Charitable trusts environmental investment ruling could have wider repercussions

Handing down his decision in Butler-Sloss v Charity Commission, Mr Justice Michael Green said the claimants, trustees of the Ashden Trust and the Mark Leonard Trust, had decided “reasonably” that there “needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions”.

He said that trustees at both trusts, which work in the field of environmental protection and sustainable development, were able to exclude investments which are not aligned with the goals of the Paris Agreement on the basis that such investments would conflict with the trusts’ charitable purposes.

Mr Justice Green added: “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.”

The decision clarifies a 1992 ruling, Harries v Church of England Commissioners, which is often cited as authority that trustees must always act in the best financial interests of their beneficiaries irrespective of other considerations.

Michael Fenn, climate change litigation expert at Pinsent Masons, said that, while the latest decision focuses on a specific point “which is of most interest to charities wishing to align themselves with Paris Agreement goals”, it could have wider implications. He added: “English courts are now increasingly being asked to consider the relationship between climate change and investment decisions.”

Fenn said: “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. 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 charity trustees had recognised that implementing their proposed Paris-aligned investment strategy would cause a financial detriment to the charities in the short term, with the risk beyond that unclear. Mr Justice Green also recognised that there is an “obvious difficulty” in defining which investments are, or are not, aligned with Paris Agreement goals. He said this was particularly true when considering the emissions of an investment target’s value or supply chain, known as ‘Scope 3’ emissions.

“While the difficulty in assessing an investment target’s Scope 3 emissions is expected to diminish in coming years as reporting develops, these are points which we are likely to see raised in defence of claims that businesses have not sufficiently considered the importance of climate change mitigation in their investment decisions,” Fenn said.

Ben Fairhead, trusts and pensions-related disputes expert at Pinsent Masons, said that, although the purpose of the trusts involved in the case was very specific since charitable trusts are unique in not having beneficiaries, “it would not be surprising to see more case law develop in this area”. He added: “There is a long line of existing case law regarding investment duties, but with likely increased scrutiny around investments by trusts in general, there could be more to come.”