The England and Wales High Court has ruled that trustees of two charitable trusts are permitted to implement a Paris-aligned investment strategy even though this might cause financial harm in the short-term.

The charities in question in the case, Butler-Sloss v Charity Commission, are the Ashden Trust and the Mark Leonard Trust, whose charitable purposes include advancing environmental protection and improvement and the relief of poverty.

They are both part of the Sainsburys Family Charitable Trusts network and have around £42m (€49m) and £22m, respectively, in assets.

The judgement blessed the trustees’ decision to adopt an investment policy that excludes many potential investments not deemed aligned with the achievement of the goals of the Paris Agreement.

According to Michael Aherne, pensions partner at Herbert Smith Freehills, the Charity Commission and the Attorney General challenged the adoption of the proposed investment strategy, arguing that the trustees had not adequately balanced the potential financial detriment to the trusts with the conflict to the charitable purposes.

However, Aherne said the judge dismissed this and approved the proposed investment strategy on the basis that the trustees had followed a proper decision-making process in which they had correctly balanced the trusts’ charitable objectives against the potential financial detriment of implementing the investment strategy.

“The judge was satisfied that the proposed investment strategy was justified, as the proposed benchmark (of CPI plus 4%) was in line with the published strategies of other large charities.” Aherne said.

“On this basis he was prepared to endorse the proposed strategy even though it was accepted by the trustees that there might be some short-term financial detriment and even though the strategy excludes over half of publicly traded companies and many commercially available investment funds.”

‘Sufficiently balanced’

Dimissing as “unfounded” criticism from the Charity Commission’s QC that there was no evidence of the charity trustees considering alternative strategies such as engaging with companies to bring about change rather than divesting completely, Justice Michael Green said:

“The claimants have decided, reasonably in my view, that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions and for there to be any chance of ensuring that there is no more than a 1.5°C rise in pre-industrial temperature.

“The only question is whether they have sufficiently balanced that objective with any financial detriment that may be suffered as a result. In my view they have and the performance of the portfolio will be tested regularly against recognised benchmarks and will seek to provide the financial return specified in the proposed investment policy.”

Pensions crossover?

According to Herbert Smith Freeshills’ Aherne, although the case was about charitable trusts it should still be of interest to pension funds.

“The fact the judge held that the admitted short-term financial detriment of adopting a Paris-aligned investment strategy was not a barrier to its adoption by the trustees is significant,” he said.

“In a pensions context, trustees of defined benefit schemes looking to implement ambitious net-zero or TCFD-related targets may seek to argue that similar short-term financial impacts do not prevent them from adopting investment strategies aligned to such targets provided they are satisfied that the anticipated long-term financial returns are acceptable in the context of the scheme’s funding and covenant position.”

He added: “This decision adds to the growing case law in this area and it wouldn’t be surprising to see a similar case arise in a pensions context in the coming years as trustees, sponsors and members become more focused on the carbon transition and Paris alignment.”

Stuart O’Brien, partner at Sackers, said the crossover to pensions may be more limited from a legal perspective, because, as noted by the judge, there is a key difference between pensions trusts and charitable trusts, with the former being trusts for the provision of financial benefits to individuals but charities not having any beneficiaries as such and trustee duties therefore being owed instead to the charitable purposes or objects of the charity.

“Whilst this may sound like a bit of a lawyer’s point, it makes a difference because it goes to the heart of what the trustees’ investment decisions are judged against,” he said in comments shared with IPE. 

Michael Fenn, climate change litigation expert at Pinsent Masons, said English courts were increasingly being asked to consider the relationship between climate change and investment decisions.

“We anticipate that the bulk of climate change litigation will involve claims by shareholders or pension trust members against company directors or trustees who are said not to have taken climate change considerations sufficiently into account in their investment strategy or other decision-making,” he said.

“While that is a very different type of claim from the one under consideration in this case, there are some points in the judgment which will be of interest to businesses facing claims that they have not taken climate change adequately into account.”

The case was brought by the charities’ trustees in part because of uncertainty over the reach of the leading case in this area, commonly referred to as the Bishop of Oxford case.

According to Pinsent Masons lawyers, this ruling, from 1992, is often cited as the authority that trustees must always act in the best financial interests of their beneficiaries irrespective of other considerations.

In his conclusion, Justice Green said he had given permission for the proceedings to be brought because he thought it “important there should be clarity as to the law on investment powers of charity trustees”.

“I hope that such clarity has been provided.”

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