This update covers the legal position in England and Wales.


In the recent judgment in Butler-Sloss v The Charity Commission for England and Wales the High Court has confirmed that the trustees of two charities whose principal purposes were environmental protection and the relief of poverty could lawfully adopt an investment policy which excluded investment in a significant portion of the market on climate-related grounds.  

The charities were trusts and their governing documentation contained a broad power of investment.  The charities sought the court's approval to proposed new investment policies which involved excluding investments, so far as practically possible, that were not aligned with the Paris Climate Change Agreement.  The policies went into some detail as to how this principle would be applied on a practical level.  The policies excluded investment in companies not in the top two quartiles of ESG ratings.  It was recognised that the effect of this was necessarily to exclude over half of publicly traded companies and many commercially available investment funds.  Nevertheless, the targeted rate of return was in line with published rates of return of other large charities.

The judge held that the primary and overarching duty of charity trustees was to further the provisions of the trust.  The power to invest therefore had to be exercised to further the charitable purposes.  This would normally be achieved by maximising the financial returns on investments made, subject to compliance with statutory investment criteria.  In considering the financial effect of making or excluding certain investments, the trustees could take into account the risk of losing support from donors and damage to the reputation of the charity generally and in particular among its beneficiaries.  However, trustees need to be careful in relation to investments on purely moral grounds, recognising that among the charity's supporters and beneficiaries there may be differing legitimate moral views on certain issues.  

The judge said that 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.  The fact that a particular investment conflicts with a charity's objects might give rise to a trustee discretion not to make such investments, but would not legally give rise to an outright prohibition on making such an investment.

Our thoughts on the implications of the judgment for pension scheme investment strategies

Applying the principles in the judgment to pension schemes would lead to the view that the power to invest must be exercised to further the purposes of the scheme, which will normally (broadly) be to provide benefits for members.  The judge's comments that furthering the purposes of the trust normally requires trustees to maximise financial returns is also potentially relevant to pension scheme trustees, as is the need to be mindful that a trust's beneficiaries may hold different legitimate moral views on certain ethical issues.  

The judge's comments about the need to take into account the risk of losing support from donors does not apply to a pension scheme in relation to which employers will have a legal obligation to fund the scheme.  However, the comments about the risk of a charity's investment strategy damaging its reputation among beneficiaries could potentially be relevant to pension schemes.  For example, the App Drivers and Couriers Union (ADCU) has announced that it intends to bring a claim against Uber for failure to provide a Sharia-compliant investment option.  As a significant proportion of Uber drivers are Muslim, ADCU alleges that this will mean that many will effectively be forced out of participation in the pension scheme.

Key Contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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