Butler-Sloss v Charity Commission: have changes to charity investments cut through?

Charity trustees can accept lower investment returns if those investments are intentionally made to help support the charity’s objects, or at least not undo the good work of the charity.

In April 2022, the Supreme Court judgment in Butler-Sloss v Charity Commission set out new principles for charity investment. While investment strategy sounds like something that a finance specialist on a trustee board looks after, it is so much more important than that, and goes to the heart of how charities fund and carry out their work. Every charity trustee needs to understand the impact of the judgment.

Ultimately, the decision brought a fundamental change to the ways charities are able to manage their investments. While the judgment was a few years ago, it remains relevant and should be considered when setting (or approving) investment strategy. This article outlines the key points trustees should understand.

A departure from the previous position?

Prior to the decision, charity trustees were thought to be under a duty to maximise the returns from their investments, without having to consider the wider context. For example, if you were a trustee of an environmental charity, investing your funds in companies that were damaging the environment – even though it might be making income for the charity to do its work – meant that the charity’s money was working against its mission and making its work harder. Charities, understandably, struggled with this position. The case was brought by the trustees of two charities because they recognised the potential impact of investments on their ability to pursue their charitable objects.

The judges in Butler-Sloss agreed: they held that it is acceptable for charities to accept lower investment returns, if the higher returns would undermine the work they are pursuing.

There are several principles that underpin this, however the ultimate message is as simple as that: charities are now permitted to take a broader view on how best to invest vital charity funds.

Underlying principles

What are a trustee’s investment powers?

Investment powers flow from governing documents, so they are the starting point. Things to consider include:

• Are there any restrictions contained in the governing documents?
• Positive considerations – is there an intentional investment policy?
• Negative considerations – do the governing documents explicitly prohibit any investments (eg a gambling support charity may prohibit investments in gambling companies)?

If the governing document contains no relevant provisions then the powers set out in the Trustee Act 2000 apply.

What are a trustee’s investment duties?

Primarily, a trustee’s duty is to use funds to further the charity’s purposes. This will usually mean maximising returns, but not always. Trustees can exercise their discretion to:

• exclude any particular investments that may cause harm to the charities purposes (usually an investment decision); and
• include investments that further the purposes of the charity (usually a grant-making or operational decision).

Making investment decisions as a trustee

The usual decision-making principles and standards apply: trustees must come to a decision that is reasonable in the circumstances. Some of the relevant factors specific to these decisions include:

• whether there could be potential harm to the charity’s work or reputation if particular investments are made or excluded;
• the balance of the harm against the likely impact on income; and
• the fact that moral or ethical decisions put forward by one stakeholder group may not be shared by all.

Final word

Ultimately, the court decision in Butler-Sloss v Charity Commission should give charity trustees confidence to explore their investment policies and have an intentional discussion about investments. It can be reasonable to accept lower investment returns if to do so is in accordance with the trustees’ investment powers and their duties in pursuing the charity’s purposes.

This judgment has also informed the Charity Investment Governance Principles Guide, a user-friendly guide which puts the charity’s purposes at the heart of investment. The guide covers more than can be addressed in this article, so trustees are encouraged to read it – accessible here.

If you would like advice or assistance in training your trustees on their duties and powers around investments, or any other areas of charity governance, contact Rachel Spruce or a member of our charities team.