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Home / News and Insights / Blogs / Charity Law / 43: Charities and ethical / responsible investment – what are the rules for charities?

On 29 April 2022, the High Court gave judgment in the case of Butler-Sloss and Ors v The Charity Commission and Attorney General on the question of the principles which apply to charity trustees when considering an ethical (or ‘responsible’) approach to investment. The judge summarised what he considered to be the law for charity trustees in this respect and we explore below what the Court’s decision means for charity trustees.


The case, Butler-Sloss and Ors v The Charity Commission and the Attorney-General, was brought by the trustees of two grant-making charitable trusts (the Ashden Trust and the Mark Leonard Trust, both part of the Sainsbury’s family charitable trusts). Both trusts have general charitable objects but conduct grant-making policies aimed primarily at tackling climate change and its impact.

The charity trustees of both charities wished to adopt new investment policies (the Proposed Investment Policy) that would exclude, as far as practically possible, investments that are not aligned with the Paris Climate Agreement of 2016 (the Paris Agreement), the principal goal of which is to limit global warming to well below 2C above pre-industrial levels, and pursuing efforts to limit it further to 1.5C.

The Proposed Investment Policy specified a targeted rate of return, net of all fees, of UK CPI (consumer price inflation) + 4% over five year rolling periods, as opposed to UK CPI + 5% under their current investment policies. In addition, the effect of the screening to implement the Proposed Investment Policy would be to exclude over half of publicly traded companies and commercially available investment funds. It was acknowledged, therefore, that implementing the policy would, at least in the shorter term, likely mean a drop in financial return.

The trustees were concerned about whether they would be exercising their duties properly if they adopted the Proposed Investment Policy. They sought a declaration from the Court that they were permitted to adopt the Proposed Investment Policy and that in doing so they will discharge their duties in respect of the proper exercise of their powers of investment.

The Charity Commission and the Attorney General were joined as parties to the case. Both joined with the trustees in asking the Court for guidance on the proper approach to ethical investment.

What was the law on ethical investment and charities before this case?

Prior to this case, the law on this subject was based upon principles from one case, the ‘Bishop of Oxford’ case, Harries v Church Commissioners for England, heard in 1991. That case forms the basis for the principles on ethical investment in the Charity Commission’s guidance CC14, Charities and investment matters: a guide for trustees.

In the Bishop of Oxford case, the Church of England Commissioners were already pursuing an ethical investment policy, but the Bishop of Oxford’s challenge was, in essence, that they weren’t going far enough. In declining the Bishop’s challenge, the judge in the case (the Vice-Chancellor) summarised what he considered to be the ‘general principles applicable to the exercise of powers of investment by charity trustees’. In essence, these were that:

  • the ‘starting point’ was that the trust will be best served by the trustees seeking to obtain the ‘maximum return which is consistent with commercial prudence’ and in ‘most cases’ that starting-point ‘will govern the trustees’ conduct’; but
  • in a ‘minority of cases’ the trustees may depart from the starting-point, namely:
    • where there is a direct conflict with the charity’s purposes – if the trustees were satisfied that investments of a particular type would conflict with the charity’s purposes, then they ‘should not so invest’;
    • where there is indirect conflict with the charity’s purposes – where holdings of particular investments ‘might hamper a charity’s work’ either by making potential beneficiaries unwilling to accept help because of the source of the charity’s money or by alienating potential donors. In such as case, the trustees need to balance the difficulties they would encounter or likely financial loss they would sustain if they are holding the investment against the ‘risk of financial detriment’ if the investment were excluded from the portfolio; and
    • other cases – where to do so would not involve a ‘risk of significant financial detriment’.

The Vice-Chancellor also emphasised 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’.

What did the Court decide in this latest case?

The doubt of the trustees over their duties under the Bishop of Oxford principles seemed to boil down to whether or not, when the Vice-Chancellor said that trustees ‘should not so invest’ when they were satisfied that investments of a particular type would conflict with the charity’s purposes, he was laying down an absolute prohibition on investing. That led into a second question of whether the balancing exercise required of the trustees in cases of ‘indirect’ conflict with the purposes was also required in cases of ‘direct’ conflict.

The possibility that the Vice-Chancellor intended to lay down an absolute prohibition was a novel interpretation, but had arisen for the trustees in this case because of the breadth of investments they were proposing would conflict with their charities’ objects – the examples offered in the Bishop of Oxford decision were simpler (such as a cancer charity not investing in the tobacco industry) and meant that the Vice-Chancellor did not envisage that such cases were likely to impact significantly on the choice of investments remaining available for charity trustees or, in practice, on the likely financial return.

No one before the Court was arguing for this ‘absolute prohibition’ interpretation and the judge reasoned that the Vice-Chancellor had not intended such an approach, which would have amounted to a duty not to so invest and give rise to ‘serious difficulties’ of interpretation of whether or not certain investments conflicted, at risk of breach of duty if the trustees got it wrong. Where trustees considered an investment might conflict, whether directly or indirectly, with their charity’s purposes, they had discretion (subject to their charity’s constitution) whether or not to invest and they had to exercise that discretion by proper decision-making – the Vice-Chancellor’s use of ‘should not so invest’ just reflected that ‘a direct conflict is likely to be the most significant factor and should be avoided if possible’.

The judge then set out 10 principles summarising what he considered to be the law in this area:

  1. ‘Trustees’ powers of investment derive from the trust deeds or governing instruments (if any) and the Trustee Act 2000;
  2. Charity trustees’ primary and overarching duty is to further the purposes of the trust. The power to invest must therefore be exercised to further the charitable purposes;
  3. That is normally achieved by maximising the financial returns on the investments that are made; the standard investment criteria set out in s.4 of the Trustee Act 2000 requires trustees to consider the suitability of the investment and the need for diversification; applying those criteria and taking appropriate advice so as to produce the best financial return at an appropriate level of risk for the benefit of the charity and its purposes;
  4. Social investments or impact or programme-related investments are made using separate powers than the pure power of investment;
  5. Where specific investments are prohibited from being made by the trustees under the trust deed or governing instrument, they cannot be made;
  6. But where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors including, in particular, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion of such investments;
  7. In considering the financial effect of making or excluding certain investments, the trustees can 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;
  8. However, trustees need to be careful in relation to making decisions as 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.
  9. 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; and
  10. 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.’

Having set out what he considered to be the law, the judge decided that the trustees in the case had exercised their powers of investments ‘properly and lawfully, having taken account of all relevant factors and not taken into account irrelevant factors’ and made a declaration accordingly.

Does the case change trustees’ duties when it comes to investment?

In effect, no. Technically, the judgment applies only to the trustees of the two charities in the case, but the principles above are clearly intended to have application for all charity trustees (adapting as necessary according to the specific investment powers of their charity).

We can expect the ten principles to form the basis for the guidance in this area, but they clarify, rather than overrule, the law which already applied. The judge has helpfully presented a reformulation designed to give charity trustees more confidence about their responsibilities when making investment decisions in this area.

What happens next?

The Charity Commission consulted in 2021 on proposed revised guidance on ‘responsible investment’, but had not finalised its guidance pending the Court’s decision in this case. It will now proceed to update its guidance, presumably to reflect the guidance given in this decision. When that will happen and whether it will involve further consultation is currently unclear.

Final thought – acceptance/rejection of gifts

It should also be noted that the Charity Commission relies upon the principles in the Bishop of Oxford case as an analogy for the decision-making process for charity trustees when deciding whether to accept or reject donations. We can probably expect, therefore, that the Commission may apply a modified version of the ten principles above in that context – although it is not expected that that will mean any change of approach in practice for charity trustees.

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