Trustees reassured on fiduciary duties thanks to “strong and sensible” guidance from Charity Commission.
New guidance has clarified that UK-based charity trustees can consider ESG-related factors in their investment decisions but falls short of inspiring increased sustainability-focused ambition from the sector.
The UK Charity Commission has confirmed that charities can incorporate ESG-related factors, such as human rights, climate change and board accountability, when choosing to avoid certain types of investments due to negative ESG-related performance or engaging with investments to improve their ESG-related performance.
“Looking at the wider environment, there is an ever-increasing awareness of ESG issues and an expectation that organisations engage with and respond to them,” Emily Ford, Policy Adviser at the Chartered Governance Institute UK & Ireland (CGIUK), told ESG Investor.
“Charities can find themselves caught between those who want them to take a stance on contentious issues, and those who believe that this is not their place.
“Against this potentially fraught backdrop, trustees need to be adequately equipped to make decisions, including those about investments in the best interests of their charities,” she said, noting that the new guidance from the Charity Commission is “significantly clearer, shorter and more accessible to trustees”.
James Corah, Head of Sustainability at asset manager CCLA, said the guidance is “strong and sensible”.
He noted that the guidance doesn’t quite provide an “absolute sense of reassurance that charities can do anything they want with their money, as long as it’s tied to their mission”.
An opportunity has been missed to encourage charities to fully consider how their investment capital forms part of their toolset in terms of achieving their mission objectives, according to Lisa Stonestreet, Head of Charity Impact at the EIRIS Foundation.
“In terms of the ‘future-proofing’ of this guidance and its relevance to modern approaches and the direction of travel, considering some of the developments we have seen recently in terms of pensions legislation and how climate is being incorporated into this, the new guidance may be missing proper consideration for future wider government legislative changes,” she added.
Long time coming
Clarification on how ESG-related themes can be incorporated in charity trustees’ fiduciary duties has long been needed.
Newton Investment Management’s 2022 ‘Charity Investment Survey’ said nine in ten UK charities felt that ESG factors are important in the management of their portfolios.
An EIRIS Foundation report noted that nearly 20% of charity pooled funds (17.5% of all charity investments in the UK) don’t have a screening policy, meaning some of the top ten holdings still include large arms, tobacco and fossil fuel companies.
Following a six-week public consultation on the Charity Commission’s guidance, which ran in 2021, 84% of 173 charities that responded said they were now confident that adopting a responsible investing approach is a valid option.
However, 28% said they remained confused about the definition of ‘responsible investment’ and 17% said the “perceived implication” in the draft guidance update is that a responsible investment approach will generate lower returns. A further 19% said they were concerned about the complexity of managing such investments.
This confusion prompted legal action, with trustees of the Ashden Trust and the Mark Leonard Trust bringing a case (Butler-Sloss case) to the UK High Court.
In April last year, the High Court ruled that UK charities can prioritise the alignment of their investments with the goals of the Paris Agreement, even if this incurs financial risk.
“The Butler-Sloss case clarified that trustees can consider factors beyond financial returns in their investment decisions – but there remained a degree of uncertainty amongst those in the sector as to how the consequences of this ruling would play out in practice,” said CGIUK’s Ford.
“The revised guidance gives trustees more clarity in a format which is suited to practical implementation. It enables trustees to pursue social or environmental good not only through the charity’s activities, but also through its investments.”
Corah from CCLA, which works for over 35,000 mission-driven organisations, said it is vital the charity sector has the guide rails in place to deliver positive and sustainable change effectively.
“The world requires change to happen, and charities are specialists in delivering that change,” he said.
“The guidance, although welcome, needs to do better to unleash their ability, their creativity, and their knowledge.”
