In the wake of the recent catastrophic weather events here in New Zealand and the latest release of the alarming Intergovernmental Panel on Climate Change report, we consider a recent United Kingdom judgment regarding ethical investment policies.
In Butler-Sloss v The Charity Commission for England and Wales, the England and Wales High Court had to consider whether two charities, whose principal purposes are environmental protection and improvement and the relief of poverty, could adopt investment policies which excluded investments that were inconsistent with the Paris Climate Agreement, notwithstanding the fact that this strategy might be detrimental to the anticipated rate of investment return.
The two charities seeking the Court’s blessing for the adoption of their investment policies were part of the Sainsbury Family Charitable Trusts network with funds of approximately £42million and £22million respectively by way of assets. The proposed investment policies effectively excluded over half of publicly traded companies and many commercially available investment funds, because of the requirement that the investments be in the top two quartiles of environmental, social and governance (ESG) ratings. The trustees acknowledged that implementing the policies would, at least in the short term, likely mean a drop in financial return for the charities.
The only reported (and therefore leading) case dealing with ethical investments by charities in the United Kingdom was the 1992 Bishop of Oxford case which held that maximising financial return is the starting point for all charity trustees when considering the exercise of investment powers. The Vice-Chancellor in that case noted 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.”
In Butler-Sloss, the aptly named Justice Green, provided a new framework for charity trustees considering non-financial considerations when exercising their powers of investment. He outlined ten considerations, which included:
Essentially, trustees are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy for the charity that is in the best interests of the charity and its purposes. Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.
If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.
Justice Green found that the trustees had sufficiently balanced their objective to implement policies which excluded investments that were inconsistent with the Paris Climate Agreement against the risk of financial detriment. Accordingly, the Court made a declaration that the trustees were permitted to adopt the proposed investment policy and in doing so, will discharge their duties in respect of the proper exercise of their powers of investment.
How can trustees in New Zealand adopt and implement ethical investment policies?
The powers and duties of a trustee, charitable or otherwise, in relation to investments derive from the terms of the trust deed, the Trusts Act 2019 (Act) and common law.
Bespoke trust drafting
Sections 23 and 24 of the Act require a trustee to comply with the requirements of a trust deed.
If a desire for socially responsible purposes is identified at the outset, a settlor may wish to address the trust’s anticipated purpose in the trust deed itself. Where restrictions or a framework are to be placed on a trustee’s power of investment, it will be important to exclude or modify the duty to invest prudently and the investment factors in section 59 of the Act.
For trusts already established, trustees may wish to review their existing investment duties and amend these accordingly, if permitted under the terms of the trust.
Investment policy statement
An investment policy statement sets out the general investment goals and objectives of the trust and describes the strategies that the trustee will use to meet them. This is where trustees can place investment restrictions on companies involved in certain business activities such as tobacco, weapons and fossil fuel extractions and place limits on fund selection.
In Butler-Sloss, the investment restrictions and limits on fund selection were as follows:
- Energy intensive companies (cement, steel, paper) and mining unless they have adopted a business strategy and plan that accords with the Paris Climate Agreement to cut emissions limit to climate change and transforming to low-carbon energy.
- Clean tech companies that specialise in extending the lifespan of fossil-fuel industries.
- Commodity producers that contribute to deforestation and destruction of the rainforest (unsustainable beef, soya and palm oil producers).
- Companies which do not rank in the 1st and 2nd quartiles of ESG ratings, unless the investment managers can convince the trustees that there is a strong case for investment from a sustainability point of view.
- No investments in funds or passive tracker investments with exposure to fossil fuel extraction.
Seek expert investment advice
Where a trustee does not have the expertise to make complex investment decisions, they should take investment advice. Therefore, if a trust’s investment policy statement is extensive advice should be sought from competent and qualified third parties. A trustee is not bound to follow such advice, but it can guide the trustee in their decision making and help to reduce the risk associated with investment.
As noted in Butler-Sloss, “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”.
If you have any questions, or if you are a trustee that would like to implement an ethical investment policy in your own trust, please get in touch with our Private Wealth Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
  EWHC 974 (Ch)
 Harries v Church Commissioners  2 ALL ER 300