Court ruling helps English foundations invest ethically

A recent judgment at the High Court of Justice for England and Wales has laid out new legal principles that give nonprofits more freedom — and more responsibility — to make investment decisions for their portfolios based on ethical principles, legally codifying what has been a growing concern for nonprofits. The case was brought by the Ashden Trust and the Mark Leonard Trust against the Charity Commission for England and Wales to argue that nonprofits can exclude companies from their portfolios for failing to act in line with the Paris Agreement on climate change — even if this involves financial risk by excluding a large part of the market. But judge Michael Green laid out a more general clarification of the law, which gives a much wider scope for nonprofits to make such decisions. “Where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors,” he said in a judgment issued April 29. Bates Wells & Braithwaite London LLP, a law firm that represented the claimants, said the ruling confirms that nonprofits have the right to consider policies in areas such as climate change for the companies they invest in. "The court has endorsed the alignment of the trusts’ investments with the goals of the Paris Agreement," the firm wrote in a briefing. "Charity trustees are now clearly empowered to give full weight to concerns arising from climate impacts and other harms caused by investments when deciding how to invest.” Foundations are big players in the development space, providing $9 billion in funding annually. But nonprofit foundations in the U.K. typically spend only an average of 3% to 5% of their assets each year on philanthropic activity — while in the U.S., the law requires at least 5% yearly. The rest is typically invested in a portfolio of stocks and other assets. English law previously placed narrower limits on how nonprofits have been expected to manage their investments, with the emphasis on a need to produce the highest possible financial return. In 1992, the bishop of Oxford, Richard Harries, brought a case against the Church Commissioners for England, a domestic grant provider, to argue that it should apply ethical considerations to its portfolio. The judgment in that case said in most situations, nonprofits are “best served by the trustees seeking to obtain … the maximum return,” but it laid out specific and fairly narrow circumstances in which investing in certain companies might be avoided. In recent years, however, English and Welsh nonprofits have consistently pushed for more latitude to invest freely, arguing that their money may be doing more harm than good if invested in companies that have harmful practices. For English and Welsh foundations supporting international causes, the changes outlined in the April judgment could mean more freedom to exclude companies with poor environmental practices from their portfolios. But it also offers wider powers to exclude a range of other companies, such as those doing business with undemocratic regimes or those using unethical labor practices. Luke Fletcher, a partner at Bates Wells, said the case would probably lead to new approaches to investment. “It would be logical if trustees of foundations started looking at the positive impacts available from investing their endowments in development finance and similar contexts, as well as seeking to reduce negative impacts across the portfolio,” he said. “This new judgment would give trustees that latitude and allow them to take more financial risk with the endowment.”