A conflict of interest

In the light of new legal opinion, charities may need to reconsider their policy towards carbon intensive investments. Moira O’Neill examines the implications for trustees.

Charity Investing

Illustration by Alex Esquerdeiro

The principle that charities should not make investments that conflict with their objectives was first recognised in the 1991 ‘Bishop of Oxford case’. Now the cornerstone of the wider responsible investment sector, the case involved a challenge by the Bishop of Oxford to the Church Commissioners over the extent to which they should divest from companies with interests in apartheid-era South Africa. However, the case predated today’s concerns about global warming and climate change. And a recent ground-breaking legal opinion on ‘fiduciary duty’ has raised the prospect that some charities may be legally required to re-evaluate their approach to carbon intensive investments.

Fiduciary duty is a concept that has evolved through case law over several centuries – as a result, it is often hard to state simply in legal terms what it is. But broadly speaking, it is the obligation of a trustee to do the right thing for a beneficiary. So, in the case of investing, many trustees think that fiduciary duty means getting the best investment return.

Trustees may have concerns that ethical or socially responsible investing is in conflict with their fiduciary duty, as it may depress the investment return. But the Charity Commission makes is clear that, provided trustees can justify why it is in the charity’s interests to invest ethically, it is appropriate for them to do so, even if returns may be lower than expected1.

What’s more, there is mounting evidence that environmental, social and governance factors can have a positive financial impact on investments. For example, in his 2012 review of UK equity markets, Professor Kay found that some pension fund trustees were focusing on maximising short-term financial returns at the expense of other factors that might impact company performance or the wider interests of investors over the long term.

Take the Volkswagen scandal in 2015. Even hardened cynics were shocked by the revelations that the car manufacturer had programmed its diesel cars to defeat emissions tests. These corporate governance failings resulted in a 30% drop in share price and massive reputational damage. Pension trustees are required to prepare a Statement of Investment Principles, stating the extent to which “social, environmental or ethical” considerations inform their investment decisions.

This makes it clear that trustees may consider these matters but offers little practical help. To clarify this issue, in 2015 Bates Wells Brathwaite, funded by the Sainsbury Family Charity Trusts, commissioned a written opinion from charity law expert Christopher McCall QC on “ethically questionable investments” in charities, with specific reference to carbon intensive assets.

The McCall opinion suggests that since fossil fuels are a major contributor to climate change, these investments conflict with the work of charities relating to the environment, poverty and health. McCall states: “These financial and on financial (ie ethical) types of objection cannot be kept entirely separate from each other, because a growing sense of principled objection may be reflected in a socially costly asset becoming taxed, subject to licences or other permissions or regulated, and its financial value may reduce as a result.” He concludes that charity trustees need to consider whether they should exclude investments that might harm the community or the environment, or might damage the reputation of the charity or charities in general. This means that where rising global temperatures could undermine a charity’s work, it should consider avoiding fossil fuel investments, in the same way that many charities avoid industries such as tobacco, armaments and pornography.

Prince Charles warned that fossil fuel investment could “represent a significant conflict” to the mission of many charities. At the same event, Helena Morrissey, then CEO of Newton and chair of the Investment Management Association, warned her peers: “We sleepwalked into the financial crisis; we have no excuse for sleepwalking into a climate crisis.”

Fossil fuel could represent a significant conflict to the mission of many charities

The Bank of England and its Governor, Mark Carney, have also expressed concerns about carbon intensive investments, as their value is likely to be adversely affected by stricter environmental regulation. At COP21, the 2015 United Nations Climate Change Conference in Paris, world leaders agreed to limit global average temperature increases to “well below 2°C”, forcing us to re-examine our reliance on fossil fuels.

Where an obvious conflict exists, McCall believes that charity trustees must divest from carbon intensive investments, regardless of the financial consequences. But what should they do when the issue is less clear cut? McCall recognises that it may not be easy to identify if there is a conflict between the purposes of the charity and proposed investments. In such cases he maintains a cautious approach is needed and trustees should be guided by their advisers.

If an adviser highlights material financial risks in the investments then he says “it must be proper” to ignore those investments. However, if the advice is less strong then such investments may be ignored if there is no material risk of financial detriment from excluding them.


Expert viewpoint

Julie Hutchison, Charities Specialist, SLW

The fossil fuel question has reached the top of the agenda for a number of charities, especially religious organisations, higher education bodies and those dealing with disaster relief abroad after extreme weather events. Universities are under a lot of pressure from students who support global campaigns like 350.org and its Fossil Free movement, which calls for institutions not to hold oil and gas investments. Edinburgh and Glasgow Universities have addressed this issue, and Bristol University recently took measures to reduce its carbon footprint.

My role is to support the charity's board as it reviews its ethical criteria and updates its Investment Policy Statement. This is handed over to the portfolio manager at Standard Life Wealth; we then have a discussion about risk and what that means at a portfolio level, what's in, what’s out. We tend to favour individual stocks rather than funds so that we can screen stocks rigorously according to the charity’s needs.

Climate change risk isn't just an investment issue for charities, it affects their people, the property they own, their portfolio and the wider operations of what they do – it’s an important facet of risk management.

  1. Charities Commission: Charities and investment matters: a guide for trustees, August 2016

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