A short piece here on charities and ethical investments. There is also some comment that applies to charities with private company shares.

It has been reported today that insurer Axa will divest itself of interests in tobacco sector equities and bonds. In some ways this has been reported as an “ethical” move by the insurer. The reported comments of Axa’s Incoming chief executive Thomas Buberl are however instructive and are analogous to what charity trustees should consider in developing a “purposes-led” position on “ethical” investments.

Thomas Buberl is quoted in the BBC as saying of the decision to sell these investments that “[t]he business case is positive… [i]t makes no sense for us to continue [tobacco industry] investments… the economic cost [of tobacco] is huge.” So, the focus here, and it would seem appropriately for the chief executive of a business, is on what is right for that business and its aims and objectives.

Purposes-led investment policy formulation

Charity trustees should also adopt a similar approach in formulating and justifying any investment policy. Any policy or approach must be one that furthers the charity’s purposes rather than being developed out of the interests, likes and/or dislikes of the trustees from time to time.

In Scotland, apart from charities established as trusts, there are no specific statutory rules on charity investments. While found in legislation also dealing with charities, the “trustee investment” rules only apply to trusts (they do not apply to Scottish charities set up as another legal form). Accordingly, for non-trust charities, as to investment legal requirements, it will be essentially the general duties of furthering the charity’s purposes and acting with care and diligence that charity trustees must follow while the statutory rules applying to trusts might be useful guidance (a point to which we will return). In England & Wales, the Charity Commission has issued specific guidance.

The Charity Commission guidance notes that “a charity’s trustees must be able to justify why it is in the charity’s best interests to invest in [an ethical] way.” In other words, to adopt such a policy and strategy, it must be considered to be in the interests of the charity’s purposes to do so. The Charity Commission guidance continues by saying that an ethical approach to investment would be appropriate where:-

  • a particular investment conflicts with the aims of the charity;
  • the charity might lose supporters or beneficiaries if it does not invest ethically; or
  • there is no significant financial detriment.

Apart from the de minimis final point, the strategic examples given are purposes-led; to invest otherwise would either be directly counter to the charity’s purposes or the purposes would be undermined by losing supporters and income. These are objective and purposes-led reasons for adopting an ethical investment policy and they are what the law permits.

Constitutionally “hard-wiring” ethics

Charity trustees should be able to “point” to the part of their constitution which supports such a policy. A charity’s constitution and its purposes should be its heart, soul, mind and conscious and the place from which such policies stem- purposes-led. Any particular ethical position should be “hard-wired” into the constitution to make it clear the objective purposes-led basis for adopting certain policies.

While Scotland does not have specific statutory guidance, the Charity Commission summary is reflective of case law that has looked generally at ethical investment policies in Scottish organisations. These cases support a purposes-led policy foundation.

“Positive” as well as “negative” investment decisions

Ethical investing can be “negative”- i.e. a decision not to invest in a particular sector. Often charity trustees will however wish to invest in a particular “positive” way- i.e. a policy to invest in a certain holding (e.g. a company with strong community or environmental credentials) or sector (e.g. renewable energy) as opposed to a policy to avoid certain investments. A “positive” investment policy should also be purposes-led with a constitutional “hard-wire”.

“Positive” investment policies: charities with private company shareholdings

Beyond “ethical” considerations, a positive decision to hold certain investments can stem from how the charity came to hold the investments in the first place. This is perhaps most common where a donor has gifted private company shares to a charity. On one view, the charity trustees should immediately on receipt consider whether or not to retain those shares and obtain proper advice before reaching a decision and thereafter monitoring any decision taken. The statutory investment rules applicable to Scottish trusts are of note here. On the one hand they set out that trustees must consider diversification. On the other hand, they allow trustees to have regard to the “circumstances of the trust”. A legitimate circumstance of the trust to take into account would seem to be the donation of private company shares. Of course, charity trustees must not become beholden to a donor. As noted above, for non-trust charities, these investment rules are at best guidance.

Accordingly, if charity trustees are holding a significant (private/family) shareholding (whether donated or not), they should actively consider what constitutional “hard-wiring” should be incorporated to objectively justify continuing to hold the position. That “hard-wiring” (through crafting of the purposes and powers) in the charity’s constitution to deal with the private shareholding will also create a better “dynamic” between charity and the private company, especially where the charity has a majority interest or outright ownership. Without such attention being given to the charity’s constitution, there can be the potential for uncertainty as the private company will have the continued risk (notwithstanding the level of communication and dialogue between the two entities) that the charity trustees might dispose of some or all of their shares. Similarly, silence on the topic in the charity’s constitution may place the charity trustees at risk as they have no objective purposes-led basis for their investment decision to hold such a significant private holding. the risks are greater for charities established as trusts because of the statutory investment rules.

There are many successful Scottish charities that have some form of positive investment policy (unwritten or not) to hold a private shareholding (across diverse sectors from food and drink to energy). They do however carry legal and regulatory risks if such a strategy is undocumented. Risks that can be mitigated with a “hard-wired” approach to investment and the circumstances of the charity; all with a view to furthering the charity’s purposes and operating with appropriate care and diligence. Charity trustees holding a private shareholding should review their constitution and consider if the investment powers are appropriate having regard to the assets held. They should also set out their investment policy. In doing so it will make decision making for the trustees easier, better reflect the circumstances and context of the charity and aid the relationship between charity and the private company in which it is invested.

This is just a short overview of an area that can be very interesting and involved as well as applying in different ways to different charities.