letter from [Bates Wells Braithwaite] and fellow signatories on the important issue of ethical investment. We agree that public attitudes to the broad issue of ethical investment by charities have moved on and we are sympathetic to calls for greater clarity for trustees.
“However, a reference to the [Charity] Tribunal could be costly, time-consuming and its outcome, by definition, uncertain. There are other options to consider that might achieve a better outcome and greater clarity and confidence in the scope trustees have for investing their charity’s money in line with their purposes, ethos and values.”
This article was updated on 20 March to amend the name of the Joseph Rowntree Charitable Trust in the third paragraph.