Appendix 4 - The Legal Considerations

1. Charity Commissioners

Colleges’ obligations as charitable trusts can be found in the booklet, “CC14 – Investment of Charitable Funds: Basic Principles”, published by the Charity Commissioners. Section 40-42 cover the issues that must be considered when exploring the possibility of adopting a socially responsible investment plan:

Section 40: The interests of a charity are, in general, best served by the trustees seeking to obtain the best financial return from the charity’s investments, consistently with commercial prudence. Any decision by the trustees to invest “ethically” by avoiding certain investments, or certain institutions, must be centred on the interests of the charity and not of the trustees. Trustees may exclude investments on this ground only if it leaves them with a wide range of investments to produce an acceptable investment performance.

- A charity is obliged to obtain the best financial return from its investments in order for it to successfully pursue its objectives. Investments can be excluded on ethical grounds, provided it is shown to be in the charity’s interests and that divesting does not result in an overall loss or decline in investment performance. In order to ensure this, the charity should maintain a range of investments wide enough to secure good returns.

Section 41: If trustees are satisfied that a particular range of investments would directly impede the furtherance of the objects of a charity or be of financial detriment then they may exclude that range. For example, investments may be excluded if they would result in a loss of financial support from subscribers.

- An entire sector, as opposed to just one company, can be excluded from an investment portfolio if it can be shown that these investments directly affect the ability of the charity to pursue its objectives or would be of financial detriment. The underlined sentence (our emphasis) is particularly important. If trustees are aware that subscribers or donors to a charity may with draw their support or funds having been made aware that it holds investments in a particular sector, then investments in that sector may be excluded.

Section 42: Trustees of a charity should decline to invest in a particular company if it carries out activities which are directly contrary to a charity’s purposes and, therefore, against it’s interests and those of its beneficiaries…. However, trustees may not exclude, to the financial detriment of the charity, a particular range or class of investments in order to give effect to some moral or political belief held by the trustees but not directly related to the interests of the charity and its beneficiaries.

- Investments in companies that, through their activities, directly impede the fulfilment of the charity’s objectives should be avoided. For example, a charity for the relief of cancer sufferers would be justified in avoiding investments in tobacco companies, even if this may result in a financial loss. However, excluding certain investments on moral or political grounds not directly related to the interests of the charity is not allowed if this will result in a financial loss.

2. Bishop of Oxfordvs. the Church Commissioners (1991).

This case set a precedent for ethical investment when the Bishop of Oxfordtook the Church Commissioners to High Court regarding its investment policy in light of the objects of the church. The outcomes were:

- Where “trustees were satisfied that investing in a company engaged in a particular type of business would conflict with the very objects their charity is seeking to achieve, they should not so invest” even if this “would be likely to result in significant financial detriment”.

- When “holdings of particular investments might hamper a charity’s work either by making potential recipients of aid unwilling to be helped because of the source of the charity’s money, or by alienating some of those who support the charity financially” the trustees “will need to balance the difficulties they would encounter, or likely financial loss they would sustain if they were the hold the investments, against the risk of financial detriment if those investments were excluded from their portfolio.”

- Trustees “would be entitled, or even required, to take into account non-financial criteria” where “the trust deed so provides.”

- The law does not require trustees “to behave in a fashion which would bring them or their charity into disrepute (although their consciences must not be too tender…)”

- When “those who support or benefit from a charity take widely different views on a particular type of investment, there is real difficulty”, but trustees “may, if they wish, accommodate the views of those who consider that on moral grounds a particular investment would be in conflict with the objects of the charity, so long as the trustees are satisfied that course would not involve risk of significant financial detriment.”

The first point is significant in that it clearly states that a charity should not invest in companies carrying out activities in direct conflict with its objectives no matter what the financial implications of this are. It is useful, therefore, to have a clear idea of what these objects or aims are – some charities do not define them.

The second point is the most important. It clearly suggests that if certain investments might alienate financial supporters of the charity or make the beneficiaries reluctant to receive the help it gives, the trustees are obliged to consider excluding such investments and to weigh up the financial losses they would incur compared with keeping them in the face of such unease. One could interpret this as obliging the trustees to form some kind of ethical investments committee to look into the possibilities of socially responsible investment if asked to do so by concerned beneficiaries or donors. They are not legally obliged to disinvest from certain companies but they are legally obliged to consider it.

The third and fourth points state that investment decisions are allowed to be made on the basis of criteria other than financial performance if the trust deed allows – trustees are not chained to the principle of achieving ‘the best financial return’ and maintaining investments in companies simply because they perform well. An important point to consider might be that particularly controversial companies or sectors (such as arms manufacturers, pharmaceutical companies or tobacco companies) are often subject to much criticism or protest, which may be directed at investors. It could be argued that the negative publicity generated from such investments would not be in the interests of the charity. Again, simply because such companies perform well does not oblige trustees to hold investments in them and trustees should be aware of the delicate position they are in should a wave of criticism start to surface.

Finally, provided it does not result in a significant loss, trustees may disinvest in a company in response to moral objections raised by beneficiaries or financial donors, concerned that such investments are in conflict with the aims of the charity.

Summary

Excluding a particular investment or a whole sector of investments from a charity’s investment portfolio is perfectly possible when:

- those investments are held in companies whose activities directly impede the fulfilment of the charity’s objectives.

- holding those investments can be shown to be against the interests of the charity in some other way, i.e. they result in a loss of financial support from donors, the alienation of its beneficiaries or are damaging to its reputation.

- divesting on political or moral grounds unrelated to the interests of the charity does not result in a financial loss, i.e. the charity must continue to receive a good return from its investments in order to fulfil its objectives.

Posted on 13/10/04 by admin