Court approves trustees' Paris-aligned investment strategy

In a recent judgment¹, the High Court has confirmed that trustees of two charitable trusts are permitted to implement a Paris-aligned investment strategy, even though this might result in a short-term financial detriment to their trusts. The charities in question are both part of the Sainsburys Family Charitable Trusts network and have approximately £42m and £22m respectively by way of assets.

Commenting on this decision, Michael Aherne, Pensions Partner at Herbert Smith Freehills, says: "Although this judgment was given in a charitable trust context, the fact the judge held that the admitted short-term financial detriment of adopting a Paris-aligned investment strategy was not a barrier to its adoption by the trustees, is significant. In a pensions context, trustees of defined benefit schemes looking to implement ambitious Net Zero or TCFD related targets may seek to argue that similar short term financial impacts do not prevent them from adopting investment strategies aligned to such targets provided they are satisfied that the anticipated long term financial returns are acceptable in the context of the Scheme's funding and covenant position."

Both charities have charitable objectives which include environmental protection and improvement and the relief of poverty. The Trustees considered that many of the trusts' current investments conflict, or might conflict, with these charitable purposes. As such, they worked with their investment advisers and asset manager to develop an investment portfolio that seeks to ensure that the charities' investments are aligned with the goals of the Paris Agreement (which aim to limit the increase in global temperatures to well below 2°C and preferably to 1.5°C) and thereby avoid direct conflict with their charitable purposes.

Both the Charity Commission and the Attorney General challenged the adoption of the proposed investment strategy by the trustees, arguing that they had not adequately balanced the potential financial detriment to the trusts with the conflict to the charitable purposes. However, the judge dismissed this and approved the proposed investment strategy on the basis that the trustees had followed a proper decision-making process in which they had correctly balanced the trusts' charitable objectives against the potential financial detriment of implementing the Paris-aligned investment strategy.

Aherne adds: "The judge was satisfied that the proposed investment strategy was justified, as the proposed benchmark (of CPI plus 4%) was in line with the published strategies of other large charities. On this basis he was prepared to endorse the proposed strategy even though it was accepted by the trustees that there might be some short-term financial detriment and even though the strategy excludes over half of publicly traded companies and many commercially available investment funds."

He concludes: "This decision adds to the growing case law in this area and it wouldn't be surprising to see a similar case arise in a pensions context in the coming years as trustees, sponsors and members become more focused on the carbon transition and Paris alignment."

[1] Butler-Sloss & Others v The Charity Commissioner & Another [2022] EWHC 974 (Ch) (29 April 2022)